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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]
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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COMMISSION FILE NO. 0-17224
DORAL FINANCIAL 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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
$462,181,338 approximately, based on the last sale price of $29.50 per
share on the NASDAQ National Market System on March 25, 1998. 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.
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock: 20,214,460 shares as of March 25, 1998. (continued)
<PAGE> 3
DOCUMENTS INCORPORATED BY REFERENCE
PART III
<TABLE>
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Item 10 Directors and Executive Officers of the Information in response to this Item is
Registrant. incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Election of Directors and Related
Matters" in the Company's definitive Proxy
Statement for use in connection with its 1998
Annual Meeting of stockholders (the "Proxy
Statement").
Item 11 Executive Compensation. Information in response to this Item is
incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Executive Compensation" in the
Company's Proxy Statement.
Item 12 Security Ownership of Certain Beneficial Information in response to this Item is
Owners and Management incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Security Ownership of Management
and Principal Holders" in the Company's
Proxy Statement.
Item 13 Certain Relationships and Related Information in response to this Item is
Transactions. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Election of Directors and Related Matters" in
the Company's Proxy Statement.
</TABLE>
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DORAL FINANCIAL CORPORATION
1997 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...............................................................................36
Item 3. Legal Proceedings........................................................................36
Item 4. Submission of Matters to a Vote of Security Holders......................................36
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................36
Item 6. Selected Financial Data..................................................................38
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................55
Item 8. Financial Statements and Supplementary Data..............................................56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....56
PART III
Item 10. Directors and Executive Officers of the Registrant......................................56
Item 11. Executive Compensation..................................................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................56
Item 13. Certain Relationships and Related Transactions..........................................56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................56
</TABLE>
<PAGE> 5
PART I
ITEM 1. BUSINESS
GENERAL.
Doral Financial Corporation ("Doral" or the "Company"), together with
its wholly-owned subsidiaries, is primarily engaged in a wide range of mortgage
banking activities, including the origination, purchase, sale and servicing of
mortgage loans on single-family residences, the issuance and sale of various
types of mortgage-backed securities, the holding and financing of mortgage
loans, mortgage-backed securities and other investment 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 mortgage loans secured by commercial real estate (the "Mortgage Banking
Business"). The Company is the leading mortgage banking institution in Puerto
Rico in volume of origination of first mortgage loans on single-family
residences and in the volume of mortgage loans serviced, with a mortgage
servicing portfolio of approximately $4.7 billion at December 31, 1997. During
1997, the Company issued $497 million of GNMA mortgage-backed securities to rank
No. 1 in Puerto Rico and No. 27 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 (the "HF Division"), a division of the Company. The Company is
also engaged in the banking business through Doral Bank (formerly known as Doral
Federal Savings Bank), a Puerto Rico commercial bank acquired by the Company in
September 1993, and in the securities business through Doral Securities, Inc.
("Doral Securities"), formerly AAA Financial Services, Inc., a broker-dealer
subsidiary established by the Company in September 1996. As a result of the
conversion of the charter of Doral Bank from that of a federal savings
association to that of a Puerto Rico chartered commercial bank on October 1,
1997, the Company is a bank holding company subject to the provisions of the
Bank Holding Company Act of 1956 (the "BHC Act") and, accordingly, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve").
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. Doral is also qualified to originate mortgage loans insured
by the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA").
The Company's strategy is to increase its volume of loan originations
and its servicing portfolio, as well as to maximize net interest income. The
Company seeks to increase its volume of loan originations by emphasizing
quality customer service and maintaining the most extensive system of branch
offices of any mortgage banking institution in Puerto Rico. The Company strives
to increase the size of its mortgage servicing portfolio by relying primarily
on internal loan originations and supplementing such originations with
purchases of loans and mortgage servicing rights from third parties. The
Company has traditionally emphasized origination of 15-year and 30-year
conventional and FHA-insured ("FHA loans") or VA-guaranteed ("VA loans")
mortgage loans on single-family residences. The Company relies on net interest
income for a more significant portion of its earnings than do most mortgage
banking companies. The Company seeks to maximize net interest income by holding
mortgage-backed securities, primarily Puerto Rico tax-exempt GNMA securities
backed by Puerto Rico mortgages, 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 certain GNMA
securities backed by Puerto Rico mortgages is tax exempt under Puerto Rico law.
A recent amendment to Puerto Rico tax laws has modified the tax-exempt
treatment of the GNMA securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments --Changes in
Puerto Rico Tax Laws Affecting Tax-Exempt Status of FHA and VA Loans." The
Company also seeks to increase net interest income by funding and holding for
investment, loans and investment securities, consisting primarily of
residential mortgage loans, mortgage-backed securities and United States
government and agency obligations the interest on which is tax exempt to the
Company for Puerto Rico income tax purposes. The Company's strategy
<PAGE> 6
is to become a more diversified consumer finance company by offering a broad
range of mortgage products as well as expanding into new areas of business such
as banking and securities brokerage. The Company also intends to pursue
opportunities to expand geographically within the mainland United States,
particularly within the New York City metropolitan area and other areas with
large Hispanic populations, through acquisitions, the establishment of new
operations or a combination of both.
Substantially all of Doral's business is currently conducted in Puerto
Rico. The Mortgage Banking Business is conducted in Puerto Rico through 20
branches, 16 of which are operated by Doral Mortgage, three by the HF Division
and one by Centro Hipotecario, Inc., a wholly-owned mortgage banking subsidiary.
Doral Mortgage also operates two branches in Miami and Orlando, Florida. The
Florida offices originated approximately $5.0 million and $9.0 million in
mortgage loans during the years ended December 31, 1997 and 1996, respectively.
Doral Bank operates through five branches in the San Juan metropolitan
area, which serve primarily as deposit-taking operations. To date, most loans
held in Doral Bank's loan portfolio have been originated pursuant to the Master
Loan Production Agreement (the "Master Loan Production Agreement") with the
Company. See "Business--Other Lending and Investment Activities--Lending
Activities of Doral Bank and Real Estate Owned." Doral Bank has experienced
rapid growth since its acquisition by the Company, increasing its assets from
$13.0 million as of September 10, 1993 to $427.6 million as of December 31,
1997. To date, this growth has been funded primarily through increases in
certificate of deposit accounts, as well as borrowings from institutional
investors, advances from the Federal Home Loan Bank of New York (the "FHLB-NY")
and long term brokered deposits. As of December 31, 1997, Doral Bank had total
deposits and net worth of $306.0 million (this amount includes $5.4 million of
corporate funds which are eliminated in the preparation of the Company's
consolidated financial statements) and $32.3 million, respectively. As of
December 31, 1997, custodial accounts associated with the Company's servicing
portfolio, commercial demand deposit accounts of the Company and certificate of
deposit accounts constituted approximately 17%, 24% and 65%, respectively, of
Doral Bank's total deposit accounts. The Company intends to continue to increase
the assets of Doral Bank as well as to expand its branch network and deposit
base.
The business and profitability of Doral 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 Doral 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 guarantee mortgage loans. Any discontinuation of, or significant
reduction in, the various programs administered by FNMA, FHLMC, GNMA, FHA or VA
or 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 FNMA, FHLMC, GNMA, FHA,
VA, HUD, the Federal Deposit Insurance Corporation (the "FDIC"), the Federal
Reserve 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, required disclosure to customers, the origination,
processing, underwriting, selling and securitizing of mortgage loans, minimum
capital requirements and activity restrictions. The Company's securities
operations are also subject to regulation by the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. 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.
During the third quarter of 1996, the Company's new broker-dealer
subsidiary, Doral Securities, became operational. While Doral Securities engages
in a general securities business, it has a particular emphasis on the sale of
Puerto Rico tax-exempt GNMA securities and other Puerto Rican securities.
2
<PAGE> 7
On September 22, 1997, the Company amended its Restated Certificate of
Incorporation to change its name from First Financial Caribbean Corporation to
Doral Financial Corporation.
MORTGAGE BANKING BUSINESS
Loan Origination and Purchase of Mortgages. The Company has an
extensive system of branch offices for originating mortgage loans in Puerto
Rico. Doral Mortgage operates 16 branches throughout Puerto Rico and two branch
offices in the State of Florida. The HF Division operates three branches in the
San Juan metropolitan area. Centro Hipotecario, Inc. operates an additional
branch in the San Juan metropolitan area.
While the Company makes available a wide variety of mortgage loan
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 and loans secured by single-family
residences. Substantially all the loans are fixed rate mortgages. Conventional
mortgage loans generally (i) do not exceed 80% of the appraised value of the
mortgaged property or (ii) are insured by private mortgage insurers.
According to applicable VA guidelines, the maximum amount of a VA loan
originated in Puerto Rico is currently $203,000. Pursuant to applicable FHA
guidelines, the maximum amount of a single-family FHA loan ranges from $81,548
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 $74,080 and $62,115, respectively, as of
December 31, 1997.
A portion of the conventional loans originated by the Company are
conforming loans which qualify for inclusion in guarantee programs sponsored by
FNMA or FHLMC. The Company also originates conventional loans that do not
qualify for the guarantee programs of FNMA or FHLMC, because they do not
conform to one or more of the requirements of such agencies ("non-conforming
loans"). The underwriting standards used by the Company for non-conforming
loans are generally similar to that of conforming loans. The principal
deviations from such standards are relaxed requirements for income verification
and credit history. The Company requires lower loan-to-value ratios in
non-conforming loans, generally 65% or less. To date, the Company has not been
actively involved in the origination of so-called "sub-prime" mortgage loans to
individuals who are deemed to be relatively high credit risks. For the years
ended December 31, 1997, 1996 and 1995, non-conforming conventional loans
represented approximately 42%, 34% and 42%, respectively, of the Company's
(including construction loans, second mortgage loans and home equity loans)
total volume of mortgage loans originated.
The Company also originates construction loans for owner-occupied
single-family residences and other real estate development projects and mortgage
loans on commercial properties. The Company has recently been more active in the
origination of mortgage loans secured by income-producing commercial properties.
While many of these loans are funded through Doral Bank, the Company's mortgage
banking units also originate such loans for resale to investors. For the year
ended December 31, 1997, the Company originated approximately $33 million of
mortgage loans secured by income-producing commercial properties, $22 million of
which were funded by Doral Bank. For the year ended December 31, 1997, the
Company originated $33 million in construction loans, of which $9 million were
originated through Doral Bank. See "--Other Lending and Investment
Activities--Lending Activities of Doral Bank and Real Estate Owned."
Construction loans and mortgage loans on commercial properties together
constituted approximately 7% and 3% of the total dollar volume of loans
originated by the Company for each of the two years ended December 31, 1997 and
1996, respectively. The Company has entered into a preferred broker agreement
with GMAC Commercial Mortgage Corporation ("GMAC") whereby the Company will act
as the exclusive broker of commercial loans for GMAC in Puerto Rico. The loans
to be brokered to GMAC would generally involve larger denomination loans that
the Company does not originate directly.
The Company also originates second mortgages. For the years ended
December 31, 1997 and 1996, second mortgages constituted approximately 2% and
4%, respectively, of the total dollar volume of loans originated by the
Company. The maximum loan-to-value ratio on second mortgages permitted by the
Company is 80% (including the amount of any first mortgage).
3
<PAGE> 8
In addition to second mortgages, the Company offers home equity or
personal loans secured by real estate 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, 1997 and 1996, the Company originated approximately
$38 million and $74 million of such loans, respectively.
Loan origination activities performed by the Company 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, the
Company issues a commitment to the 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. The Company, 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 FHA loans
and VA loans purchased from third parties was approximately $65 million, $63
million and, $77 million for the years ended December 31, 1997, 1996 and 1995,
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 $74 million, $34 million
and $10 million of mortgage loans were originated through mortgage brokers for
the years ended December 31, 1997, 1996, and 1995, respectively. Purchases of
loans from other mortgage bankers in the wholesale loan market as well as the
origination of mortgage loans through loan brokers provides the Company with a
source of low cost production that complements the Company's internal
originations and allows the Company to efficiently increase the size of its
servicing portfolio.
The following table sets forth the number and dollar amount of the
Company's mortgage loan originations (excluding purchases from third parties)
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 1995
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(Dollars in thousands, except average initial loan balance)
<S> <C> <C> <C>
FHA/VA LOANS:(1)
Number of Loans..................... 4,657 4,362 4,016
Volume of Loans..................... $344,992 $306,753 $267,909
Percent of Total Volume............. 35% 41% 48%
CONVENTIONAL AND OTHER LOANS:(2)
Number of Loans..................... 10,102 9,575 5,059
Volume of Loans..................... $627,490 $446,957 $291,537
Percent of Total Volume............. 65% 59% 52%
TOTAL LOANS:
Number of Loans(3).................. 14,759 13,937 9,075
Volume of Loans(4).................. $972,482 $753,710 $559,446
AVERAGE INITIAL LOAN BALANCE:
FHA/VA Loans........................ $ 74,080 $ 70,300 $ 66,700
Conventional and other Loans(2)..... $ 62,115 $ 46,700 $ 57,600
REFINANCING(5)...................... 51% 47% 41%
</TABLE>
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(1) Excludes $65 million, $63 million and $77 million in FHA and VA loans
purchased from third parties for the years ended December 31, 1997,
1996 and 1995, respectively.
(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 1,886, 2,044 and 834, of loans funded by Doral Bank pursuant
to the Master Loan Production Agreement for the years ended December
31, 1997, 1996 and 1995, respectively. See "--Other Lending and
Investment Activities--Lending Activities of Doral Bank and Real
Estate Owned."
(4) Includes $169.0 million, $98.7 million, and $52.3 million, principal
amount of loans funded by Doral Bank pursuant to the Master Loan
Production Agreement for the years ended December 31, 1997, 1996 and
1995, respectively. See "--Other Lending and Investment
Activities--Lending Activities of Doral Bank and Real Estate Owned."
(5) As a percentage of the total dollar volume of loans originated.
A substantial portion of the Company's total mortgage loan originations
has consistently been comprised of refinance loans. Demand for refinance 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, 1997, 1996
and 1995, refinancing activity represented approximately 51%, 47%, and 41%,
respectively, of the Company's total dollar volume of mortgage loans originated.
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 the HF Division, has
increased relations with realtors and developers in order to increase home
purchase loan originations, particularly in newly constructed residential
developments. Mortgage loans to finance the acquisition of new residential units
for the years ended December 31, 1997, 1996 and 1995, were $140 million, $136
million and $84 million, respectively. 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 refinance loans could have on
overall mortgage loan production. In addition, strength in the new housing
sector will allow the Company to originate FHA and VA loans that qualify for tax
exemption under the recent amendments to Puerto Rico tax laws limiting tax
exemption to FHA and VA loans used to finance the acquisition of newly
constructed residential housing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Recent Developments--Changes in
Puerto Rico Tax Laws Affecting Tax Exempt Status FHA and VA Loans."
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 banking
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
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origination income must be deferred and amortized using the interest method, in
the case of loans held for investment, or deferred until the related loans are
sold, in the case of loans held for sale.
Loan Servicing. The Company's principal source of servicing rights has
traditionally been its mortgage loan originations. However, during 1997 the
Company purchased servicing rights to approximately $1.0 billion principal
amount of mortgage loans. While the Company intends that internal loan
originations continue to be its principal source of servicing rights, it will
continue to seek and consider attractive opportunities for the bulk purchases of
mortgage servicing rights. When the Company 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. The Company 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. For the years
ended December 31, 1997 and 1996, the weighted-average servicing fee for the
Company's servicing portfolio was approximately 0.37% and 0.39%, respectively.
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. In general, the
Company's servicing agreements are terminable by the investor for cause. With
respect to all mortgage loans funded by Doral Bank after October 1, 1995, Doral
Bank may terminate the Company's servicing rights without cause upon notice to
the Company. 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, 1997, 1996 and 1995, approximately $201.6 million,
$256.6 million and $267.5 million, respectively, or 4%, 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 real estate
mortgage conduits ("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 loses 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; and (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.
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The following table sets forth certain information regarding the total
loan servicing portfolio of the Company for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA Mortgage Loans .................... $ 2,142,345 $ 1,305,792 $ 1,117,296
Conventional and Other
Mortgage Loans(1) .......................... 2,512,790 1,762,690 1,550,964
----------- ----------- -----------
Total Servicing Portfolio ................ $ 4,655,135 $ 3,068,482 $ 2,668,260
=========== =========== ===========
BEGINNING SERVICING PORTFOLIO ................ $ 3,068,482 $ 2,668,260 $ 2,643,526
ADD:
Loans Funded and Purchased(2) ................ 1,036,999 816,566 636,030
Bulk Servicing Acquired ...................... 1,040,000 -- 42,300
LESS:
Servicing Sales Transferred .................. 0 102,000 310,000
Run-off(3) ................................... (490,346) (314,344) (343,596)
----------- ----------- -----------
ENDING SERVICING PORTFOLIO ................... $ 4,655,135 $ 3,068,482 $ 2,668,260
=========== =========== ===========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of Loans .............................. 86,269 62,199 54,993
Weighted Average Interest Rate ............... 8.35% 8.53% 8.43%
Weighted Average Maturity (months) ........... 180 221 181
Weighted Average Servicing Fee Rate .......... .3673 .3933 .3831
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD END:(4)
60-89 days past due .......................... 1.84% 1.77% 1.78%
90 days or more past due ..................... 1.92% 2.18% 2.22%
----------- ----------- -----------
Total delinquencies .......................... 3.76% 3.95% 4.00%
=========== =========== ===========
Foreclosures Pending ......................... 1.32% 1.12% 1.04%
</TABLE>
(1) Includes $174.0 million, $152.3 million and $73.7 million, of loans
serviced for Doral Bank for the years ended December 31, 1997, 1996 and
1995, respectively, which represented 3.74%, 4.96% and 2.76%, 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.
(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 the Company's mortgage servicing portfolio is composed of mortgages
secured by real estate in Puerto Rico. At December 31, 1997 and 1996, less than
1% and 2%, respectively, of the Company's mortgage servicing portfolio related
to mortgages secured by real property outside Puerto Rico (all of which were
secured by real property located in the State of Florida).
7
<PAGE> 12
The amount of principal prepayments on mortgage loans serviced by the
Company was $279 million, $201 million and $160 million for the years ended
December 31, 1997, 1996, and 1995, respectively. Such prepayments represented
approximately 8%, 7% and 6% of the aggregate principal amount of mortgage loans
serviced during such periods and the average size of the loans prepaid were
$37,800, $35,360 and $37,800, respectively. Principal prepayments remained
stable during 1997 and 1996 compared to 1995. Principal prepayments declined
during 1995 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 resulting from declines in interest rates.
Servicing agreements relating to the mortgage-backed securities
programs of FNMA, FHLMC and GNMA, and certain other investors, require the
Company 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, 1997 and 1996, the monthly average amount of
funds advanced by the Company under such servicing agreements was approximately
$4.5 million and $6.3 million, respectively. Funds advanced by the Company
pursuant to these arrangements are generally recovered by the Company 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 a private investor, 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. During 1997, the
Company increased its sale of loans on a recourse basis. For additional
information regarding recourse obligations, see "--Sale of Loans; Issuance of
Mortgage-Backed Securities."
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. To date, the impact of
loans repurchased as a result of borrower misrepresentations has not been
material.
The Company's servicing rights provide it with a significant continuing
source of income. 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 and, 1995, the Company sold servicing rights on $102
million and, $310 million, respectively, of mortgage loans. No sales of
servicing were made during the year ended December 31, 1997. 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 purchases,
the Company 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
8
<PAGE> 13
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
Management."
HRU, Inc., an entity in which the Company owns a 33% equity interest,
provides mailing and electronic data processing services for the Company's
mortgage servicing operations and earns fees from the Company based on the
volume of mortgage loans serviced. Such fees are determined at fair market value
and amounted to approximately $1,012,000, $900,000 and $860,000, for the years
ended December 31, 1997, 1996 and 1995, respectively.
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, for the mortgage loans in the Company's servicing
portfolio 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. 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, 1997, 1996
and 1995, Doral held REO with a book value of approximately $3.0 million, $2.2
million and $2.1 million, respectively. Sales of REO resulted in net losses to
Doral of approximately $787,000, $305,000 and $145,000, for the years ended
December 31, 1997, 1996 and 1995, 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 $1.6 million as of
December 31, 1997. 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.
As of December 31, 1997, the unpaid balance of the notes held by the Company was
$1.6 million.
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 not generated any loss of principal as
of December 31, 1997. The Company, however, incurs about $2,200 per loan
foreclosed in interest and legal charges during the time between payment by the
Company and FHA or VA reimbursement. For the years ended December 31, 1997, 1996
and 1995 total expenses related to FHA or VA loans foreclosed amounted to
$60,000, $60,000 and $75,000, respectively. Although FNMA and FHLMC are
obligated to reimburse the Company for principal and interest payments advanced
by the Company as a servicer (except for recourse servicing), the funding of
delinquent payments or the exercise of foreclosure rights involve 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, the
Company's primary service area, could result in an increase in defaults or
delinquencies on mortgage loans that are serviced by the Company or held by the
Company 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. The Company
customarily sells or securitizes most of the loans that it originates, except a
portion of the loans originated by Doral Bank, which are hold to maturity. As
described below, the Company utilizes various different sales channels to sell
its mortgage products. The Company issues GNMA-guaranteed mortgage-backed
securities, which involve the packaging of FHA loans, 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, 1997, 1996
and 1995, the Company issued approximately $497 million, $373 million and $366
million, respectively, in GNMA-guaranteed mortgage-backed securities according
to the "Mortgage Marketplace."
9
<PAGE> 14
Certain GNMA-guaranteed mortgage-backed securities sold by the Company
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
estimated maturities, which range from 1 to 30 years and have a weighted-average
maturity of approximately 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 broker-dealers.
During years ended December 31, 1997, 1996 and 1995, the Company issued GNMA
serial notes totaling approximately $269 million, $317 million and $284 million,
respectively.
Conforming conventional loans, other than those funded by Doral Bank
under the Master Loan Production Agreement that are held for investment,
originated or purchased by the Company 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 the Company sells to broker-dealers. In
connection with any such exchanges, the Company pays guarantee fees to FNMA and
FHLMC. The issuance of mortgage-backed securities provides the Company 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
(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 REMICs 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 interest only strips ("IOs"). See "Management's Discussion and
Analysis of Financial Condition And Results of Operation--Results of Operations
for the three years ended December 31, 1997, 1996 and 1995"--Revenue 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 consist 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 date, credit
enhancement, in the form of an insurance policy and subordination, has generally
been used to improve the credit rating of the senior certificates and thereby
increase 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. The Company did not
engage in securitizations during the year ended December 31, 1997 because it has
been able to obtain greater revenues through the creation of IOs by bulk sales
of whole loans to local financial institutions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations for the Three Years Ended December 31, 1997, 1996 and 1995." Subject
to market conditions, the Company may enter into similar securitization
transactions in the future.
Financial Security Assurance, Inc. ("FSA") has insured approximately
$35 million and $70 million of senior certificates issued in connection with
such securitization transactions during the years ended December 31, 1996 and
1995, respectively. 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, 1997, 1996 and 1995, the Company held
approximately $13.7 million, $14.6 million and $13.1 million, respectively, in
subordinate certificates and $3.9 million, $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.
10
<PAGE> 15
The decision whether to sell non-conforming loans in bulk to local
financial institutions or to securitize such loans through mortgage conduits
depends 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 depends 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.
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.
While the Company generally sells conforming loans 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. Prior to 1997, recourse obligations had
decreased, in part, due to the securitization of non-conforming loans into
private label mortgage-backed securities that were sold on a non-recourse basis.
As the Company has shifted from selling non-conforming loans through
securitizations to bulk sales of whole loans to local financial institutions,
which are often done on a recourse or partial recourse basis, recourse
obligations have increased. As of December 31, 1997, the Company was servicing
mortgage loans with an aggregate principal amount of $537.4 million on a
recourse or partial recourse basis. As of December 31, 1997, 1996 and 1995, the
Company's recourse obligations relating to its mortgage servicing portfolio were
approximately $265.5 million, $74.4 million and $85.2 million, respectively. Of
these recourse obligations, approximately $97.2 million, $14 million and $16
million principal amount, respectively, consisted of loans sold to FNMA and
FHLMC or exchanged into securities of such agencies, and approximately $168.3
million, $60 million and $69 million principal amount, respectively, consisted
of non-conforming loans sold to other private investors. The Company estimates
the fair value of the retained recourse obligation at the time mortgage loans
are sold. The Company has generally been successful in obtaining at least the
carrying value of such repurchased loans upon the resale thereof or upon
foreclosure. The Company protects itself from possible losses by requiring a
lower loan-to-value ratio for non-conforming loans, generally 65% or lower. As
of December 31, 1997, the Company maintained a reserve for recourse obligations
and for the put obligations referred to below of approximately $1.4 million.
From time to time, the Company may sell mortgage-backed securities and
mortgage loans subject to put arrangements. Pursuant to these arrangements, the
Company grants the purchaser of the mortgage-backed securities or loans a put
option that grants the buyer the right to sell, and obligates the Company to
buy, the securities or loans at a future date at a negotiated price. Pursuant to
SFAS No. 125, sales of securities or loans with puts are accounted for as sales
or borrowings based on a financial components approach that focuses on whether
control of the asset has been surrendered. As of December 31, 1997, the Company
had outstanding $175.6 million in mortgage-backed securities and mortgage loans
sold subject to put arrangements, which expire in varying amounts from 1998
through 2002, all of which were accounted for as sales because the Company
believes that control of the asset has been surrendered.
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 secured by real property in Puerto Rico 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, 1997,
1996 and 1995, the Company held mortgage loans (excluding mortgage-backed
securities held to maturity and loans receivable) prior to sale for an average
period of 322 days, 259 days and 352 days, respectively. The increase in the
number of days mortgage loans and mortgage-backed securities were held prior to
sale during 1997 was due to increased holdings of mortgage-backed securities
held for trading and to the decision of the Company to hold tax exempt Puerto
Rico GNMA securities pending the outcome of local legislation modifying the tax
exempt status of Puerto Rico GNMA securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Recent
Development--Changes in Puerto Rico Tax Laws affecting Tax-Exempt Status of FHA
and VA
11
<PAGE> 16
Loans." During 1997, the Company's mortgage banking units also began investing
in U.S. agency securities, which are tax exempt to the Company under Puerto
Rico tax laws.
The operation of the GNMA serial note program in Puerto Rico also tends
to increase the period during which mortgage loans are held prior to sale. 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.
Changes in prevailing market interest rates between the time Doral
funds a mortgage loan and the time the mortgage loan or mortgage-backed security
is sold to permanent investors could reduce Doral's net interest income on
mortgage loans held prior to sale and gains from the sale of loans, thereby
reducing Doral's net income. Doral attempts to manage these risks by securing
commitments for future delivery or engaging in managed hedging transactions such
as those described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Management."
Interest Rate Management. The Company's Mortgage Banking Business is
subject to the risk that future changes in interest rates may adversely affect
the value of the Company's portfolio of mortgage loans and mortgage-backed
securities, servicing assets and IOs. Interest rate fluctuations may also
adversely affect the Company's servicing income and net interest income. The
Company 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Management."
Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, the Company has benefitted historically
from certain incentives provided by United States and Puerto Rico tax laws.
Section 936, which provided certain of these incentives, was repealed on August
20, 1996, subject to a ten-year grandfather period discussed below.
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 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 by the eligible institutions
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.
On December 2, 1997, a new tax incentives statute (the "1998 Tax
Incentives Act") was signed into law. The 1998 Tax Incentives Act applies to new
companies establishing operations in Puerto Rico as well as to companies
currently conducting operations in Puerto Rico that choose to renegotiate their
existing tax-exempt grants. In the case of existing companies that renegotiate
their grants, only that portion of their income that exceeds an average base
income, as computed under the 1998 Tax Incentives Act, will be subject to the
provisions of the Act. Under the 1998 Tax Incentives Act, the Tollgate Tax will
be replaced with an income tax rate ranging from 2% to 7%. However, passive
income derived from the investment of IDI in Puerto Rico financial institutions
and other designated investments will continue to be tax exempt. The 1998 Tax
Incentives Act, by eliminating the Tollgate Tax, could have the effect of
reducing incentives for the investment of funds by Exempt Companies on a
long-term basis in Puerto Rico but should not affect existing Puerto Rico
incentives for investing on a short-term basis.
12
<PAGE> 17
Most Exempt Companies are United States corporations ("936
Corporations") that meet certain requirements and have elected the benefits of
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
included 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 the Company's net interest income by
helping create a pool of lower-cost funds that the Company 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 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 the credit for
QPSII has resulted in a decrease in the amount of 936 Funds invested in Puerto
Rico financial market by 936 Corporations. Management believes that the
principal impact of the loss of 936 Funds has been a moderate increase in the
Company's funding costs. The adverse effect of any such increase has been
ameliorated by a general decline in interest rates since the repeal of Section
936. Prior to the elimination of the credit for QPSII, the Company had
implemented a strategy to diversify its sources of funding and reduce its
reliance on 936 Funds. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"--Funding."
13
<PAGE> 18
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 Bank and Real Estate Owned. The Company,
through Doral Bank, 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 Bank also originates or purchases
development and construction loans, commercial real estate loans, general
commercial loans and unsecured consumer loans. Prior to the conversion of its
charter to that of a Puerto Rico commercial bank on October 1, 1997, Doral Bank
operated as a federal savings association under the name "Doral Federal Savings
Bank."
At December 31, 1997, 1996 and 1995, loans held for investment which
were originated as part of the Company's other lending activities through Doral
Bank, totaled $133.1 million, $128.8 million and $51.4 million, respectively. Of
such loans, 78%, 81% and 72%, respectively, were secured by mortgages on
single-family residences. Substantially all of Doral Bank's loans are secured by
real property located in Puerto Rico. At December 31, 1997, 1996 and 1995, 99%,
98% and 99%, respectively, of the mortgage loans held for investment by Doral
Bank were secured by property located in Puerto Rico. At December 31, 1997, the
largest loan held for investment by Doral Bank was $3.4 million and the maximum
aggregate amount of loans that Doral Bank could make to a single borrower under
federal and local banking regulations as of such date was $3.7 million. See
"--Regulation--Banking Operations--Puerto Rico Regulation" for a discussion of
the lending limits applicable to Doral Bank as a Puerto Rico commercial bank.
In addition to its portfolio of loans held for investment, Doral Bank
maintains a portfolio of mortgage loans held for sale consisting principally of
first mortgage loans secured by residential properties. As of December 31, 1997,
1996 and 1995, Doral Bank held mortgage loans available for sale of $71.2
million, $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. Doral Bank anticipates that it will continue to sell a significant
portion of its new loan originations and, therefore, that the portion of its
portfolio that is classified as held for sale will increase.
In connection with its acquisition by the Company in 1993, Doral Bank
entered into a Master Loan Production Agreement with the Company whereby the
Company agreed to help Doral Bank meet its stated production goals by, among
other things, (i) advertising, promoting and marketing to the general public;
(ii) interviewing prospective borrowers and conducting the initial processing of
loan applications, consistent with Doral Bank's underwriting guidelines; and
(iii) providing personnel and facilities with respect to the execution of loan
agreements. In the future, Doral Bank may determine to engage in direct mortgage
loan originations through its branch network.
For mortgage loans originated prior to October 1, 1995, Doral Bank had
in effect a Master Purchase, Servicing and Collection Agreement (the "Master
Purchase Agreement") with the Company providing for the sale by Doral Bank 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 Bank's loan portfolio (the "Doral Bank Loans"). The
Master Purchase Agreement further provides that the Company, exclusively, will
service the Doral Bank 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 Bank Loans is a percentage of the
outstanding principal amount of such Doral Bank Loans.
For Doral Bank Loans originated after October 1, 1995, the Master
Purchase Agreement was substituted with a Master Servicing and Collection
Agreement (the "Master Servicing Agreement") whereby the Company will
contractually agree to service all Doral Bank Loans originated after the date
of the Master Servicing Agreement. Under the Master Servicing
14
<PAGE> 19
Agreement, the Company will not, however, purchase the intangible right to
service such Doral Bank 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 Bank Loans being serviced. Doral Bank retains the right to terminate
the Company's servicing rights, without cause, upon notice to the Company.
The following table sets forth certain information regarding the
Company's loans held for investment as part of its other lending activities
through Doral Bank as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, PERCENT DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1997 OF TOTAL 1996 OF TOTAL 1995 OF TOTAL
---- -------- ---- -------- ---- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction loans ........................ $ 9,927 7% $ 2,793 2% $ 2,637 5%
Residential mortgage loans ................ 87,037 65 91,596 70 29,481 57
Commercial real estate mortgage loans...... 19,036 14 18,462 14 9,205 18
Consumer -- secured by mortgage ........... 7,828 6 12,207 9 7,362 14
Consumer -- other ......................... 2,328 2 356 (1) 324 (1)
Commercial (non-real estate) .............. 3,461 2 2,047 2 701 1
Loans on saving deposits .................. 3,513 3 1,771 1 1,940 4
Land secured .............................. 1,488 1 814 (1) 330 (1)
--------- -------- --------- ------- --------- -------
Gross loans(2)(3) ........................ 134,618 100% 130,046 100% 51,980 100%
--------- --------- ---------
Less:
Unearned interest and deferred loan fees.. (322) (561) (383)
Allowance for loan losses ................ (1,241) (719) (242)
--------- --------- ---------
(1,563) (1,280) (625)
--------- --------- ---------
Loans receivable, Net(4) ................. $ 133,055 $ 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 mortgage loans held for sale by Doral Bank of $71.2 million,
$35.0 million and $31.7 million as of December 31, 1997, 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 Bank originates adjustable and fixed interest rate loans.
However, given traditional consumer preferences in Puerto Rico for fixed rate
mortgage loans, Doral Bank's principal product, the Company does not anticipate
significant growth in adjustable rate mortgages except in the case of
construction loans and mortgage loans secured by commercial properties. At
December 31, 1997, 1996 and 1995 approximately 10%, 3% and 7%, respectively, of
Doral Bank'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 Bank pays on the
short-term deposits that have primarily funded these loans.
15
<PAGE> 20
The following table sets forth certain information as of December 31,
1997 regarding the dollar amount of maturities in Doral Bank's portfolio of
loans held for investment based on the remaining contractual maturity. Expected
maturities may deffer from contractual maturities because of prepayments and
other market factors. Loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE 1-5 YEARS DUE 5 OR MORE
DUE 1 YEAR AFTER YEARS AFTER
OR LESS DECEMBER 31, 1997 DECEMBER 31, 1997 TOTAL(1)
---------- ----------------- ----------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction loans ......................... $ 9,927 $ -- $ -- $ 9,927
Residential mortgage loans ................. 3,446 3,205 80,386 87,037
Commercial real estate mortgage loans ...... -- 2,161 16,875 19,036
Consumer - secured by mortgage ............. 863 -- 6,965 7,828
Consumer - other ........................... 1,424 790 114 2,328
Commercial (non-real estate) ............... 2,959 502 -- 3,461
Loans on Saving Deposits ................... 640 2,873 -- 3,513
Land secured ............................... 125 35 1,328 1,488
-------- -------- -------- --------
TOTAL(2) $ 19,384 $ 9,566 $105,668 $134,618
======== ======== ======== ========
</TABLE>
- ------------------------
(1) Amounts have not been reduced for the allowance for loans losses,
deferral loan fees or unearned interest.
(2) Does not include mortgage loans held for sale.
The following table sets forth the dollar amount of total loans due
after one year from December 31, 1997, as shown in the preceding table, which
have fixed interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE-RATE TOTAL
---------- --------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Construction loans.......................... $ 2,117 $ 7,810 $ 9,927
Residential mortgage loans.................. 84,482 2,555 87,037
Commercial real estate mortgage loans....... 19,036 -- 19,036
Consumer - secured by mortgage.............. 6,966 863 7,828
Consumer - other............................ 2,328 -- 2,328
Commercial (non-real estate)................ 756 2,705 3,461
Loans on saving deposits.................... 3,513 -- 3,513
Land secured................................ 1,487 -- 1,488
-------- -------- --------
TOTAL $120,685 $ 13,933 $134,618
======== ======== ========
</TABLE>
Scheduled contractual amortization of loans does not reflect the
expected term of the Doral Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and, with
respect to conventional loans, due-on-sales clauses, which give Doral Bank the
right to declare a conventional loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans
are lower than current mortgage loan rates (due to refinancing of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstances, the weighted average yield on loans decreases as higher-yielding
loans are repaid or refinanced at lower rates.
Nonperforming Assets and Allowance for Loan Losses. Nonperforming
assets ("NPAs") consist of loans on a non-accrual basis and other real estate
owned. Doral Bank's policy is to place all loans 90 days or more past due on a
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. For the years
ended December 31, 1997, 1996 and 1995, the Company would have recognized
$201,000, $114,000 and $211,000, respectively, in additional interest income had
all delinquent loans owned by the Doral Bank been accounted for on an accrual
basis. The policy of placing loans that are 90 days or more past due on
non-accrual status does not apply to mortgage loans held for sale as part of the
Company's Mortgage Banking Business because such loans are considered adequately
secured by real estate. As of December 31, 1997, the Company's mortgage banking
units held approximately $30.7 million in mortgage loans that were 90 days or
more past due that were accruing interest. Such loans are not considered
non-performing loans by the Company.
16
<PAGE> 21
The following table sets forth information with respect to the
Company's non-accrual loans, REO and other nonperforming assets as of December
31, 1997, 1996 and 1995. The Company did not have any troubled debt
restructurings as of any of the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage Banking Business(1):
Non-accrual loans .............................................. $ -- $ -- $1,250(2)
Other real estate owned ........................................ 3,025 2,246 2,085
Other nonperforming assets(3) .................................. 1,597 1,833 893
Other Lending Activities through Doral Bank(4):
Non-accrual loans
Construction ......................................... -- 125 --
Residential Mortgage Loans ........................... 1,623 1,101 715
Commercial Real Estate ............................... 775 502 160
Consumer ............................................. 64 -- 71
Commercial Non-Real Estate ........................... -- -- 3
Other ................................................ -- -- --
------ ------ ------
Total Non-Accrual Loans ........................................ 2,462 1,728 949
------ ------ ------
Other real estate owned ........................................ -- -- --
Total NPAs as a percentage of loans receivable, net and other
real estate owned ........................................... 1.8% 1.3% 1.8%
Total NPAs as percentage of total assets ....................... 0.58% 0.62% 0.59%
Ratio of allowance for loan receivables to
nonperforming loans ......................................... 46.97% 41.62% 25.50%
</TABLE>
- ------------------------
(1) Includes mortgage loans held for sale and real estate owned related to
the Company's Mortgage Banking Business.
(2) Represents $1.25 million of 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.
(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
"Accounts receivable and mortgage servicing advances net" in the
Company's financial statements. See "--Mortgage Banking
Business--Foreclosure Experience and Real Estate Owned."
(4) Includes mortgage loans and REO of Doral Bank.
The Mortgage Banking Business' other REO arises primarily through
foreclosure on mortgage loans repurchased from investors, either because of
breach of representations or warranties or pursuant to recourse arrangements.
The Company believes that the value of the REO reflected on its financial
statements represents a reasonable estimate of the properties' fair value, net
of cost of sales. During the past five years, the impact of loans repurchased as
the result of breach of representations or warranties or pursuant to recourse
arrangements has not been material.
The provision for loan losses relating to loans held by Doral Bank was
$1,241,000 at December 31, 1997, compared to $719,000 as of December 31, 1996.
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 construction loans
and commercial mortgage loans for which Doral Bank 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 Bank's
portfolio of mortgage loans, which are primarily collateralized by real estate.
The collateral for each nonperforming mortgage loan is analyzed by Doral Bank to
determine potential loss exposure, and in conjunction with
-17-
<PAGE> 22
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 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 if economic
conditions change substantially from the assumptions used by the Company in
determining the allowance for loan losses.
-18-
<PAGE> 23
The following table summarizes certain information regarding the
Company's allowance for loan losses related to loans held for investment by
Doral Bank and losses on other real estate owned for both Doral Bank and the
Company's Mortgage Banking Business for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REAL ESTATE HELD FOR SALE:
Balance at beginning of period .............................. $ 356 $ 356 $ 356
Provision for losses ........................................ 787 -- --
Losses charged to the allowance(1) .......................... (467) -- --
Other ....................................................... -- -- --
------- ------- -------
Balance at end of period .................................... $ 676 $ 356 $ 356
======= ======= =======
ALLOWANCE FOR LOAN RECEIVABLES(2):
Balance at beginning of period .............................. $ 719 $ 242 $ 428
Provision for loan losses ................................... 600 655 110
CHARGE - OFFS:
Construction ............................................. -- -- --
Residential Mortgage Loans ............................... -- (103) --
Commercial Real Estate ................................... -- -- --
Consumer ................................................. (124) (123) (114)
Commercial Non-Real Estate ............................... -- -- (188)
Other .................................................... -- -- --
------- ------- -------
TOTAL CHARGE-OFFS ........................................ (124) (226) (302)
RECOVERIES:
Construction ............................................. -- --
Residential Mortgage Loans ............................... -- --
Commercial Real Estate ................................... -- --
Consumer ................................................. 46 48 6
Commercial Non-Real Estate ............................... -- -- --
Other .................................................... -- -- --
------- ------- -------
TOTAL RECOVERIES ......................................... 46 48 6
------- ------- -------
NET CHARGE OFFS ............................................. (78) (178) (296)
------- ------- -------
BALANCE AT END OF PERIOD .................................... $ 1,241 $ 719 $ 242
======= ======= =======
Allowance for loan losses as a percent of total loan
receivables outstanding...................................... 0.92% 0.55% 0.47%
Allowance for loan losses as a percent of non-performing
loan receivable ............................................. 50.41% 41.61% 25.50%
Ratio of net charge-offs to average loan receivables
outstanding ................................................. 0.04% 0.15% 0.54%
</TABLE>
- ------------------------
(1) Does not include losses of $787,000, $305,000 and $145,000 for the
years ended December 31, 1997, 1996 and 1995, respectively, from the
sale of REO that were charged directly against operations.
(2) Relates to loans held for investment by Doral Bank.
-19-
<PAGE> 24
The following table sets forth information concerning the allocation of
Doral Bank's allowance for loan losses by loan category as of the date
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
---- ---- ----
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction ................. $ 10 1% $ 30 4% $ 3 1%
Residential Mortgage Loan .... 763 61 311 43 165 68
Commercial Real Estate ....... 199 16 144 20 26 11
Consumer ..................... 233 19 210 29 43 18
Commercial Non-Real Estate ... 35 3 24 4 5 2
Other ........................ 1 0 -- -- -- --
------ ------ ------ ------ ------ ------
TOTAL ............. $1,241 100% $ 719 100% $ 242 100%
====== ====== ====== ====== ====== ======
</TABLE>
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, 1997, the Company
held securities for trading with a fair market value of $620.3 million,
approximately $550.0 million which consisted of Puerto Rice tax-exempt GNMA
securities 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. Pursuant to SFAS No. 115,
securities held for trading are reflected on the Company's financial statements
at their fair market value with resulting gains or loans included as part of
mortgage loan sales and fees.
In addition to securities held for trading as of December 31, 1997, the
Company held $240.9 million of mortgage-backed securities and other investment
securities that were classified as available for sale and reported at fair
value, with unrealized losses deducted from stockholders equity.
As part of its strategy to maximize net interest income, the Company as
of December 31, 1997, also held approximately $143.5 million in securities and
other investments that are classified as held to maturity because the Company
has the intent and ability to hold these securities until maturity. Of this
amount, approximately $93.1 million were held by Doral Bank.
-20-
<PAGE> 25
The following table presents certain information regarding the
composition and remaining contractual maturity of the Company's available for
sale mortgage-backed and debt securities portfolio as of the dates indicated
below. Expected maturities may differ from contractual maturities because of
prepayments and other market factors. The table does not reflect any effect of
income taxes.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
-------- -------- -------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE:
FNMA MORTGAGE-BACKED SECURITIES
Due within one year........... $ $ --% $ -- $ -- --% $ -- $ -- --%
Due from one-five years ...... -- -- -- -- -- -- -- --
Due from five-ten years ...... -- -- -- -- -- -- -- --
Due over ten years ........... 2,008 1,959 5.69% 2,241 2,134 5.67% 7,164 7,132 6.16%
FHLMC MORTGAGE-BACKED
SECURITIES
Due within one year .......... -- -- --
Due from one-five years ...... -- -- --
Due from five-ten years ...... -- -- --
Due over ten years ........... 2,155 2,087 5.50% 2,365 2,277 5.50% 4,414 4,381 6.13%
GNMA MORTGAGE-BACKED SECURITIES
Due within one year .......... -- -- -- -- -- -- -- -- --
Due from one-five years ...... -- -- -- -- -- -- -- -- --
Due from five-ten years ...... -- -- -- -- -- -- -- -- --
Due over ten years ........... 43,375 44,537 7.01% 7,535 7,596 7.00% 2,992 3,066 7.00%
DEBT SECURITIES AVAILABLE FOR SALE:
U.S. TREASURY
Due within one year .......... -- -- -- -- -- -- -- -- --
Due from one-five years ...... -- -- -- -- -- -- -- -- --
Due from five-ten years ...... -- -- -- -- -- -- -- -- --
Due over ten years ........... 25,661 25,580 6.27% -- -- -- -- -- --
FEDERAL HOME LOANS BANK NOTES
Due within one year .......... -- -- -- -- -- -- -- -- --
Due from one-five years ...... -- -- -- -- -- -- -- -- --
Due from five-ten years ...... -- -- -- -- -- -- -- -- --
Due over ten years ........... 166,200 166,713 7.37% -- -- -- -- -- --
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL SECURITIES
AVAILABLE FOR SALE $239,399 $240,876 7.16% $ 12,141 $ 12,007 6.46% $ 14,570 $ 14,579 6.32%
======== ======== ==== ======== ======== ==== ======== ======== ====
</TABLE>
-21-
<PAGE> 26
The following table presents certain information regarding the
composition and period to maturity of the Company's portfolio of securities and
other investments held to maturity as of the dates indicated. Expected
maturities may differ from contractual maturities because of prepayments and
other market factors. The table does not reflect any effect of income taxes.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
CARRYING MARKET AVERAGE CARRYING MARKET AVERAGE CARRYING MARKET AVERAGE
VALUE VALUE YIELD VALUE VALUE YIELD VALUE VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD
TO MATURITY:
GNMA
Due within one year............ $ $ --% $ -- $ --% $ -- $ --%
Due from one-five years ....... -- -- -- -- -- -- -- -- --
Due from five-ten years ....... -- -- -- -- -- -- -- -- --
Due over ten years ............ 5,053 5,177 7.00% 37,879 38,483 6.98% 10,745 10,919 7.42%
CMO CERTIFICATES (OTHER ISSUERS)
Due within one year .......... 4,895 5,013 5.70% -- -- -- -- -- --
Due from one-five years ...... 5,871 5,868 5.60% 12,488 12,608 5.64% 12,488 12,583 5.64%
Due from five-ten years ...... 12,483 12,720 5.89% 12,483 12,708 5.89% 12,483 12,453 5.89%
Due over ten years ........... 27,227 27,888 4.81% 33,857 34,487 4.78% 34,278 34,486 4.78%
DEBT SECURITIES HELD TO MATURITY:
FARM CREDIT NOTES
Due within one year .......... -- -- -- -- -- -- -- -- --
Due from one-five years ...... -- -- -- -- -- -- -- -- --
Due from five to ten years .. 40,000 40,100 7.12% -- -- -- -- -- --
Due over ten years ........... -- -- -- -- -- -- -- -- --
FEDERAL HOME LOAN BANK NOTES
Due within one year ......... -- -- -- -- -- -- 4,999 4,995 4.89%
Due from one to five years .. -- -- -- 2,000 1,999 7.05% -- -- --
Due from five to ten years .. 5,000 5,013 7.00% 1,493 1,488 7.50% -- -- --
Due over ten years .......... 30,000 30,125 7.44% -- -- -- -- -- --
PR. HOUSING BANK NOTES
Due within one year ......... 5,000 4,990 6.20% -- -- -- -- -- --
Due from one to five years .. -- -- -- -- -- -- -- -- --
Due from five to ten years .. -- -- -- -- -- -- -- -- --
Due over ten years .......... -- -- -- -- -- -- -- -- --
U.S. TREASURY NOTES
Due within one year ......... 6,989 6,978 5.37% -- -- -- 1,997 2,001 5.50%
Due from one to five years .. -- -- -- 6,956 6,976 5.38% -- -- --
Due from five to ten years .. -- -- -- -- -- -- -- -- --
Due from over ten years ..... -- -- -- -- -- -- -- -- --
U.S. TREASURY BILLS
Due within one year ......... 1,016 1,012 5.40% 66 69 5.14% 63 63 5.00%
Due from one to five years .. -- -- -- -- -- -- -- -- --
Due from five to ten years .. -- -- -- -- -- -- -- -- --
Due from over ten years ..... -- -- -- -- -- -- -- -- --
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL SECURITIES HELD TO MATURITY: $143,534 $144,784 6.39% $107,222 $108,818 5.91% $ 77,053 $ 77,500 5.49%
======== ======== ==== ======== ======== ==== ======== ======== ====
</TABLE>
-22-
<PAGE> 27
BROKER-DEALER ACTIVITIES
The Company is involved in the securities business through Doral
Securities, a broker-dealer registered with the Securities and Exchange
Commission (the "Commission") and a member of the National Association of
Securities Dealers, Inc. (the "NASD"). While Doral Securities is engaged in a
general securities business, it has a particular focus on the sale of Puerto
Rico tax-exempt GNMA securities and other Puerto Rican securities.
Doral Securities' business is generally organized into two units:
institutional and retail. The institutional unit employs approximately five
registered representatives and handles the institutional trading activities of
the firm. The retail unit, which employs approximately nine registered
representatives, is responsible for handling the needs of individual retail
clients. Doral Securities is an introducing broker-dealer for retail
transactions with all transactions cleared through the Pershing Division of
Donaldson, Lufkin and Jenrette Securities Corporation. Total fees and
commissions from the institutional and retail units of Doral Securities for the
year ended December 31, 1997 were approximately $675,000.
Doral Securities also earns interest revenues by acting as an
intermediary between borrowers, including the Company, and lenders of funds
utilizing repurchase and reverse repurchase agreements. As of December 31, 1997,
Doral Securities had $442.2 million in outstanding reverse repurchase
agreements, of which approximately $354.8 million consisted of funds loaned to
the Company and which are eliminated in the preparation of the Company's
consolidated financial statements.
Under Regulation K, promulgated by the Federal Reserve, Doral
Securities may only conduct securities activities "outside the United States."
For purposes of Regulation K, Puerto Rico is considered to be outside the United
States. In addition, under Regulation K, Doral Securities may not engage in
underwriting or dealing in equity securities without the prior approval of the
Federal Reserve. Doral Securities is currently considering applying for such
approval.
-23-
<PAGE> 28
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
the Company and its sale to permanent investors. The Company generally holds
Puerto Rico tax-exempt GNMA securities for longer periods to take advantage of
tax-exempt interest income on such securities 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, the
Company'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. The
Company's principal short-term facilities include a 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 have been assigned to a pool
but prior to securitization. These facilities also generally allow for the
financing of mortgage-backed securities upon issuance. Typically, the Company
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 Company 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 the Company 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 the Company 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. The Company's warehousing lines of credit are
generally terminable at the discretion of the lender.
The Company also obtains short-term financing through repurchase
agreements with financial institutions and investment banking firms. Under these
agreements, the Company 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.
Doral uses the proceeds of such sales to repay borrowings under its bank
warehousing lines of credit and to Fund the carrying of its portfolio of
Mortgage-Leased and debt securities. The effective cost of funds under
repurchase agreements is typically lower than the cost of funds borrowed under
Doral's warehousing lines of credit. Doral'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.
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, 1997, the Company's credit facilities included three
presale or gestation facilities with affiliates of major U.S. brokerage houses
and the Syndicated Credit Agreement. 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 the implementation of its strategy to diversify its sources
of funding, the Company entered into a syndicated credit agreement with a group
of banks, including Bankers Trust Company as lender and agent bank (the
"Syndicated Credit Agreement.") The Syndicated Credit Agreement provides for
credit facilities totaling up to $110 million which currently expire on June 27,
1998. The facilities include: (i) a $100 million secured one-year revolving
warehousing credit facility to finance residential mortgage loans and
mortgage-backed securities; and (ii) $10 million secured one-year revolving
credit facilities to provide financing for receivables and other working capital
needs. 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.
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<PAGE> 29
The Company has also entered into a Credit Agreement dated as of
November 5, 1997, with Bankers Trust Company that provides a revolving credit
facility of $25 million for the financing of mortgage servicing rights and
working capital. This credit facility, which expires on October 31, 1998, is
secured by the Company's servicing portfolio. As of December 31, 1997, the
Company had borrowed $15 million under this credit facility.
On October 10, 1996, the Company issued $75 million 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 and for general corporate purposes, including
capital contributions to Doral Bank, Doral Securities and other subsidiaries.
On February 19, 1998, the Company completed the sale of 1,817,000
shares of its Common Stock pursuant to a public underwritten offering. The
public offering resulted in proceeds to the Company of approximately $41.0
million before deducting expenses of the offering.
Funding Arrangements Relating to Banking Operations. Deposits and
borrowings, consisting of FHLB-NY advances and term notes, are the primary
sources of Doral Bank's funds for use in its lending, investment and other
business activities. In addition, Doral Bank obtains funds in the form of loan
repayments and income from operations as well as capital contributions from the
Company. The Company made capital contributions of $3 million, $5 million and
$8.5 million to Doral Bank during the years ended December 31, 1997, 1996 and
1995, respectively. Loan repayments are a relatively stable source of funds
while net increases in deposits are significantly influenced by general interest
rates and money market conditions.
Deposits have been the principal source of funds for Doral Bank's
lending activities. At December 31, 1997, Doral Bank held $305.0 million in
deposits at a weighted-average interest rate cost of 4.36%. Doral Bank offers
passbook savings accounts, checking accounts, NOW accounts and fixed interest
rate certificate accounts with varying maturities. An important portion of Doral
Bank's deposits consists of non-interest bearing wholesale deposit accounts such
as corporate and custodial accounts. At December 31, 1997, $72.1 million
(including $5.4 million of corporate funds which are eliminated in the
preparation of the Company's consolidated financial statements) or approximately
24% of Doral Bank's total deposits consisted of non-interest bearing accounts.
Approximately 17% of Doral Bank's total deposits related to corporate and
custodial accounts of the Company and its affiliates. 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
Bank.
Funding Arrangements Relating to Securities Operations. Since
commencing operations in September 1996, Doral Securities' primary sources of
funding have been capital contributions from the Company, repurchase agreements
with financial institutions and other institutional investors involving
marketable securities and cash flows from operations. Doral Securities'
obligations are generally guaranteed by the Company.
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<PAGE> 30
The following table presents the average balance of each deposit type
and the average rate paid on each deposit type of Doral Bank for the period
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit ............ $147,143 6.01% $ 82,670 5.87% $ 50,142 6.12%
Regular passbook savings ........... 16,233 4.42 13,856 4.36 7,988 3.68
Interest-bearing checking accounts . 10,189 4.40 3,287 3.46 2,349 3.35
Non-Interest bearing(1) ............ 56,010 -- 45,777 -- 44,776 --
-------- -------- -------- -------- -------- --------
TOTAL DEPOSITS ................ $229,575 4.36% $145,590 3.80% $105,175 3.20%
======== ======== ======== ======== ======== ========
</TABLE>
-----------------
(1) Includes $50.7 million, $30.3 million and $27.4 million of
escrow funds of the Company's mortgage banking units maintained
with Doral Bank as of December 31, 1997, 1996 and 1995,
respectively.
The following table sets forth the maturities of Doral Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1997.
<TABLE>
<CAPTION>
AMOUNT
------
Certificate of deposit maturing (IN THOUSANDS)
<S> <C>
Three months or less................. $ 25,662
Over three through six months........ 9,439
Over six through twelve months....... 22,522
Over twelve months................... 44,947
--------
TOTAL....................... $102,570
========
</TABLE>
Doral Bank may also obtain funding through collateralized borrowings
directly from 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 120% of the outstanding obligation. At December 31,
1997, Doral Bank had $32 million in outstanding advances from the FHLB-NY at a
weighted-average interest rate cost of 6.25%. For additional information
regarding funding for Doral Bank 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."
25
<PAGE> 31
From time to time, Doral Bank may also obtain funding through the use
of repurchase agreements with brokerage firms and other financial institutions.
As of December 31, 1997, Doral Bank did not have any outstanding borrowings
under repurchase agreements.
PUERTO RICO INCOME TAXES
The Company is subject to Puerto Rico income taxes. Pursuant to the
Puerto Rico Internal Revenue Code of 1994 (the "PR Code") is subject to a
maximum marginal statutory corporation income tax rate of 39%.
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 and 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 PR Code, corporations are not permitted to file consolidated
returns with their subsidiaries and affiliates. Effective for taxable years
commencing after June 30, 1995, the Company is entitled to a 100% dividend
received deduction on dividends received from Doral Bank, Doral Mortgage or any
other Puerto Rico corporation subject to tax under the PR Code. Effective July
1, 1995, the PR Code also provided for the elimination of the existing 29%
withholding tax applicable on interest paid to nonresident 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
The Company and its subsidiaries are corporations organized under the
laws of Puerto Rico. Accordingly, the Company and its subsidiaries 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.
Prior to October 1, 1997, Doral Bank, as a federal savings association,
was also subject to U.S. income taxes. It was entitled to a foreign tax credit
for a portion of income taxes paid to the Puerto Rico Treasury Department. Doral
Bank had 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. Following the conversion of Doral Bank to a Puerto
Rico commercial bank on October 1, 1997, it is subject to taxation in
substantially the same manner as the Company and the other subsidiaries of the
Company.
EMPLOYEES
At December 31, 1997, the Company employed 984 persons, of whom 297
were involved in loan production activities and 143 were involved in loan
servicing activities. None of the Company's employees is represented by a labor
union and the Company considers its employee relations to be good.
26
<PAGE> 32
REGULATION--MORTGAGE BANKING BUSINESS
The Company's Mortgage Banking Business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans and the issuance and sale of
mortgage-backed securities. Those rules and regulations, among other things,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts, and with respect to VA loans, fix
maximum interest rates. Moreover, lenders such as the Company are required
annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD audited financial
statements, and each regulatory entity has its own financial requirements. The
Company's affairs are also subject to supervision and examination by FHA, VA,
FNMA, FHLMC, GNMA and HUD at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. The Company is also
subject to regulation by the Office of the Commissioner, with respect to, among
other things, licensing requirements and establishment of maximum origination
fees on certain types of mortgage loan 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.
The Company 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,
the Company 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 the Company being
unable to receive such authorization in the future. The Company's operations in
the State of Florida are subject to regulation 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 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--BANKING OPERATIONS
FEDERAL REGULATION
General
The Company is a bank holding company subject to supervision and
regulation by the Federal Reserve under the BHC Act. As a bank holding company,
the Company's activities and those of its banking and nonbanking subsidiaries
are limited to the business of banking and activities closely related or
incidental to banking, and the Company may not directly or indirectly acquire
the ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company in the United States, including a
bank, without the prior approval of the Federal Reserve. In addition, bank
27
<PAGE> 33
holding companies are generally prohibited under the BHC Act from engaging in
nonbanking activities, subject to certain exceptions.
Doral Bank is considered a foreign bank for purposes of the
International Banking Act of 1978, as amended (the "IBA"). Under the IBA, Doral
Bank is not permitted to operate a branch or agency that is located outside of
its "home state" except to the extent that a national bank with the same home
state is permitted to do so as described under "--Interstate Banking
Legislation" below. Puerto Rico is not considered a state for purposes of the
geographic limitations contained in the IBA. Doral Bank does not currently
operate in the mainland United States and, therefore, has not designated any
state as its home state for purposes of the IBA. In addition, some states have
laws prohibiting or restricting foreign banks from acquiring banks located in
such states and treat Puerto Rico's banks and bank holding companies as foreign
banks for such purposes.
Doral Bank is subject to supervision and examination by applicable
federal and state banking agencies, including the FDIC and the Office of the
Commissioner. Doral Bank is subject to requirements and restrictions under
federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be granted and
the interest that may be charged thereon, and limitations on the types of other
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of Doral Bank.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve as it attempts to control
the money supply and credit availability in order to influence the economy.
Holding Company Structure
Doral Bank is subject to restrictions under federal law that govern
certain transactions between the Company or other nonbanking subsidiaries of the
Company, whether in the form of loans, other extensions of credit, investments
or asset purchases. Such transactions by Doral Bank to the Company, or to any
one nonbanking subsidiary of the Company, are limited in amount to 10% of Doral
Bank's capital stock and surplus and, with respect to all of its nonbanking
subsidiaries, to an aggregate of 20% of the transferring institution's capital
stock and surplus. Furthermore, such loans and extensions of credit by Doral
Bank are required to be secured in specified amounts and must be on terms that
are consistent with safe and sound banking practices. All other transactions
between the Company and its nonbanking subsidiaries and Doral Bank, while not
subject to quantitative or collateral requirements, are subject to the
requirement that they be on terms and conditions no less favorable to Doral Bank
than would be available to unaffiliated third parties.
Under Federal Reserve policy, a bank holding company, such as the
Company, is expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such subsidiary bank.
This support may be required at times when, absent such policy, the bank holding
company might not otherwise provide such support. In addition, any capital loans
by a bank holding company to any of its subsidiary banks are subordinate in
right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary depository institution will be assumed by
the bankruptcy trustee and entitled to a priority of payment. Doral Bank is
currently the only subsidiary depository institution of the Company. The Company
has not made any capital loan to Doral Bank nor has it entered into any
agreement with any Federal bank regulating agency to maintain the capital of
Doral Bank.
Because the Company is a holding company, its right to participate in
the assets of any subsidiary upon the latter's liquidation or reorganization
will be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of depository institution subsidiaries) except to the
extent that the Company may itself be a creditor with recognized claims against
the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution (which term includes both banks and savings associations), the
deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in
28
<PAGE> 34
danger of default." "Default" is defined generally as the appointment of a
conservator or a receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance. In some circumstances (depending upon the
amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee
liability may result in the ultimate failure or insolvency of one or more
insured depository institutions in a holding company structure. Any obligation
or liability owned by a subsidiary depository institution to its parent company
is subordinated to the subsidiary bank's cross-guarantee liability with respect
to commonly controlled insured depository institutions. Doral Bank is currently
the only controlled FDIC-insured depository institution of the Company.
Capital Adequacy
Under the Federal Reserve's risk-based capital guidelines for bank
holding companies and state member banks, the minimum guidelines for the ratio
of qualifying total capital ("Total Capital") to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) is 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, in the case of a bank holding company, less goodwill and certain other
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 goodwill, core deposit intangibles, to be deducted from
Tier l Capital. The regulations, however, permit the inclusion of a limited
amount of intangibles related to purchased mortgage servicing rights and
purchased credit card relationships and include a "grandfather" provision
permitting the continued inclusion of certain existing intangibles.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies and member banks. These guidelines provide
for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain
other intangible assets discussed below (the "Leverage Ratio") of 3% for bank
holding companies and member banks that meet certain specified criteria,
including that they have the highest regulatory rating. All other bank holding
companies and member banks will be 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" 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 average total assets, less all intangibles.
The FDIC has established regulatory capital requirements for state
non-member insured banks, such as Doral Bank, that are substantially similar to
those adopted by the Federal Reserve for state member banks.
Set forth below are the Company's and Doral Bank's capital ratios at
December 31, 1997 based on existing Federal Reserve and FDIC guidelines.
<TABLE>
<CAPTION>
THE COMPANY DORAL BANK
----------- ----------
<S> <C> <C>
Tier 1 Capital 18.0% 18.5%
Total Capital 18.2% 19.0%
Leverage Ratio 10.1% 9.6%
</TABLE>
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<PAGE> 35
Failure to meet capital guidelines could subject a bank holding company
or an insured bank to a variety of enforcement remedies, including, with respect
to an insured bank, the termination of deposit insurance by the FDIC, and to
certain restrictions on its business. See "FDICIA" below.
Bank regulators have in the past indicated their desire to raise
capital requirements applicable to banking organizations beyond current levels.
However, management is unable to predict whether and when higher capital
requirements would be imposed and, if so, at what levels or on what schedule.
FDICIA
Under FDICIA, federal banking regulators must take prompt corrective
action in respect of depository institutions that do not meet minimum capital
requirements. 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 1 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 regulatory rating and not
experiencing or anticipating significant growth), a risk based Tier l 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 1 capital ratio of less than 3% or a risk-based Total Capital
ratio of less than 6%. An institution is deemed critically undercapitalized if
it has tangible equity equal to 2% or less of total assets. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.
At December 31, 1997, Doral Bank was well capitalized. An institution's
capital category, as determined by applying the prompt corrective action
provisions of law, may not constitute an accurate representation of the overall
financial condition or prospects of the Company or Doral Bank, and should be
considered in conjunction with other available information regarding Doral
Bank's financial condition and results of operations.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. 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.
The capital-based prompt corrective action provisions of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions
such as Doral Bank, but they are not directly applicable to holding companies,
such as the Company, which control such institutions. However, federal banking
agencies have indicated that, in regulating holding companies, they may take
appropriate action at the holding company level based on their assessment of the
effectiveness of supervisory actions imposed upon subsidiary insured depository
institutions pursuant to such provisions and regulations.
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<PAGE> 36
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve approval, to acquire banks
located in states other than the holding company's home state without regard to
whether the transaction is prohibited under state law. In addition, commencing
June 1, 1997, national and state banks with different home states are permitted
to merge across state lines, with approval of the appropriate federal banking
agency, unless the home state of a participating bank passed legislation prior
to May 31, 1997 expressly prohibiting interstate mergers. States were allowed to
"opt in" to permit interstate branching by merger prior to June 1, 1997, and to
permit de novo interstate branching. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where any bank involved
in the interstate merger transaction could have established or acquired branches
under applicable federal or state law. A bank that has established a branch in a
state through de novo branching may establish and acquire additional branches in
such state in the same manner and to the same extent as a bank having a branch
in such state as a result of an interstate merger. If a state opted out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo. For purposes of the FDIA, Doral Bank is considered a
state bank and is subject to the same restrictions on interstate branching as
other state banks. However, for purposes of the IBA, Doral Bank is considered a
foreign bank. Under IBA, foreign banks may branch interstate by merger or de
novo to the same extent as domestic banks in the foreign bank's home state.
Doral Bank does not currently operate in the mainland United States and
therefore has not selected a home state.
Various other 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 their financial condition or results of operations.
Dividend Restrictions
The payment of dividends by Doral Bank to the Company may be affected
by regulatory requirements and policies, such as the maintenance of adequate
capital. If, in the opinion of the applicable regulatory authority, a depository
institution under its jurisdiction is engaged in, or is about to engage in, an
unsafe or unsound practice (that, depending on the financial condition of the
depository institution, could include the payment of dividends), such regulatory
authority may require, after notice and hearing, that such depository
institution cease and desist from such practice. 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, all insured depository institutions are subject to the capital-based
limitations required by FDICIA. See "--FDICIA."
See "--Regulation--Banking Operations--Puerto Rico Regulation" for a
description of certain restrictions on Doral Bank's ability to pay dividends
under Puerto Rico law.
FDIC Insurance Assessments
The deposits of Doral Bank are insured by the Savings Association
Insurance Fund ("SAIF") administered by the FDIC and, accordingly, Doral Bank is
subject to FDIC deposit insurance assessments.
Pursuant to FDICIA, the FDIC has adopted a risk-based assessment
system, under which the assessment rate for an insured depository institution
varies according to the level of risk incurred in its activities. An
institution's risk category is based partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each
insured depository institution is also assigned to one of the following
"supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially
sound institutions with only a few minor weaknesses; group "B" institutions are
institutions that demonstrate weaknesses that, if not corrected, could result in
significant deterioration; and group "C" institutions are
31
<PAGE> 37
institutions for which there is a substantial probability that the FDIC will
suffer a loss in connection with the institution unless effective action is
taken to correct the areas of weakness.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA")
was enacted and signed into law. DIFA repealed the statutory minimum premium,
and currently premiums related to deposits assessed by both the BIF and the
Savings Association Insurance Fund ("SAIF") are to be assessed at a rate of
between 0 cents and 27 cents per $100.00 of deposits. DIFA also provides for a
special one-time assessment imposed on deposits insured by the SAIF to
recapitalize the SAIF to bring the SAIF up to statutory required levels. Doral
Bank accrued for the one-time assessment in the third quarter of 1996.
DIFA also separated, effective January 1, 1997, the Financing
Corporation ("FICO") assessment to service the interest on its bond obligations
from the BIF and SAIF assessments. The amount assessed on individual
institutions by the FICO is in addition to the amount, if any, paid for deposit
insurance according to the FDIC's risk-related assessment rate schedules. FICO
assessment rates for 1997 were set at 1.30 basis points annually for
BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable
deposits. These rates may be adjusted quarterly to reflect changes in assessment
bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits
must be one-fifth the rate on SAIF-assessable deposits until the insurance funds
are merged or until January 1, 2000, whichever occurs first. As of December 31,
1997, Doral Bank had a deposit base of approximately $293 million, consisting
entirely of SAIF assessment deposits.
Brokered Deposits
FDIC regulations adopted under FDICIA govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it is
well capitalized or (ii) it is adequately capitalized and receives a waiver from
the FDIC. A bank that is adequately capitalized may not pay an interest rate on
any deposits in excess of 75 basis points over certain prevailing market rates
specified by regulation. There are no such restrictions on a bank that is well
capitalized. The Company does not believe the brokered deposits regulation has
had or will have a material effect on the funding or liquidity of Doral Bank
which is currently a well capitalized institution.
PUERTO RICO REGULATION
General
As a commercial bank organized under the laws of the Commonwealth,
Doral Bank is subject to supervision, examination and regulation by the Office
of the Commissioner of Financial Institutions of the Commonwealth (the "Office
of the Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as
amended (the "Banking Law").
Section 27 of the Banking Law requires that at least 10% of the yearly
net income of Doral Bank be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal to
10% of total paid-in capital (preferred and common). As of December 31, 1997,
Doral Bank had an adequate reserve fund established.
Section 27 of the Banking Law 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
institution.
Section 16 of the Banking Law requires every bank to maintain a legal
reserve which shall not be less than 20% of its demand liabilities, other than
government deposits (federal, state and municipal) secured by actual collateral.
The Office of the Commissioner can by regulation increase the reserve
requirement to 30% of demand deposits.
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<PAGE> 38
Section 17 of the Banking Law permits Doral Bank to make loans to any
one person, firm, partnership or corporation, up to an aggregate amount of 15%
of the paid-in capital and reserve fund of the Bank and of such other components
as the Office of Commissioner may permit from time to time. As of December 31,
1997, the legal lending limit for Doral Bank under this provision based solely
on its paid-in capital and reserve fund was approximately $3.7 million. If such
loans are secured by collateral worth at least 25% more than the amount of the
loan, the aggregate maximum amount may reach one third of the paid-in capital of
the bank, plus its reserve fund and such other components as the Office of
Commissioner may permit from time to time. 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
the Commonwealth, or by current debt bonds, not in default, of municipalities or
instrumentalities of the Commonwealth.
Section 14 of the Banking Law authorizes Doral Bank 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. Doral Bank did not have any subsidiaries as of
December 31, 1997, but is in the process of applying to establish a mortgage
banking subsidiary in the United States.
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 the
Commonwealth. The current regulations of the Finance Board provide that the
applicable interest rate on loans to individuals and unincorporated businesses
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.
CERTAIN REGULATORY RESTRICTIONS ON INVESTMENTS IN COMPANY COMMON STOCK
Because of the Company's status as a bank holding company, owners of
the Common Stock are subject to certain restrictions and disclosure obligations
under various federal laws, including the BHC Act. Regulations pursuant to the
BHC Act generally require prior Federal Reserve 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 and either (i)
the Company has registered securities under Section 12 of the Securities
Exchange Act of 1934, or (ii) no person will own, control or hold the power to
vote a greater percentage of that class of voting securities immediately after
the transaction. 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.
Section 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 or 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. The Office of the Commissioner has interpreted the
restrictions of Section 12 as applying to acquisitions of voting securities of
entities controlling a bank, such as a bank holding company. Under the Puerto
Rico Banking Act, the determination of the Office of the Commissioner whether to
approve a change of control filing is final and non-appealable.
The provisions of the Mortgage Banking Law also only require regulatory
approval for the acquisition of more than 10% of the Company's outstanding
voting securities. See "--Regulation--Mortgage Banking Business."
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<PAGE> 39
The above regulatory restrictions relating to investment in the Company
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.
REGULATION--BROKER-DEALER OPERATIONS
Doral Securities is registered as a broker-dealer with the Securities
and Exchange Commission (the "Commission") and the Office of the Commissioner.
Doral Securities is also a member of the National Association of Securities
Dealers, Inc. As a registered broker-dealer, it is subject to regulation by the
Commission, 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, Doral Securities is subject to the Commission'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. As a subsidiary of a bank holding company, Doral Securities
is also subject to regulation by the Federal Reserve.
MARKET AREA AND COMPETITION
Prior to March 1992, Puerto Rico was the Company'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 99% of the Company's loan originations for the years ended
December 31, 1997, 1996 and 1995. Within Puerto Rico, the Company's primary
market area is the metropolitan San Juan area, which accounted for approximately
52%, 55% and 45% of the Company loan originations for the years ended December
31, 1997, 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 commercial banks. There are approximately
37 mortgage banks, one savings institution and 16 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.
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 3.8 million for the Puerto Rico
Government's fiscal year ending June 30, 1997. 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 is referred to herein as "commonwealth
status." The United States and Puerto Rico share a common defense, market and
currency. Puerto Rico exercises virtually the same control over its internal
affairs as a state government does. The people of Puerto Rico are citizens of
the United States, but do not vote in national elections and 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
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<PAGE> 40
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 48.4% of the votes cast,
and statehood and independence received 46.2% and 4.4% of the votes casts,
respectively.
On March 4, 1998, the U.S. House of Representatives approved
legislation (the "Political Status Act") that provides for 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 Political Status Act, 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 was
introduced into the Senate on March 19, 1997. The Political Status would have to
be approved by the Senate and signed by the President (or his veto overridden)
before becoming law. It is not possible at this time to predict what course the
legislation will follow in the Senate, and whether it will be subsequently
enacted into law.
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 fiscal 1970 to 37.8% in fiscal 1996.
The economy of Puerto Rico is closely integrated with that of the
mainland United States. During the fiscal year ended June 30, 1997,
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, 1997, Puerto Rico experienced a positive adjusted
merchandise trade balance of $2.7 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.
Gross product increased from $25.1 billion ($24.5 billion in 1992
prices) for fiscal 1993 to $32.1 billion ($27.7 billion in 1992 prices) for
fiscal 1997, an increase of 27.7% (12.9% in real terms). Since fiscal 1985,
personal income, both aggregate and per capita, has increased consistently each
fiscal year. In fiscal 1997, aggregate personal income was $32.1 billion ($30.0
billion in 1992 prices) and personal income per capita was $8,509 ($7,957 in
1992 prices). Average employment increased from 999,000 in fiscal 1993 to
1,128,000 in fiscal 1997. Average unemployment decreased from 16.8% in fiscal
1993 to 13.1% in fiscal 1997.
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. See "Puerto Rico
Secondary Mortgage Market and Favorable Tax Treatment." 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
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<PAGE> 41
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.
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
adjacent sites and consist of approximately 30,000 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 throughout Puerto Rico and New York City. These
offices are leased for various terms expiring through 2005. Annual aggregate
rental payments made in the years 1997, 1996 and 1995 were $2,517,614,
$2,083,538 and $2,096,979, 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 Bank's branch in
Catano, Puerto Rico is located and a two acre parcel of undeveloped land, which
the Company purchased for approximately $3.0 million in December 1996, on which
the Company intends to construct new headquarter 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Doral'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 (the "NASDAQ
National Market") under the symbol "DORL." Prior to September 23, 1997, the
Company's Common Stock was traded under the symbol "FRCC." The table below sets
forth, for the calendar quarters indicated, the high and low sales prices on the
NASDAQ National Market and the cash dividends declared on the Common Stock
during such periods.
<TABLE>
<CAPTION>
CASH
DIVIDEND
PRICE RANGE DECLARED
------------------------ PER SHARE
CALENDAR ---------
YEAR QUARTER HIGH LOW
<S> <C> <C> <C> <C>
1996 1st $11 3/8 $ 8 7/8 $0.075
2nd 11 3/4 9 3/8 0.085
3rd 12 9/16 9 3/8 0.085
4th 14 3/8 10 3/8 0.085
1997 1st $15 5/8 $13 0.085
2nd 16 5/16 12 1/8 0.10
3rd 27 14 7/8 0.10
4th 25 3/4 19 3/4 0.10
1998
(through March 25, 1998) 1st $29 7/8 $20 1/2 0.10
</TABLE>
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<PAGE> 42
As of March 25, 1998, the approximate number of record holders of the
Company's Common Stock was 785, 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 $29.50 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.
The terms of the Company's 8% Convertible Cumulative Preferred Stock
(Liquidation Preference $1,000 per share) (the "8% Preferred Stock") do not
permit the payment of cash dividends on Common Stock if dividends on the 8%
Preferred Stock are in arrears. The holders of shares of 8% Preferred Stock are
entitled to receive cumulative cash dividends, when, as and if declared by the
Board of Directors, out of assets of the Company legally available therefor, at
the annual rate of 8% of their liquidation preference, or $6.66 2/3 per share
per month.
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 its 7.84% Senior
Notes due 2006 (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 October 1,
1996, (the "Measure Date") exceed the sum of:(i) 50% of the Company's
Consolidated Net Income (as defined in the Senior Note Indenture), accrued from
the Measure Date to the end of the quarter ending not less than 45 days prior to
the dividend payment date; (ii) $15 million; and (iii) the net proceeds of any
sale of capital stock subsequent to the Measure Date. In addition, 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 ability of the Company to pay dividends may also be restricted by
various regulatory requirements and policies of bank regulatory agencies having
jurisdiction over the Company and its subsidiaries. See "BUSINESS--Regulation
- --Banking Operations--Federal Regulation--Dividend Restrictions."
The Puerto Rico Internal Revenue Code generally imposes a 10%
withholding tax on the amount of any dividends paid by Doral 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 except that notwithstanding the making of such election a
10% withholding will still be made on the amount of any dividend distribution
unless the individual files with the Company, prior to the first distribution
date for the taxable year, a certificate to the effect that said individual's
gross income from sources within Puerto Rico during the taxable year does not
exceed $1,300 if single, or $3,000 if married, in which case dividend
distributions will not be subject to Puerto Rico.
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<PAGE> 43
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, 1997. This information should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" contained herein.
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<PAGE> 44
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 90,131 $ 66,987 $ 61,907 $ 46,508 $ 23,775
Interest expense 61,438 46,443 43,380 23,252 9,710
----------- ----------- ----------- ----------- -----------
Net interest income 28,693 20,544 18,527 23,256 14,065
Provision for loan losses 600 655 110 168 23
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 28,093 19,889 18,417 23,088 14,042
Non-interest income 45,286 40,846 29,930 25,535 46,453
Non-interest expense 35,582 29,456 26,287 29,878 29,574
----------- ----------- ----------- ----------- -----------
Income before taxes, cumulative effect
and extraordinary items 37,797 31,279 22,060 18,745 30,921
----------- ----------- ----------- ----------- -----------
Income taxes 5,249 4,238 2,500 2,530 9,601
Income before cumulative effect and 32,548 27,041 19,560 16,215 21,320
extraordinary item
Cumulative effect of change in
accounting principle -- -- -- 1,215 --
----------- ----------- ----------- ----------- -----------
Income before extraordinary item 32,548 27,041 19,560 17,430 21,320
Extraordinary item -
non-cash loss on extinguishment of debt 12,317 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income $ 20,231 $ 27,041 $ 19,560 $ 17,430 $ 21,320
=========== =========== =========== =========== ===========
Cash dividends paid $ 7,199 $ 6,008 $ 4,374 $ 3,943 $ 3,142
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:(1)
Mortgage loans held for sale $ 406,297 $ 261,608 $ 245,484 $ 263,773 $ 262,515
Securities held for trading, net 620,288 436,125 418,348 327,960 129,180
Securities held to maturity 143,534 107,222 77,945 66,804 6,530
Security available for sale 240,876 12,007 14,579 -- --
Loans receivable, net 133,055 128,766 51,355 34,809 9,561
Total assets 1,857,789 1,106,083 917,922 768,019 486,431
Loans payable and securities
sold under agreements to repurchase 1,103,448 584,294 598,436 569,436 335,994
Notes payable 164,934 152,126 51,682 17,055 --
Deposits accounts 300,494 158,902 95,740 66,471 26,451
Stockholder's equity 186,955 150,531 129,017 90,496 76,945
PER SHARE DATA:(2)
Basic:
Income before cumulative effect
and extraordinary item $ 1.77 $ 1.49 $ 1.33 $ 1.15 $ 1.58
Cumulative effect -- -- -- 0.08 --
Extraordinary item (0.67) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income $ 1.10 $ 1.49 $ 1.33 $ 1.23 $ 1.58
=========== =========== =========== =========== ===========
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Diluted:(2)
Income before cumulative effect and
extraordinary item $ 1.70 $ 1.42 $ 1.27 $ 1.07 $ 1.41
Cumulative effect -- -- -- 0.08 --
Extraordinary item (0.64) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income $ 1.06 $ 1.42 $ 1.27 $ 1.15 $ 1.41
=========== =========== =========== =========== ===========
Cash dividends
Common Stock 0.39 0.33 0.29 0.26 0.20
Serial A Preferred Stock -- 0.3825 1.05 1.05 1.05
8% Convertible Cumulative Preferred
Stock 15.33 -- -- -- --
Weighted average shares outstanding:
Basic 18,340,079 18,133,122 14,615,840 13,885,468 13,229,708
Diluted 19,364,316 19,362,536 15,520,270 15,153,928 15,033,928
OPERATING DATA:
Mortgage loans originated $ 1,037,000 $ 817,000 $ 636,000 $ 824,000 $ 1,433,000
and purchased
Loan Servicing Portfolio $ 4,655,000 $ 3,068,000 $ 2,668,000 $ 2,644,000 $ 2,375,000
SELECTED RATIOS:(3)
Return on Average Assets 1.37% 2.68% 2.32% 2.78% 5.28%
Return on Average Equity 11.99% 19.35% 17.82% 20.82% 31.49%
Dividend Payout Ratio for Common Stock 36.79% 23.24% 22.83% 22.61% 14.18%
Average Equity to Average Assets 11.39% 13.81% 13.02% 13.35% 16.77%
</TABLE>
- ---------------------
(1) Certain reclassifications of prior years' data have been made to
conform to 1997 classifications.
(2) Adjusted to reflect a two-for-one stock split effective December 10,
1993 and a two-for-one stock split effective August 28, 1997.
(3) The Return on Average Assets Ratio, Return on Average Equity Ratio and
the Dividend Payout Ratio for Common Stock based on income before
extraordinary item for 1997 would have been 2.19%, 19.29% and 22.94%,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Doral has been engaged in the mortgage banking business since 1972.
Doral is the leading originator of mortgage loans on single-family residences in
Puerto Rico. The volume of loans originated and purchased by Doral was
approximately $1.04 billion , $817 million, $636 million, $824 million and $1.4
billion for the years ended December 31, 1997, 1996, 1995, 1994, and 1993,
respectively. The Company issued $497 million of GNMA mortgage-backed securities
to rank No. 1 in Puerto Rico and No. 27 in the United States in such issuances
for the year ended December 31, 1997 according to the "Mortgage Marketplace."
The Company's mortgage servicing portfolio has increased from
approximately $2.4 billion as of December 31, 1993 to approximately $4.7 billion
as of December 31, 1997. The Company's traditional strategy has been to increase
the size of its mortgage servicing portfolio by relying principally on internal
loan originations. During 1997, the Company purchased
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<PAGE> 46
approximately $1.0 billion in mortgage servicing rights. While the Company will
continue to emphasize internal loan originations as the principal method to
increase the size of its mortgage servicing portfolio, it also intends to
purchase mortgage servicing rights from third parties to the extent it can
identify attractive opportunities.
The Company entered the banking business in September 1993 through the
acquisition of a federal thrift institution, Doral Bank (formerly Doral Federal
Savings Bank). In October 1997, Doral Bank converted its charter to that of a
Puerto Rico commercial bank and currently operates through five branches in the
San Juan, Puerto Rico metropolitan area. For the years ended December 31, 1995,
1996 and 1997 Doral Bank's net income was $1.5 million, $2.3 million and $5.0
million respectively. The increases in net income reflects a substantial
increase in interest earning assets during these periods. Doral Bank increased
its assets from $160.4 million as of December 31, 1995 to $280.7 million and
$427.6 million as of December 31, 1996 and 1997, 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.
In September 1996, the Company entered the securities business through
the establishment of Doral Securities, a broker-dealer subsidiary that operates
through a single branch office located in San Juan, Puerto Rico.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995.
GENERAL
Doral'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 Doral's revenues are: (i) net interest
income; (ii) mortgage loan sales and fees; (iii) servicing income; (iv) gain on
sale of servicing rights; and (v) other income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income ..................... $90,131 $66,987 $61,907
Interest expense .................... 61,438 46,443 43,380
------- ------- -------
Net interest income ................. 28,693 20,544 18,527
Mortgage loan sales and fees ........ 28,588 26,610 13,528
Servicing income .................... 14,995 11,659 10,577
Gain on sale of servicing rights .... -0- 1,813 5,205
Other income ........................ 1,703 764 620
</TABLE>
Net Income. The Company's income from operations for the year ended
December 31, 1997 increased to $32.5 million compared to $27.0 million for 1996
and $19.6 million for 1995. After an extraordinary non-cash charge of $12.3
million, net income for the year ended December 31, 1997 was $20.2 million
compared to $27.0 million for 1996 and $19.6 million for 1995. The extraordinary
non-cash charge was related to the exchange by the Company of convertible
preferred stock for outstanding convertible subordinated debentures. See
"Liquidity and Capital Resources" and Note 3 and Note 26 to the Company's
Consolidated Financial Statements for additional information regarding this
transaction. Consolidated results include the operations of Doral Bank, which
contributed approximately $5.0 million to the Company's consolidated net
earnings in 1997, compared to $2.3 million for 1996 and $1.5 million for 1995.
41
<PAGE> 47
Net Interest Income. Net interest income is the difference between the
interest earned by Doral on its interest earning assets and the interest paid by
Doral on its interest bearing liabilities and amortization of the Company's
interest only strips. See "Amortization of IOs and MRSs". The conditions that
affect net interest income from period to period include the relationship
between interest income earned by Doral on its interest earnings assets and
interest expense paid by Doral on its interest bearing liabilities, the amount
of interest earning assets held by Doral and the average holding period between
the time mortgage loans (including mortgage-backed securities) are originated
and sold as part of Doral's mortgage banking activities.
In each year since Doral's inception, interest income earned by Doral
on its interest earning assets has exceeded Doral's interest expense. Doral's
net interest income increased by approximately 40% from 1996 to 1997 compared to
an 11% increase from 1995 to 1996. The increase in net interest income for both
1997 and 1996 is principally due to an increase in Doral's total interest income
as a result of an increase in its interest earning assets. Doral Bank
contributed approximately $10.1 million or 35% of the consolidated net interest
income of the Company for the year ended December 31, 1997, compared to $6.9
million or 34% of consolidated net interest income for the year ended December
31, 1996 and to $4.3 million or 23% of consolidated net interest income for the
year ended December 31, 1995.
The following table presents for the Company for the periods indicated
the total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for the Company and its non-banking
subsidiaries and average daily balances for Doral Bank, in each case during the
periods presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- --------------------------- ------------------------------
NET INTEREST INCOME 1997 1996 1995
- -------------------------------------------------------------------- --------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- -------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS $ 371,099 $32,768 8.83% $341,532 $31,410 9.20% $ 300,878 $28,213 9.38%
MORTGAGE-BACKED SECURITIES 607,944 45,464 7.48% 460,415 32,106 6.97% 412,725 31,883 7.72%
INVESTMENT SECURITIES 71,444 5,454 7.63% 30,009 2,031 6.77% 8,966 490 5.47%
OTHER INTEREST-EARNINGS ASSETS(1) 90,364 6,445 7.13% 20,850 1,440 6.91% 18,585 1,321 7.11%
TOTAL INTEREST BEARING ASSETS $1,140,851 $90,131 7.90% $852,806 $66,987 7.85% $ 741,154 $61,907 8.35%
INTEREST-EARNING LIABILITIES
LOANS PAYABLE $ 188,880 $13,325 7.05% $202,850 $13,621 6.71% $ 219,750 $15,713 7.15%
REPURCHASE AGREEMENTS 548,310 31,665 5.78% 385,710 21,002 5.45% 368,175 21,712 5.90%
DEPOSITS 229,575 10,014 4.36% 145,590 5,526 3.80% 105,175 3,361 3.20%
OTHER BORROWED FUNDS(2) 92,706 6,434 6.94% 84,120 6,294 7.48% 33,923 2,594 7.65%
TOTAL INTEREST BEARING LIABILITIES $1,059,471 $61,438 5.80% $818,270 $46,443 5.68% $ 727,023 $43,380 5.97%
NET INTEREST BEARING ASSETS $ 81,380 $ 34,536 $ 14,131
NET INTEREST INCOME $28,693 $20,544 $18,527
INTEREST RATE SPREAD(3) 2.10% 2.17% 2.38%
INTEREST RATE MARGIN(3) 2.52% 2.41% 2.50%
NET INTEREST-EARNINGS ASSETS RATIO 107.68% 104.22% 101.94%
</TABLE>
- --------------------
(1) Consist of money market instruments, reverse repurchase agreements and
deposits in other banks.
(2) Consist of FHLB-NY advances, notes payable and convertible subordinated
debentures.
(3) Interest rate spread represents the difference between the Company's
weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest earning
assets.
42
<PAGE> 48
The following table describes the extent to which changes in interest
rates and changes in volume of interest-rated assets and liabilities have
affected the Company's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has been
allocated in proportion to the absolute dollar amounts of the changes due to
rate and volume.
<TABLE>
<CAPTION>
- ----------------------------------------------------- ---------------------------------- ----------------------------------
NET INTEREST VARIANCE ANALYSIS 1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE/(DECREASE) DUE TO: INCREASE/(DECREASE DUE TO:
VOLUME RATE TOTAL: VOLUME RATE TOTAL:
- ----------------------------------------------------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS $ 2,719 ($ 1,361) $ 1,358 $ 3,812 ($ 615) $ 3,197
MORTGAGE-BACKED SECURITIES 10,288 3,070 13,358 3,684 (3,461) 223
INVESTMENT SECURITIES 2,804 619 3,423 1,150 391 1,541
OTHER INTEREST-EARNING ASSETS 4,801 204 5,005 161 (42) 119
-------- -------- -------- -------- -------- --------
TOTAL INTEREST-EARNING ASSETS $ 20,612 $ 2,532 $ 23,144 $ 8,807 ($ 3,727) $ 5,080
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
LOANS PAYABLE (938) 642 (296) (1,208) (884) (2,092)
REPURCHASE AGREEMENTS 8,854 1,809 10,663 1,034 (1,744) (710)
DEPOSITS 3,188 1,300 4,488 1,292 873 2,165
OTHER BORROWED FUNDS 642 (502) 140 3,838 (138) 3,700
-------- -------- -------- -------- -------- --------
TOTAL INTEREST-BEARING LIABILITIES $ 11,746 $ 3,249 $ 14,995 $ 4,956 ($ 1,893) $ 3,063
-------- -------- -------- -------- -------- --------
NET INTEREST-EARNINGS ASSETS $ 8,866 ($ 717) $ 8,149 $ 3,851 ($ 1,834) $ 2,017
======== ======== ======== ======== ======== ========
</TABLE>
Interest Income. Doral's total interest income increased from
approximately $61.9 million during 1995 to $67.0 million during 1996 to $90.1
million during 1997. The increase in interest income is primarily related to the
increase in the Company's total average interest earning assets which increased
by approximately $288 million during 1997 and by approximately $112 million
during 1996.
Interest income on loans increased by $1.4 million or 4% during 1997 as
compared to 1996 and by $3.2 million or 11% during 1996 as compared to 1995. The
increase during 1997 reflected an increase on interest income received by Doral
Bank on loans of $7.6 million during 1997 as compared to 1996, this increase was
partially offset by a decrease of $6.2 million on interest income on loans
received by Doral's mortgage banking units, reflecting increased sales and
securitization of whole loans.
Interest income on mortgage-backed securities increased by $13.4
million or 42% during 1997 as compared to 1996 after increasing by only $223,000
or 1% from 1995 to 1996. The increase during 1997 compared to 1996 reflected an
increase in the average balance of mortgage-backed securities, which increased
from $460 million to $608 million during this period. The increase in
mortgage-backed securities reflected the strategy of the Company to hold Puerto
Rico tax exempt GNMA securities for longer periods prior to sale in order to
maximize tax exempt interest income on such securities as well as to hold such
securities pending the implementation of legislative changes in Puerto Rico
modifying the tax exempt status of such securities. See "Recent Developments -
Changes in Puerto Rico Tax Laws Affecting Tax Exempt Status of FHA and VA
Loans."
Interest income with respect to investment securities increased by $3.4
million or 169% from 1996 to 1997 and by $1.5 million or 314% from 1995 to 1996.
The increase in interest income reflected the strategy of Doral to increase its
tax exempt interest income by investing in U.S. Treasury and Agency securities,
the interest on which is tax exempt under Puerto Rico law and is not subject to
U.S. income taxation in the case of Doral, because of Doral's status as a
foreign corporation
43
<PAGE> 49
for U.S. income tax purposes. Doral's average balance of investment securities
was $71 million for the year ended December 31, 1997 as compared to $30 million
and $9 million for the years ended December 31, 1996 and 1995, respectively.
Interest income with respect to other interest-earning assets increased
by $5.0 million or 348% from 1996 to 1997 as compared to an increase of only
$119,000 from 1995 to 1996. Other interest-earning assets consist primarily of
money market instruments, overnight deposits, term deposits and reverse
repurchase agreements. The increase from 1996 to 1997 was due primarily to
higher liquidity in the banking and broker-dealer subsidiaries of the Company
and the investment of such liquidity in reverse repurchase agreements and term
deposits. The increase in interest income from other interest-earning assets
reflects Doral's strategy to diversify its sources of interest income by
entering into new business segments.
Interest Expense. Doral's total interest expense increased to $61.4
million during 1997 compared to $46.4 million for 1996, an increase of 32%.
Interest expense during 1996 increased by $3.1 million compared to 1995 an
increase of 7%. The large increase in interest expense for 1997 was due
primarily to the increase in the amount of Doral's interest-bearing liabilities
used to fund the increase in the Company's interest earning assets. Average
interest bearing liabilities increased to $1.1 billion at an average cost of
5.80% for the year ended December 31, 1997, compared to $818 million at an
average cost of 5.68% for the year ended December 31, 1996 and $727 million at
an average cost of 5.97% for the year ended December 31, 1995.
Interest expense related to loans payable decreased by $296,000 million
or 2.2% 1996 from 1997 and also decreased from 1995 to 1996 by $2.1 million or
13%. The decrease during 1997, 1996 and 1995 were largely the result of the
Company's efforts to diversify its funding sources by obtaining lower cost
borrowings as well as longer term borrowings. The weighted-average interest rate
cost for borrowings under the Company's warehouse lines of credit was 7.05% for
1997 compared to 6.71% for 1996 and 7.15% for 1995.
Interest expense related to securities sold under agreements to
repurchase increased by $10.7 million or 51% during 1997 as compared to 1996
after having decreased by $710,000 during 1996 as compared to 1995. The increase
during 1997 reflected increased borrowings to finance mortgage-backed securities
and other investment securities at the Company's mortgage banking units. The
weighted average interest rate of Doral's borrowings under repurchase agreements
was 5.78% for 1997, 5.45% for 1996 and 5.90% for 1995.
Interest expense on deposits increased by $4.5 million or 81% during
1997 as compared to 1996 and increased by $2.2 million or 64% during 1996 as
compared to 1995. The increase in interest expense on deposits reflects the
increase in deposits held at Doral Bank which increased from $95.7 million as of
December 31, 1995 to $158.9 million as of December 31, 1996 and $300.5 million
as of December 31, 1997. The growth in deposits reflects the opening of
additional branches by Doral Bank, which now operates through five branches, and
the offering of competitive rates. Doral Bank intends to continue its branch
expansion program during 1998. Doral Bank's average interest cost on deposits
was 4.36% during 1997, 3.80% during 1996 and 3.20% during 1995. As of December
31, 1997, approximately, $50.7 million ($5.4 million of such deposits are not
reflected in Doral's Consolidated Financial Statements because of inter-company
eliminations) or 16.9% of total deposits held at Doral Bank consisted of
non-interest bearing accounts comprised primarily of servicing accounts and
corporate deposit accounts maintained by Doral and its affiliates.
Interest expense on other borrowed funds increased by $140,000 or 2.2%
during 1997 as compared to 1996 and increased by $3.7 million or 143% during
1996 as compared to 1995. Interest expense on other borrowed funds includes
various term notes issued by Doral Bank, the Company's $75 million senior notes
due October 10, 2006 and Doral Bank's advances from the FHLB-NY as well as
various other borrowings. The increase in interest expense in other borrowed
funds from 1996 to 1997 was primarily due to long-term advances from the FHLB-NY
taken during 1997, while the increase from 1995 to 1996 was due to the issuance
of the Company's $75 million senior notes due October, 2006 and the issuance of
various term notes issued by Doral Bank.
44
<PAGE> 50
Provision for Loans Losses. The provision for loan losses relates to
loans held by Doral Bank and is charged to earnings to bring the total allowance
for loan losses to a level considered appropriate by management based on the
Company's loss experience, current delinquency rates, known and inherent risk in
the loan portfolio, the estimated value of any underlying collateral and an
assessment of current economic conditions. While management believes that the
current provision for loan losses is sufficient, future additions to the
allowance for loan losses could be necessary if economic conditions change
substantially from the assumptions used by the Company in determining the
allowance for loan losses.
The Company made provisions to its allowance for loan losses of
$600,000, $655,000 and $110,000, for the years ended December 31, 1997, 1996 and
1995. The provision was $55,000 less during 1997 versus 1996 because of the
stability of the size of the loan portfolio as a result of loan sales and
improvement in delinquency ratios experienced during 1997. The provision
increased by $545,000 from 1995 to 1996 primarily as a result of the increase in
the size of Doral Bank's loan portfolio and an increase in the amount of
construction loans and commercial mortgage loan for which Doral Bank provides a
higher allowance for loan losses.
Revenues from Mortgage Loan Sales and Fees. Revenues from Mortgage Loan
Sales and Fees consist of the following components: (i) gains on sales of loans
and origination fees (net of direct loan origination costs), (ii) net gains or
losses on hedging instruments and (iii) unrealized gains or losses on securities
held for trading.
Revenues from mortgage loan sales and fees increased by 7% during 1997,
compared to 97% in 1996 and to 28% in 1995. The increases in 1997 and 1996 were
the result of increased volume and profitability on sales of various loans
products including the creation of interest only strips ("IOs") in connection
with bulk sales of mortgage loans to corporate investors.
The Company creates IOs (previously classified as excess servicing fees
receivable) as a result of the sale of loans in bulk or securitization
transactions. See Note 2 to the Company's Consolidated Financial Statements. IOs
are created on the sale of loans by computing the present value of the excess of
the weighted-average coupon on the loans sold over the sum of: (i) the
pass-through interest paid to the investor and (ii) a basic servicing fee, based
on the servicing fee permitted by FNMA and FHLMC, and adjusting such amount for
expected losses and prepayments. The amount of the IO is recognized at the time
of sale of the related loans as an adjustment to the resulting gain or loss on
sale of loan and is recorded as a component of "Mortgage Loan Sales and Fees" on
the Company's Consolidated Statement of Income. Sales of mortgage loans made
during 1997 resulted in the recording of approximately $14.5 million of IOs
compared to $15.9 million and $2.6 million in 1996 and 1995, respectively. The
unamortized balance IOs are reflected in the Company's Consolidated Balance
Sheet as a component of "Securities held for trading." See "Amortization of IOs
and MSRs."
Beginning with the second quarter of 1995, following the implementation
by the Company of SFAS No. 122 (later superseded by SFAS 125), whenever the
Company originates a mortgage loan it assigns a fair value to the related
mortgage servicing right (the "servicing asset") associated with such mortgage
loan. The servicing asset represents the discounted present value of the
servicing fees expected to be received on the loan over the expected term of the
loan. The amount of the servicing asset is recognized at the time of sale of the
related loan as an adjustment to the resulting gain or loss on sale of loans and
is recorded as a component of "Mortgage Loan Sales and Fees" on the Company's
Consolidated Statement of Income. During the years ended December 31, 1997, 1996
and 1995, the Company capitalized $28.9 million, $10.8 million and $8.2 million
respectively, in servicing assets. The increase in the creation of servicing
assets reflects increased mortgage originations during such periods as well as
bulk purchases of servicing rights made during 1997. The unamortized balance of
the servicing asset is reflected on the Consolidated Balance Sheet of the
Company. See "Amortization of IOs and MSRs."
For the years ended December 31, 1997 and 1995, the increase in
mortgage loan sales and fees was net of losses on options and futures contracts
used for hedging purposes in the amount of $2.1 and $5.4 million, respectively,
while in 1996 such hedging activities produced gains in the amount of $3.1
million, thereby increasing mortgage loan sales and fees by the same amount.
45
<PAGE> 51
Pursuant to SFAS 115, the Company includes in earnings any unrealized
gains or losses in the market value of its securities held for trading. For the
years ended December 31, 1997, 1996 and 1995, revenues from mortgage loan sales
and fees included $6.6 million, $2.9 million and $3.4 million, respectively, of
unrealized gains on the value of its securities held for trading. The increase
in 1997 compared to 1996 was primarily due to an increase in the volume of
securities held for trading and an increase in the market value of Puerto Rico
tax exempt GNMA securities following the Puerto Rico tax law changes that
prospectively limited the tax exempt status of certain GNMA securities. See
"Recent Developments Changes in Puerto Rico Tax Laws Affecting the Exempt Status
of FHA and VA Loans."
Servicing Income. Servicing income represents revenues earned by Doral
for administering mortgage loans. Doral'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 Doral's loan servicing
portfolio and the amount of its servicing fees have increased substantially
since Doral's inception as a result of increases on loan originations and the
size of its servicing portfolio. Since 1993, the Company's strategy has been to
rely primarily an internal mortgage loan originations to increase the size of
its servicing portfolio. During the second and third quarters of 1997, the
Company engaged in several bulk purchases of mortgage servicing rights,
aggregating approximately $1.0 billion. The Company anticipates that it will
continue to make bulk purchases of mortgage servicing rights in the future to
the extent it can identify attractive opportunities.
Servicing fees increased 29% from 1996 to 1997 and 10% from 1995 to
1996. Loan servicing fees, however, decreased 8% from 1994 to 1995. Increases in
the amount of loan servicing fees for 1997 and 1996 were primarily due to
increases in the principal amount of loans serviced as compared to prior years.
The mortgage servicing portfolio was approximately $4.7 billion at December 31,
1997, compared to $3.1 billion as of December 31, 1996 and $2.7 billion as of
December 31, 1995. The decrease in loan servicing income during 1995 was due
primarily to sales of mortgage servicing rights made during 1995 and the last
quarter of 1994 aggregating approximately $512 million. At December 31, 1997,
less than 1% of the Company's servicing portfolio was related to mortgages
originated outside Puerto Rico (all of which were originated in Florida).
The amount of principal prepayments on mortgage loans serviced by the
Company was $279 million, $201 million, and $160 million for the years ended
December 31, 1997, 1996 and 1995, respectively. This represented approximately
8%, 7%, and 6% of the aggregate principal amount of mortgage loans serviced
during such periods and the average size of the loans prepaid was $37,800,
$35,360, and $37,800, 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.
Gain on Sale of Servicing Rights. During the years ended December 31,
1996 and 1995, the Company sold servicing rights of $102 million and $310
million, respectively, realizing pretax gains of approximately $1.8 million and
$5.2 million, respectively. No such sales where made during 1997. 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 sell servicing rights in the future when market conditions are
favorable.
Amortization of IOs and MSRs. IOs are amortized over the expected life
of the asset and such amortization is recorded as a reduction of interest
income. The amortization of IOs is based on the amount and timing of estimated
future cash flows to be received with respect to the IO. See Note 2 to the
Company's Consolidated Financial Statements for additional information regarding
the accounting treatment of IOs. Amortization of such IOs for each of the years
ended December 31, 1997, 1996, and 1995 was approximately $4.0 million, $1.6
million and $988,000, respectively.
The Company's servicing assets are amortized in proportion to, and over
the period of estimated servicing income. Amortization of servicing assets is
included as a component of "Other Expenses" in the Company's Consolidated
Financial
46
<PAGE> 52
Statements. During 1997, total amortization of servicing assets amounted to $3.4
million versus $1.0 million for 1996 and $562,000 for 1995.
Increases in prepayment rates or credit loss rates over anticipated
levels used in calculating the value of IOs and servicing assets can adversely
affect the Company's revenues and liquidity by increasing the amortization rates
for servicing assets and IOs as well as requiring the Company to recognize an
impairment against income over and above scheduled amortization. See "Interest
Rate Management." 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.
Other Income and Non-Interest Expense. Other non-interest income
increased 123% in 1997 as compared to 1996, and 23% from 1995 to 1996. The
increases during 1997 and 1996 were due primarily to increased commissions and
fees earned by Doral Bank and Doral Securities.
Total non-interest expense increased by 21% in 1997 as compared to 1996
and 12% from 1995 to 1996, reflecting additional costs associated with expanding
the Company's customer base and loan origination capacity.
Puerto Rico Income Taxes. The Puerto Rico maximum statutory corporate
income tax rate is 39%. For 1997, the effective income tax rate of Doral was
13.9% as compared to 13.5% for 1996 and 11.3% for 1995. The increase in
effective tax rates for 1997 and 1996 compared to 1995 was mainly due to a non
recurring deduction taken in 1995 for the value of shares previously granted
under employment agreements. No such deduction was made in 1997 or 1996.
The lower effective tax rates (as compared to the maximum statutory
rate) experienced by Doral, 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
Doral attributable to this exemption amounted to approximately $8.1 million,
$8.5 million, and $4.6 million for the years ended December 31, 1997, 1996 and
1995, 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 has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the loan
originations increases. The Company's cash requirements arise from loan
originations and purchases, repayments of debt upon maturity, payments of
operating and interest expenses and servicing advances and loan repurchases. The
Company's primary sources of liquidity are sales in the secondary mortgage
market of the loans it originates and purchases, short term borrowing 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 financing
and public offerings of preferred and common stock. Doral Bank, the Company's
bank subsidiary, also relies on deposits, borrowing from the FHLB-NY as well as
term notes backed by letters of credit of the FHLB-NY.
The Company is dependent upon its ability to access warehouse,
gestation and repurchase facilities in addition to its ability to continue to
pool and sell loans in the secondary market. Doral borrows money under
warehousing lines of credit to fund its mortgage loan originations and repays
the borrowing as the mortgages are sold. The warehousing lines of credit then
become available for additional borrowing. Included among Doral's warehousing
line of credit facilities are gestation or pre-sale 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. Doral's
warehousing lines of credit are generally subject to termination at the
discretion of
47
<PAGE> 53
the lender. The Company has several warehousing and gestation facilities
totaling $702 million as of December 31, 1997. See Note 15 to the Company's
Consolidated Financial Statements included elsewhere herein for more information
on the Company's warehousing lines of credit.
The Company also had available repurchase agreements lines of credit
(excluding the gestation lines referred to above) of approximately $1.2 billion
at the end of 1997. Under these agreements, Doral 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. Doral uses the proceeds of such sales to repay borrowings under its
warehousing lines of credit and to finance the cost of carrying its
mortgage-backed securities and other investment securities. The effective costs
of funds under repurchase agreements is typically lower than the cost of funds
borrowed under Doral's warehousing lines of credit. Doral'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.
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 Doral to advance funds to make
scheduled payments of principal, interest, taxes and insurance, if such payments
have not been received from the borrowers. Doral generally recovers funds
advanced pursuant to these arrangements within 30 days. During the year ended
December 31, 1997, the monthly average amount of funds advanced by the Company
under such servicing agreements was approximately $4.5 million.
Doral Bank obtains funding for its lending activities through the
receipt of deposits, FHLB-NY advances and from other borrowings, such as term
notes backed by FHLB-NY letters of credit. As of December 31, 1997, Doral Bank
held approximately $300.5 million in deposits (excluding $5.4 million in
deposits from affiliates that are eliminated in the preparation of the Company's
Consolidated Financial, Statements) at a weighted-average interest rate of
4.36%. For additional information regarding Doral Bank's deposit accounts see
Note 19 to the Company's Consolidated Financial Statements included elsewhere
herein. Doral Bank, as a member of FHLB-NY, has access to collateralized
borrowing 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, 1997, Doral Bank had $32 million in
outstanding advances from the FHLB-NY at a weighted average interest rate cost
of 6.25%. In addition, as of December 31, 1997, Doral Bank had $53.1 million
outstanding in term notes secured by FHLB-NY letters of credit at an average
interest rate cost of 6.62%. 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 a one-time 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. Because Doral Bank has the right to
prepay the notes upon an upward adjustment of the rate, in all but one of the
three cases in which the investor has requested an upward adjustment, Doral Bank
has been successful in negotiating a rate adjustment below 100% of LIBID.
As of December 31, 1997, the Company and Doral Bank were in compliance
with all the regulatory capital requirements that were applicable to them as a
bank holding company and state non-member bank, respectively (i.e. total capital
and Tier 1 capital to risk weighted assets of at least 8% and 4%, respectively,
and Tier 1 capital to average assets of at least 3%). Set forth below are the
Company's and Doral Bank's regulatory capital ratios as of December 31, 1997,
based on existing Federal Reserve and FDIC guidelines.
48
<PAGE> 54
<TABLE>
<CAPTION>
THE
---
COMPANY DORAL BANK
------- ----------
<S> <C> <C>
Tier 1 Capital Ratio (Tier 1 capital............. 18.0% 18.5%
to risk weighted assets)
Total Capital (total capital to risk
weighted assets)................................. 18.2% 19.0%
Leverage Ratio (Tier 1 capital to
average assets).................................. 10.1% 9.6%
</TABLE>
As of December 31, 1997, Doral Bank was considered a well-capitalized
bank for purposes of the prompt corrective action regulations adopted by the
FDIC pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991. To be considered a well capitalized institution under the FDIC's
regulations, an institution must maintain a Leverage Ratio of at least 5%, Tier
1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and not
be subject to any written agreement or directive to meet a specific capital
ratio.
On October 22, 1997, the Company completed the exchange of the
$8,460,00 outstanding principal amount of the Company's 8.25% Convertible
Subordinated Debentures due January 1, 2006 (the "Convertible Debentures") held
by a private investor for 8,460 shares of its 8% Convertible Cumulative
Preferred Stock (Liquidation Preference $1,000 per share) (the "8% Preferred
Stock"). Notwithstanding the fact that the conversion rights of the 8% Preferred
Stock and the Convertible Debentures were identical, Accounting Principals Board
Opinion No. 26 ("APB 26") required the Company to record an extraordinary
non-cash charge to earnings of approximately $12.3 million for the fourth
quarter of 1997, which amount is equal to the difference between the fair market
value of the shares of 8% Preferred Stock issued pursuant to the exchange and
the net carrying amount of the Convertible Debentures on the Company's financial
statements. As a result of the appreciation in the price of the Company's Common
Stock since the issuance of the Convertible Debentures in 1995, the fair market
value of the shares of 8% Preferred Stock, which are directly related to the
value of the Company's Common Stock, exceeded the net carrying amount of the
Convertible Debentures by approximately $12.3 million. The Company's retained
earnings were reduced by the amount of the charge and the Company's
paid-in-capital account was simultaneously increased by approximately $20.8
million, which represents the sum of the charge and the elimination of the
indebtedness represented by the Convertible Debentures, resulting in a net
increase in the Company's stockholders' equity of approximately $8.5 million.
This non-cash charge was recorded during the fourth quarter as an extraordinary
item on the Company's financial statements and did not affect the Company's
income from operations.
On February 19, 1998, the Company completed the sale of 1,817,000
shares of Common Stock pursuant to a underwritten public offering at a price to
the public of $24.00 per share, resulting in net proceeds to the Company of
approximately $40.9 million before deducting expenses of the offering.
Doral expects that it will continue to have adequate liquidity,
financing arrangements and capital resources to finance its operations. The
Company will continue to explore alternative and supplementary methods of
financing its operations, including both debt and equity financing. There can be
no assurance, however, that the Company will be successful in consummating any
such transactions.
ASSETS AND LIABILITIES
At December 31, 1997, the Company's total assets were $1.9 billion
compared to $1.1 billion at December 31, 1996. The increase in assets was due
primarily to net increases of $229 million, $184.2 million and $144.7 million in
securities available for sale, securities held for trading, and mortgage loans
held for sale, respectively. Total liabilities were $1.7 billion at December 31,
1997, compared to $956 million at December 31, 1996. The increase in liabilities
was largely the result of an increase in securities sold under agreements to
repurchase and deposit accounts at Doral Bank. The additional leverage
49
<PAGE> 55
was used to finance the increase in the Company's interest earning assets. At
December 31, 1997, deposit accounts totaled $300.5 million, compared to $159
million at December 31, 1996. Deposit accounts include $50.7 million in
non-interest bearing demand deposits representing escrow funds from the
servicing operations of the Company's mortgage banking units. As of December 31,
1997, Doral Bank had $428 million in assets, compared to $281 million at
December 31, 1996.
INTEREST RATE MANAGEMENT
General. 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, 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 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. A substantial portion of the Company's total mortgage loan
originations have consistently been comprised of refinance loans. For the years
ended December 31, 1997, 1996 and 1995, refinance loans represented
approximately 51%, 47% and 41%, respectively, of the Company's total dollar
volume of mortgage loans originated. 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.
Mortgage Banking Operations. 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 Doral's gain or loss on
the sale of such mortgage loan. 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 based on
the FHLMC auction for residential mortgages. For FNMA and FHLMC conforming loans
and FNMA and FHLMC mortgage-backed securities, the Company seeks to sell or to
obtain commitments for the purchase of such loans or mortgage-backed securities
as soon as practicable following the funding of such loans. Conforming 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 to
purchase such loans at the time it fixes the rates for the loans. As of December
31, 1997, the Company had $175 million of commitments by third party investors
to purchase mortgage loans and mortgage-backed securities. Nonconforming
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, which tend to increase in value when
interest rates increase.
In the case of Puerto Rico tax exempt 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 tax exempt GNMA
securities in Puerto Rico tend to be more stable than for U.S. taxable GNMA
securities 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-counter market. Options are contracts that grant
the purchaser the right
50
<PAGE> 56
to buy or sell the underlying asset by a certain date for a specified price.
Interest rate futures are commitments to either purchase or sell designated
instruments (such as U.S. Treasury Note contracts or Eurodollar certificates of
deposit) at a future date for a specified price. Future contracts are generally
traded on an exchange, are marked to market daily and are subject to initial and
maintenance margin requirements. For a discussion of recent amendments to Puerto
Rico law limiting the type of FHA and VA loans that qualify for tax exemption,
see "Recent Developments - Changes in Puerto Rico Tax Laws Affecting Tax Exempt
Status of FHA and VA Loans."
With respect to GNMA securities that are originated by the Company and
no longer qualify for Puerto Rico tax exemption, the Company intends to
implement a less aggressive hedging strategy because it intends to sell such
securities in the United States market as soon as practicable following
completion of the securitization process.
The Company has in place long-term repurchase agreements secured by
collateralized mortgage obligations backed by GNMA certificates with a principal
amount of approximately $100 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.
Declines in interest rates can adversely affect the Company's revenues
by increasing prepayment rates and causing an increase of the amortization of
servicing assets and IOs 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 its servicing
income or the value of its servicing assets or IOs from the risks of future
interest rate fluctuations. The primary means used by the Company to reduce the
sensitivity of the Company's servicing income and the value of its servicing
asset due 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, such as those experienced during 1993.
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 borrowing used to finance these positions normally reprice on a
periodic basis (e.g., daily, monthly or quarterly). In order to hedge the
interest rate risk associated with the Company's portfolio of securities held
for trading and available for sale, the Company may use a variety of hedging
instruments including listed put and call options and futures contracts on
financial instruments (primarily Eurodollar certificates of deposit and U.S.
Treasury note contracts). In determining the amount of its portfolio to hedge,
the Company will consider, among other things, the volatility of prices of its
securities. As noted above, the price for Puerto Rico tax exempt GNMA securities
tend to be more stable than their U.S. counterparts.
The Company maintains a substantial portfolio of mortgage-backed
securities (primarily fixed-rate GNMA certificates) and other investment
securities. Generally, the value of fixed rate securities declines when interest
rate rise, and conversely, increase when interest rates fall. At December 31,
1997, the Company held $620.3 million of mortgage-backed and other investments
(all of which carried fixed interest rates) which were classified as held for
trading and reported at fair value, with unrealized gains and losses included in
earnings. In addition, at December 31, 1997, the Company held $240.9 million of
mortgage-backed securities and other investment securities (all of which carried
fixed interest rates) which were classified as available for sale and reported
at fair value, with unrealized losses deducted from stockholders equity.
Accordingly, declines in the value of the Company's securities held for trading
and available for sale could have a negative impact on the Company's earnings or
financial condition.
In the future, Doral and Doral Bank may use alternative hedging
techniques including futures, options, interest rate swap agreements or other
hedge instruments to help mitigate interest rate and market risk. However, there
can be no assurance
51
<PAGE> 57
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.
Banking Operations. Doral Bank has attempted to limit its exposure to
interest rate risk through the use of both the internal management of the
composition of its assets and liabilities and through the use of a hedging
instruments. Internal asset/liability management techniques involve the
attraction of longer term funds through the use of, among other things, brokered
certificates of deposits, five year term notes and FHLB-NY advances.
In addition to the use of the internal asset liability management
techniques discussed above, Doral Bank has used interest rate swap agreements to
effectively fix the cost of short-term funding sources which are used to finance
the funding and holding of interest-earnings assets with longer maturities. An
interest rate swap is an agreement where one party (in this case, Doral Bank)
agrees to pay a fixed-rate of interest on a notional principal amount to a
second party (generally a securities broker-dealer) in exchange for receiving
from the second party a variable rate of interest on the same notional amount
for a pre-determined period of time. No actual assets are exchanged in a swap of
this type and interest payments are generally netted. As of December 31, 1997,
the Bank had in place two interest rate swap agreements with an aggregate
notional amount of $55.0 million. One such agreement is for a notional amount of
$5.0 million and is designed to fixed the interest rate cost on a $5.0
fluctuating rate term note. This agreement ends at the time the related term
note matures. Under this Agreement, Doral Bank makes payments based on a fixed
interest rate of 4.92% and receives payments based on a fluctuating rate equal
to 87% of the three-month LIBOR rate. The second agreement which was entered
into on November 5, 1997, is for a notional amount of $50.0 million, has a five
year term and is designed to fix the interest rate cost on a portion of Doral
Bank's short-term deposit liabilities. Under this second agreement, Doral Bank
makes payments based on a fixed interest of 6.125% and receives payments based
on a fluctuating rate equal to 100% of the three-month LIBOR rate. The net
expense (income) resulting to Doral Bank from its interest rate swaps agreements
was approximately $33,000 and $12,000 for the year ended December 31, 1997 and
1996, respectively.
While to date, Doral Bank has limited its use of synthetic hedging
instruments to interest rate swap agreements, it may use other hedging
instruments in the future such as options, futures, interest rate collars and
caps.
Interest Rate Sensitivity Analysis. The following table summarizes the
anticipated maturities or repricing of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 1997, based on the information
and assumptions set forth in the notes below. For purposes of this presentation,
the interest-earning components of mortgage loans held for sale and securities
held for trading are assumed to mature with one year.
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<PAGE> 58
<TABLE>
<CAPTION>
Non-
Doral Financial Corporation Interest
Interest Rate Sensitivity Analysis 1 Year 1 to 3 3 to 5 Over 5 Rate
As of December 31, 1997 or Less Years Years Years Bearing Total
- ---------------------------------- ---------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS:
Total Loans $ 428,936 $ 19,497 $ 19,485 $ 71,434 $ -- $ 539,352
Investment Securities
Held for Trading 777,692 -- -- -- -- 777,692
Held to Maturity and Available for Sale 12,900 5,871 -- 365,639 -- 384,410
Other assets -- -- -- -- 156,335 $ 156,335
---------- ----------- ----------- ----------- ----------- -----------
TOTAL $1,219,528 $ 25,368 $ 19,485 $ 437,073 $ 156,335 $ 1,857,789
INTEREST BEARING LIABILITIES:
Loans Payable $ 265,306 $ -- $ -- $ -- $ -- $ 265,306
Repurchase Agreements 838,142 -- -- -- -- 838,142
Deposits 130,193 37,832 31,300 34,511 66,658 300,494
Other Borrowed Funds 41,834 18,100 40,000 97,000 -- 196,934
Other Liabilities -- -- -- -- 69,958 69,958
Stockholder's equity -- -- -- -- 186,955 186,955
---------- ----------- ----------- ----------- ----------- -----------
TOTAL $1,275,475 $ 55,932 $ 71,300 $ 131,511 $ 323,571 $ 1,857,789
OFF BALANCE SHEET INSTRUMENTS $ 55,000 $ (5,000) $ (50,000) -- -- --
INTEREST RATE SENSITIVITY GAP $ (947) $ (35,564) $ (101,815) $ 305,562 $ (167,236) --
CUMULATIVE INTEREST RATE SENSITIVITY $ (947) $ (36,511) $ (138,326) $ 167,236 -- --
CUMULATIVE GAP/TOTAL ASSETS (.05)% (1.97)% (7.45)% 9.00% -- --
</TABLE>
INFLATION
Doral 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 Management" for a discussion of the effects of changes of interest rates on
the Company's operations.
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<PAGE> 59
CHANGES IN ACCOUNTING STANDARDS
SFAS No. 128. In February 1997, the FASB issued SFAS No. 128, "Earnings
Per Share." This Statement simplifies the standards for computing earnings per
share ("EPS") previously found on APB Opinion No. 15, "Earnings Per Share," and
makes it comparable to international EPS standards. It replaces the presentation
of the primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS computation on the face of the income
statement for all entities with complex capital structures and requires
reconciliation of the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued after
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. This Statement requires restatement of
prior-period EPS data presented. The capital structure of the Company is such
that the adoption of this new standard will not affect current or prior period
presentations of basic or diluted EPS. Accordingly, the Company's basic EPS
amounted to $1.10, $1.49 and $1.33, for the years ended December 31, 1997, 1996
and 1995, respectively, while diluted EPS would amount to $1.06, $1.42 and $1.27
for such periods, which is equivalent to the primary EPS and fully diluted EPS
previously presented. Earnings per share calculations presented above for 1997
consider a non-cash extraordinary charge of $12.3 million as discussed in Notes
3 and 26 of the Consolidated Financial Statements included herein. Earnings per
share on income from operations before the extraordinary event were $1.77 for
basic EPS and $1.70 for diluted EPS.
SFAS No. 130. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. This Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. In Doral's case, unrealized
gains and losses on certain investments in debt securities will be the only
other comprehensive income item to be included in comprehensive income.
This Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. This Statement affects only financial
statement presentation and, therefore, management understands that its adoption
will not have a material effect, if any, on the Company's financial position or
results of operations.
SFAS No. 131. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This Statement establishes the standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.
This Statement requires that a public business enterprise report
financial and descriptive information about its reportable segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. It also requires reporting descriptive information about the way
that the operating segments were determined, the products and the services
provided by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's general purpose
financial statements, and the changes in the measurement of segment amount from
period to period. Doral's management has not yet made a determination on the
business lines of the Company that fulfill the segment definition described
above.
This Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. This statement affects only financial
statement presentation and disclosure and therefore management understands it
will not have a material effect, if any, on the Company's financial position or
results of operations.
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<PAGE> 60
YEAR 2000 ISSUES
The Company has established a corporate-wide task group to oversee the
identification, correction, reprogramming and testing of the Company's systems
and software applications for year 2000 compliance as well as to identify other
possible risks associated with the year 2000 problem. The task group reports
directly to the Board of Directors. The year 2000 problem refers to the fact
that many software applications and operational programs written in the past
were not designed to recognize calendar dates beginning in the year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the year 2000 could result in miscalculations or system failures.
The Company will work closely with HRU, Inc., the company that provides data
processing services for the Company's mortgage servicing operation, as well as
with third party vendors of computer hardware and software applications to
ensure that the systems used by HRU, Inc. and the computer hardware and software
provided by such other vendors will be year 2000 compliant by the end of 1998.
The Company intends to devote the resources, which may include external
resources, such as consultants, it deems necessary to address this issue and has
established the goal of having substantially all its systems and software
applications year 2000 compliant by the end of 1998. While the Company has not
yet completed the process of quantifying the expenses related to achieving year
2000 compliance, management, based on preliminary information, does not
anticipate that such expenses will have a material impact on the Company's
results of operations or financial condition during the next two years.
RECENT DEVELOPMENTS
Changes in Puerto Rico Tax Laws Affecting Tax Exempt Status of FHA and
VA Loans. The Company has historically benefitted 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 July 22, 1997, an amendment was adopted to the Puerto Rico Internal
Revenue Code that modified the tax exempt treatment of FHA and VA loans secured
by real property in Puerto Rico and GNMA mortgage-backed securities backed by
such loans. Under the terms of the amendment, effective August 1, 1997, only FHA
and VA loans used to finance the original acquisition of newly constructed
housing and mortgage-backed securities backed by such loans qualify for
tax-exempt treatment. The amendment, however, provides a preferential tax rate
of 17% for individuals to be withheld at source with respect to interest
received on FHA and VA loans not qualifying for tax exemption. In addition, the
amendment grandfathered the tax exempt status of FHA and VA loans originated on
or prior to July 31, 1997 and mortgage-backed securities backed by such loans.
During the year ended December 31, 1997, approximately 40% of the Company's
total FHA and VA loan originations have consisted of mortgage loans to finance
the acquisitions of newly constructed housing that qualified for tax exemption
under the amendment. Management believes that the change in tax treatment of FHA
and VA loans described above will not have a material adverse effect on the
Company's financial condition or results of operation.
Possible Expansion into Mainland United States. During the first
quarter of 1998, the Company organized a new mortgage banking subsidiary, Doral
Money, Inc. The Company intends to use Doral Money as a vehicle to explore
expansion possibilities in the United States. The Company is also exploring the
possibility of establishing a depository institution in the New York
metropolitan area.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item 7A is incorporated by reference
to the information included under the caption "Interest Rate Management" in Item
7 of this Form 10-K.
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<PAGE> 61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called 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"
contained in Company's definitive Proxy Statement for its 1998 Annual Meeting of
stockholders (the "Proxy Statement") to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by
reference to the section entitled "Executive Compensation" of the Company's
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by
reference to the section entitled "Security Ownership of Management and
Principal Holders" of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by
reference to the section entitled "Election of Directors and Related Matters--
Certain Relationships and Related Transactions" of the Company's Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The information called for by this
subsection of Item 14 is set forth in the
Financial Statements and Auditors' Report
beginning on page F-1 of this Form 10-K. The index
to Financial Statements is set forth on page F-2
of this Form 10-K.
(2) Financial Statement Schedules.
All financial schedules have been
omitted because they are not applicable
or the required information is shown in
the financial statements or notes
thereto.
(3) Exhibits.
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<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1.(b) Certificate of Designation creating 8% Convertible Cumulative
Preferred Stock (Liquidation Preference $1,000 per Share.(25)
3.1(c) Second Restated Certificate of Incorporation of Doral, as
currently in effect.(25)
3.2 By-laws of Doral, as amended as of January 30, 1996.(18)
4.1 Common Stock Certificate.(25)
4.2 1997 Employee Stock Option Plan.(26)
10.14 Doral Restricted Stock Plan.(3)
10.18 Form of Contract of Pledge used by Doral 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
Doral.(3)
10.28 Mortgage Loan Origination and Servicing Agreement among Doral,
Puerto Rico Housing Bank and Finance Agency, and Banco Popular de
Puerto Rico dated December 23, 1997.(27)
10.30 Loan Agreement between Doral 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 Doral
and Banco Santander Puerto Rico.(14)
10.33 Loan Agreement dated November 25, 1987 between Doral and
Scotiabank de Puerto Rico.(4)
10.34 (a) Repurchase Agreement, between Doral and BP Capital Markets,
Inc., dated November 10, 1995.(18)
(f) Repurchase Agreement between Doral and First Boston (Puerto
Rico), Inc., dated November 28, 1989.(4)
(k) Master Repurchase Agreement between Doral and PaineWebber,
Inc., dated as of March 24, 1992.(5)
10.35 Employment Agreement dated May 1, 1997 between Doral and Salomon
Levis.(23)
10.36 Employment Agreement dated May 1, 1997 between Doral and Zoila
Levis.(23)
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 Doral and PaineWebber
Incorporated, dated as of March 24, 1992.(5)
10.40 Insurance and Indemnity Agreement dated as of May 28, 1992,
between Doral and Financial Security Assurance Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de
Puerto Rico and Doral confirming the renewal of the Loan
Agreement dated November 25, 1987.(5)
10.42 Financing Agreement dated May 14, 1992, between Doral and Banco
Popular de Puerto Rico.(5)
10.43 Employment Agreement dated as of October 1, 1997, between Doral
and Richard F. Bonini.(25)
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991,
between Doral and Banco Santander Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992,
between Doral and Banco Santander Puerto Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the Loan
Agreement between Doral and Scotiabank de Puerto Rico dated
November 25, 1987.(5)
</TABLE>
57
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.47 Amendment dated June 29, 1989 to the Loan Agreement between Doral
and Scotiabank de Puerto Rico dated November 25, 1987.(5)
10.49 Employment Agreement dated as of December 1, 1996 between Doral
and Luis Alvarado.(22)
10.50 Customer Agreement, dated March 9, 1993, between Doral and
Meridian Capital Markets Inc. relating to the execution of
Forward Contracts.(6)
10.51 Master Repurchase Agreement, dated March 24, 1993, between Doral
and Bear Sterns Mortgage Capital Corporation.(7)
10.52 Amended and Restated Master Production Agreement, dated as of
October 1, 1995, between Doral, Doral Mortgage and Doral Bank,
Master Production Agreement, dated as of October 1, 1995, between
Doral, Doral Mortgage and Doral Bank.(8)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of
September 15, 1993, between Doral and Doral Bank.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as
of November 29, 1993 between Doral and Nomura Asset Capital
Corporation.(13)
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993,
between Doral and Meridian Capital markets, a Division of
Meridian Bank.(13)
10.56 Financing Facility Agreement dated March 21, 1994, between Nomura
Asset Capital Corporation, Doral and Doral Mortgage.(12)
10.57 Master Repurchase Agreement among Merrill Lynch Mortgage Capital,
Inc., Doral and Doral Mortgage together with Supplemental Terms
to Master Repurchase Agreement, each dated as of January 12,
1995.(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 Doral, Doral
Mortgage, the lenders party thereto and Bankers Trust Company, as
Agent.(17)
10.62 Exchange Agreement dated July 9, 1997, between Doral and Popular,
Inc.(24)
10.63 Financing Agreement dated October 10, 1995, between Doral and
Banco Santander together with related Assignment and Pledge
Agreements.(16)
10.64 Master Servicing and Collection Agreement dated October 1, 1995,
between Doral and Doral Bank.(18)
10.65 Employment Agreement, dated as of February 25, 1998, between
Doral and Frederick C. Teed.(27)
10.66 First Amendment to Master Servicing and Collection Agreement,
dated as of March 1, 1996, between Doral and Doral Bank.(19)
10.67 First Amendment to Amended and Restated Master Production
Agreement, dated as of March 1, 1996, between Doral, Doral
Mortgage Corporation and Doral Bank, respectively.(19)
10.68 First Amended and Restated Credit Agreement, dated as of
September 25, 1996, between Doral, 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 Doral and
Mario S. Levis.(21)
10.71 Employment Agreement, dated as of December 31, 1996, between
Doral Mortgage and Edison Velez.(22)
</TABLE>
58
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.72 Amendment, dated March 1, 1997 to Employment Agreement dated as
of December 31, 1996, between Doral Mortgage and Edison
Velez.(23)
10.72 Employment Agreement, dated May 1, 1997 between Doral Bank and
Jose G. Velez.(23)
10.73 Credit Agreement dated November 5, 1997, between Doral, Doral
Mortgage, the lenders party thereto and Bankers Trust Company as
Agent.(27)
10.74 Second Amendment to First Amended and Restated Credit Agreement,
with lenders thereto and Bankers Trust Company as agent, dated
March 28, 1997.(27)
10.75 Third Amendment to First Amended and Restated Credit Agreement,
dated as of June 27, 1997.(27)
10.76 Fourth Amendment to Amended and Restated Credit Agreement dated
November 7, 1997.(27)
21 List of Doral's subsidiaries.(27)
23 Consent of Price Waterhouse.(27)
27 Financial Data Schedule (Edgar version only).(27)
</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.
59
<PAGE> 65
(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 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) 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, 1997.
(23) 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, 1997.
(24) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(25) 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,
1997.
(26) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-8 (No. 333-31283) filed with the
Commission on July 15, 1997.
(27) Filed herewith.
(b) Reports on Form 8-K.
(1)Current Report on Form 8-K ("Form 8-K"), dated October 1, 1997,
reporting under Item 5 - "Other Items" the conversion of Doral Bank to a Puerto
Rico commercial bank and Doral becoming a bank holding company.
60
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, Doral Financial Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DORAL FINANCIAL CORPORATION
By: /s/ Salomon Levis
-----------------------------------------------
Salomon Levis
Chairman of the Board and
Chief Executive Officer Date:
March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Salomon Levis Chairman of the Board and March 31, 1998
- --------------------------------- Chief Executive Officer
(Salomon Levis)
/s/ Richard F. Bonini
- --------------------------------- Director and March 31, 1998
(Richard F. Bonini) Chief Financial Officer
/s/ Edgar M. Cullman, Jr
- --------------------------------- Director March 31, 1998
(Edgar M. Cullman, Jr.)
/s/ Frederick M. Danziger
- --------------------------------- Director March 31, 1998
(Frederick M. Danziger)
/s/ John L. Ernst
- --------------------------------- Director March 31, 1998
(John L. Ernst)
/s/ Zoila Levis
- --------------------------------- Director March 31, 1998
(Zoila Levis)
/s/ A. Brean Murray
- --------------------------------- Director March 31, 1998
(A. Brean Murray)
/s/ Victor M. Pons, Jr.
- --------------------------------- Director March 31, 1998
(Victor M. Pons, Jr.)
/s/ Ricardo Melendez
- --------------------------------- Vice President and March 31, 1998
(Ricardo Melendez) Principal Accounting Officer
</TABLE>
61
<PAGE> 67
DORAL FINANCIAL 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
1
<PAGE> 68
DORAL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FEBRUARY 23, 1998
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ........................................ F-3
Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 1997 and 1996 ..... F-4
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995 ............................. F-5
Consolidated Statement of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 ....................... F-6
Consolidated Statement of Changes in Stockholder's
Equity for the years ended
December 31, 1997, 1996 and 1995 ............................. F-8
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.
<PAGE> 69
DORAL FINANCIAL
CORPORATION
REPORT AND CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE> 70
PRICE WATERHOUSE
The Chase Manhattan Bank Building
PO Box 363566
San Juan PR 00936-3566
Telephone 787-754-9090
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Doral Financial 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
Doral Financial Corporation and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, 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.
Price Waterhouse
San Juan, Puerto Rico
February 23, 1998
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 10 Expires Dec. 1, 1998
Stamp 1457900 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
F-3
<PAGE> 71
DORAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands)
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,390 $ 10,439
Money market investments 157,404 70,774
Mortgage loans held for sale, net 406,297 261,608
Securities held for trading 620,288 436,125
Securities held to maturity 143,534 107,222
Securities available for sale 240,876 12,007
Loans receivable, net 133,055 128,766
Accounts receivable and mortgage servicing advances, net 42,890 17,715
Accrued interest receivable 13,537 10,091
Servicing assets, net 46,416 20,969
Property, leasehold improvements and equipment, net 10,848 9,360
Cost in excess of fair value of net assets acquired, net 6,203 6,562
Federal Home Loan Bank (FHLB) stock 4,692 3,492
Real estate held for sale, net 3,025 2,246
Prepaid and other assets 11,334 8,707
----------- -----------
Total assets $ 1,857,789 $ 1,106,083
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Loans payable $ 265,306 $ 196,643
Securities sold under agreements to repurchase 838,142 387,651
Deposit accounts 300,494 158,902
Notes payable 164,934 152,126
Advances from Federal Home Loan Bank of N.Y. 32,000 15,000
Convertible Subordinated Debentures - 10,000
Accounts payable and other liabilities 57,201 26,992
Income tax payable 2,883 217
Deferred tax liability 9,874 8,021
----------- -----------
Total liabilities 1,670,834 955,552
----------- -----------
Commitments and contingencies (Note 25)
----------- -----------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; no shares outstanding - -
8% Convertible Cumulative Preferred Stock, $1 par value
(liquidation preference $1,000 per share), 20,000 shares authorized;
8,460 shares issued and outstanding 8 -
Common stock, $1 par value, 50,000,000 shares authorized;
18,425,460 shares issued (1996 - 18,250,184); 18,397,460 shares
outstanding (1996 - 18,222,184) 18,425 18,250
Paid-in capital 51,692 29,562
Legal surplus 1,704
Retained earnings 114,253 102,925
Unrealized gain (loss) on securities available for sale,
net of deferred tax 901 (81)
Treasury stock at par value, 28,000 shares (28) (28)
Unearned compensation under employment contracts - (97)
----------- -----------
Total stockholders' equity 186,955 150,531
----------- -----------
Total liabilities and stockholders' equity $ 1,857,789 $ 1,106,083
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 72
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except for per share information)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest Income:
Loans $32,768 $31,410 $28,213
Mortgage-backed securities 45,464 32,106 31,883
Investment securities 5,454 2,031 490
Other interest-earning assets 6,445 1,440 1,321
------- ------- -------
Total interest income 90,131 66,987 61,907
------- ------- -------
Interest expense:
Loans payable 13,325 13,621 15,713
Securities sold under agreements to repurchase 31,665 21,002 21,712
Deposits 10,014 5,526 3,361
Other borrowed funds 6,434 6,294 2,594
------- ------- -------
Total interest expense 61,438 46,443 43,380
------- ------- -------
Net interest income 28,693 20,544 18,527
Provision for loan losses 600 655 110
------- ------- -------
Net interest income after provision for loan losses 28,093 19,889 18,417
Non-interest income:
Mortgage loans sales and fees 28,588 26,610 13,528
Servicing income 14,995 11,659 10,577
Gain on sale of servicing assets - 1,813 5,205
Other income 1,703 764 620
------- ------- -------
Total non-interest income 45,286 40,846 29,930
------- ------- -------
Non-Interest expense:
Compensation and benefits 8,111 8,982 6,471
Taxes, other than payroll and income taxes 1,403 1,087 1,151
Advertising 3,554 3,500 2,475
Professional services 3,283 2,671 2,867
Telephone 2,171 1,813 1,683
Rent 2,518 2,083 2,097
Maintenance 971 694 654
Other 13,571 8,626 8,889
------- ------- -------
Total non-interest expense 35,582 29,456 26,287
------- ------- -------
Income before income taxes and extraordinary item 37,797 31,279 22,060
------- ------- -------
Income taxes:
Current 3,956 961 1,400
Deferred 1,293 3,277 1,100
------- ------- -------
5,249 4,238 2,500
------- ------- -------
Income before extraordinary item 32,548 27,041 19,560
Extraordinary item -
non-cash loss on extinguishment of debt 12,317 - -
------- ------- -------
Net income $20,231 $27,041 $19,560
======= ======= =======
Earnings per share
Basic:
Income before extraordinary item $ 1.77 $ 1.49 $ 1.33
Extraordinary item (0.67) - -
------- ------- -------
Net income $ 1.10 $ 1.49 $ 1.33
======= ======= =======
Diluted:
Income before extraordinary item $ 1.70 $ 1.42 $ 1.27
Extraordinary item (0.64) - -
------- ------- -------
Net income $ 1.06 $ 1.42 $ 1.27
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 73
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
(in thousands)
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,231 $ 27,041 $ 19,560
--------- --------- ---------
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization 2,298 1,796 1,765
Amortization of interest only strips held in trading securities 3,980 1,628 988
Amortization of cost in excess of fair value of net assets acquired 359 375 376
Amortization of servicing assets 3,437 999 562
Extraordinary item 12,317 - -
Deferred tax provision 1,293 3,277 1,100
Gain on sale of servicing assets - (1,813) (5,205)
Allowances for losses 792 797 352
Origination and purchases of mortgage loans held for sale (977,505) (719,886) (583,659)
Principal repayments and sales of mortgage loans held for sale 434,487 368,573 283,830
Purchases of securities held for trading (694,120) (156,935) (72,124)
Increase in interest only strips (8,395) (15,900) (2,639)
Principal repayments and sales of securities held for trading 805,575 488,619 357,461
Increase in servicing assets (28,884) (10,804) (8,207)
(Increase) decrease in accounts receivable and mortgage
servicing advances (25,967) (8,920) (2,858)
Increase in accrued interest receivable (3,446) (1,935) (280)
Increase (decrease) in loans payable 78,646 (25,957) (94,428)
(Decrease) increase in payable related to short sales (9,983) (12,107) 22,090
Increase in interest payable 1,252 2,388 383
Increase in securities sold under agreements to repurchase 450,491 23,923 59,885
Increase (decrease) in accounts payable and other liabilities 28,957 7,228 (2,151)
Increase (decrease) in income tax payable 2,667 (171) (2,184)
Amortization of unearned compensation under employment
contracts 97 96 64
--------- --------- ---------
Total adjustments 78,348 (54,729) (44,879)
--------- --------- ---------
Net cash (used) provided by operating activities 98,579 (27,688) (25,319)
--------- --------- ---------
Cash flows used for investing activities:
Purchases of securities held to maturity (158,939) (54,480) (10,789)
Principal repayments and maturities of securities held to maturity 122,627 25,203 3,208
Origination of loans receivable (59,494) (98,680) (52,341)
Principal repayments of loans receivable 55,205 21,270 4,060
Purchases of securities available for sale (331,052) (4,639) -
Principal repayments and maturities of securities available for sale 210,850 7,121 -
Purchase of Federal Home Loan Bank stock (1,200) (2,040) (737)
Purchase of property, leasehold improvements and equipment (3,786) (4,651) (802)
Payments of contingent purchase price of subsidiary - (410) (293)
Real estate held for sale (779) (162) 31
Proceeds from sale of servicing assets - 1,813 5,229
Increase in prepaid and other assets (2,627) (3,981) (1,062)
--------- --------- ---------
Net cash used by investing activities (169,195) (113,636) (53,496)
--------- --------- ---------
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 74
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(in thousands)
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by financing activities:
Increase in deposits $ 141,591 $ 63,161 $ 29,269
Proceeds from convertible subordinated debentures - - 10,000
Increase in common stock, net (3) 475 23,261
Proceeds (repayment) of advances from Federal Home Loan Bank 17,000 4,593 9,988
Increase in notes payable 12,808 100,443 34,627
Dividends declared and paid (7,199 (6,007) (4,374)
---------- ---------- ----------
Net cash provided by financing activities 164,197 162,665 102,771
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 93,581 21,341 23,956
Cash and cash equivalents at beginning of year 81,213 59,872 35,916
---------- ---------- ----------
Cash and cash equivalents at the end of year $ 174,794 $ 81,213 $ 59,872
========== ========== ==========
Cash and cash equivalents include:
Cash and due from banks $ 17,390 $ 10,439 $ 4,300
Money market investments 157,404 70,774 55,572
---------- ---------- ----------
$ 174,794 $ 81,213 $ 59,872
========== ========== ==========
Supplemental Schedule of Noncash Activities:
Investing activities - conversion of subordinated debentures $ 1,540 $ - $ -
========== ========== ==========
Financing activities -
Conversion of preferred stock $ - $ 1,084 $ 959
========== ========== ==========
Extinguishment of debt $ 8,460 $ - $ -
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 75
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(in thousands)
8%
Serial Convertible
preferred preferred Common Paid-in Legal
stock stock stock capital surplus
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 204 $ - $14,365 $ 9,506 $ -
Shares issued on December 11, 1995 3,020 20,241
Shares converted (96) 383 (287)
Cash dividends:
Serial preferred stock, $1.05 per share
Common stock - $.58 per share
Net income
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net of deferred taxes ========== ========== ======= ======== ======
Balance at December 31, 1995 108 - 17,768 29,460 -
Shares issued on January 31, 1996 50 430
Shares converted (108) 432 (324)
Shares redeemed (4)
Cash dividends:
Serial preferred stock, $.3825 per share
Common stock - $.66 per share
Net income
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net of deferred taxes
========== ========== ======= ======== ======
Balance at December 31, 1996 - - 18,250 29,562 -
Adjustment - shares redeemed (1) (2)
Shares converted April 29,1997 176 1,364
Shares issued October 22, 1997 8 20,768
Cash dividends:
8% Convertible preferred stock, $15.33
per share
Common stock - $.39 per share
Transfer of retained earnings per legal
requirements due to conversion of Doral Bank 1,200
Net income 504
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net of deferred taxes
========== ========== ======= ======== ======
Balance at December 31, 1997 $ - $ 8 $18,425 $ 51,692 $1,704
========== ========== ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
Unearned
Unrealized gain compensation
Retained (loss) on securities Treasury under employment
earnings available for sale stock contracts Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 66,706 $ - $ (28) $ (257) $ 90,496
Shares issued on December 11, 1995 23,261
Shares converted -
Cash dividends:
Serial preferred stock, $1.05 per share (187) (187)
Common stock - $.58 per share (4,187) (4,187)
Net income 19,560 19,560
Amortization of unearned compensation 64 64
Net change in fair value of securities
available for sale, net of deferred taxes 9 9
========= ===================== ========= ================== ========
Balance at December 31, 1995 81,892 9 (28) (193) 129,016
Shares issued on January 31, 1996 480
Shares converted -
Shares redeemed (4)
Cash dividends:
Serial preferred stock, $.3825 per share (14) (14)
Common stock - $.66 per share (5,994) (5,994)
Net income 27,041 27,041
Amortization of unearned compensation 96 96
Net change in fair value of securities
available for sale, net of deferred taxes (90) (90)
========= ===================== ========= ================== ========
Balance at December 31, 1996 102,925 (81) (28) (97) 150,531
Adjustment - shares redeemed (3)
Shares converted April 29,1997 1,540
Shares issued October 22, 1997 20,776
Cash dividends:
8% Convertible preferred stock, $15.33
per share (130) (130)
Common stock - $.39 per share (7,069) (7,069)
Transfer of retained earnings per legal
requirements due to conversion of Doral Bank (1,200) -
Net income 19,727 20,231
Amortization of unearned compensation 97 97
Net change in fair value of securities
available for sale, net of deferred taxes 982 982
========= ===================== ========= ================== ========
Balance at December 31, 1997 $ 114,253 $ 901 $ (28) - $186,955
========= ===================== ========= ================== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 76
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. REPORTING ENTITY
The consolidated financial statements include the accounts of Doral
Financial Corporation formerly, First Financial Caribbean Corporation,
and its wholly-owned subsidiaries ("DFC" or the "Company"), Doral
Mortgage Corporation ("Doral"), Centro Hipotecario de Puerto Rico,
Inc., Doral Bank, formerly Doral Federal Savings Bank, and Doral
Securities, Inc., formerly AAA Financial Services Corp. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The Company operates under the Bank Holding Company Act (see note 5).
It currently has three lines of business: 1) mortgage banking; 2)
commercial banking; and 3) broker-dealer business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is primarily engaged in the origination, purchase,
securitization and sale of FHA, VA and conventional first and second
mortgage loans and to a lesser extent 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 Puerto Rico commercial bank that
operates 5 branches located in Puerto Rico. It also provides brokerage
services through Doral Securities. It is the Company's policy to hold
some or all of its loans and securities for extended periods of time
prior to sale.
The following summarizes the more significant accounting policies
followed in the preparation of the accompanying consolidated financial
statements.
Use of estimates in the preparation of financial statements
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.
Securities held for trading
Securities held for trading are presented at fair value. Changes in
fair value are recorded currently in income.
The Company includes as securities held for trading, interest only
strips (IOs) related to the sale of mortgage loans with servicing
retained, formerly known as excess servicing fees receivable.
F-9
<PAGE> 77
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
The Company sells or securitizes substantially all of the mortgage
loans it produces (other than those originated by Doral Bank) 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 IOs, amounts equal to the present value of
servicing fees to be received in future years in excess of normal rates
based upon the estimated lives of the loans and using long-term
interest rates that reflect the risks of the assets. The IOs are
realized through receipt of the excess service fees over time. The
Company periodically evaluates the net realizable value of its IOs
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 IOs due to actual and anticipated prepayment
experience, is recognized currently as a reduction of IOs. The IOs are
amortized over their estimated life using a method approximating the
level-yield method. The amortization is recorded as a reduction of
interest income.
From time to time the Company may sell loans and mortgage-backed
securities with put arrangements and/or other recourse provisions.
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 Company estimates the fair value of the
retained recourse obligation or any liability incurred, such as put
options, on loans or mortgage-backed securities sold at the time of
sale and makes the allocation from the proceeds of the sale. Such put
options are recorded at fair value at the time of sale as a liability
in the Company's balance sheet.
Securities held to maturity
Securities which the Company has the ability and intent to hold until
their maturity are recorded at amortized cost.
Securities available-for-sale
Securities that are held neither for trading or to maturity are
presented as securities available-for-sale and 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 Bank 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.
F-10
<PAGE> 78
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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. Loan losses are
charged and recoveries are credited to the allowance for loan losses.
Recognition of interest on loans receivable is discontinued when loans
are more than 90 days in arrears. At that time, any interest accrued is
reversed against interest income. Such interest, if ultimately
collected, is credited to income in the period of the recovery. Loans
for which the recognition of interest has been discontinued are
designated as non-accruing. Such loans are not reinstated to accrual
status until principal and interest payments are brought up to date.
The Company measures impairment of a loan 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.
Servicing Assets
Servicing assets retained in a sale or securitization are measured at
their allocated previous carrying amounts based on relative fair
values, if practicable, at the date of sale or securitization. To
determine the fair value of the servicing assets, the Company uses the
market prices of comparable servicing sale contracts.
Purchased servicing assets are initially recorded at their fair value
(amount paid). 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.
Servicing assets are evaluated for impairment. In determining
impairment, servicing assets 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 servicing assets is less than its
carrying amount. Impairment is recognized by charging such excess to
income.
Real estate held for sale
The Company acquires real estate through foreclosures. These properties
are held for sale and are stated at the lower of fair value, minus
estimated costs to sell, or cost.
Property, leasehold improvements and equipment
Property, leasehold improvements and equipment are carried at cost.
Depreciation and amortization are provided on the straight-line method
over the estimated useful lives of the assets or the terms of the
leases, if shorter, for leasehold improvements. These range from five
to ten years.
F-11
<PAGE> 79
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
The Company measures 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.
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
On January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"),
as amended by SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of FASB Statement 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.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31,
1996, except for certain provisions related to repurchase agreements,
dollar roll, securities lending, and similar transactions, which shall
be effective for transfers of financial assets occurring after December
31, 1997.
The adoption of this standard did not have a material adverse effect on
the Company's financial statements. In addition, management believes
that the adoption of the provisions deferred by SFAS No. 127 will not
have a material effect on the Company's financial statements.
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> 80
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1997 AND 1996
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 deferred expenses
in the asset accounts.
Interest rate risk management
The Company has various mechanisms to reduce its exposure to interest
rate fluctuations including, among others, entering into transactions
dealing with financial derivatives such as futures contracts, options
and interest rate swaps.
The cost of unexpired options, net of premiums collected on written
options, designated as hedges is capitalized as part of the carrying
cost and charged to income in relation to the life of the underlying
security being hedged. Unrealized net gains or losses on unexpired
options positions are considered as part of the lower cost or market
evaluation made for mortgage loans.
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, 1997, accounts receivable include
advances to investors of approximately $9,460,000 (1996 - $8,195,000).
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 servicing assets
The Company recognizes gain or loss on the sale of servicing assets
after the sales contract is executed, all regulatory 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.
F-13
<PAGE> 81
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Legal surplus
The Banking Act of the Commonwealth of Puerto Rico requires that a
minimum of 10% of Doral Bank's net income for the year be transferred
to a legal surplus account until such surplus equals the greater of 10%
of paid-in-capital. Such surplus is not available for dividends to the
shareholders.
Statement of Cash Flows
Cash and cash equivalents include cash and due from banks, money market
investments and certificates of deposit with an original maturity of
three months or less.
Earnings per share
In October 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). This statement
replaces the presentation of the primary EPS with basic EPS. It also
requires dual presentation of basic and diluted EPS computation on the
face of the income statement for all entities with complex capital
structures and requires reconciliation of the numerator and denominator
of the diluted EPS computation. This Statement requires restatement of
prior-period EPS data presented.
Basic 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 after giving retroactive effect to
common stock splits.
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, when outstanding, 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 weighted-average number of shares of common stock used for
computing the basic and diluted earnings per share was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Basic 18,340,079 18,133,122 14,615,890
Diluted 19,364,316 19,362,536 15,520,270
</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-14
<PAGE> 82
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement establishes standards for the
reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general purpose
financial statements. This Statement requires an enterprise to classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital
in the equity section of the statement of financial position. In the
Company's case, at the date of these financial statements, unrealized
gains and losses on certain investments in debt and equity securities
would be the only item to be included in comprehensive income.
The requirement of SFAS 130 becomes effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. This statement affects only financial statement presentation
and, therefore, management understands that its adoption will not have
a material effect, if any, on the Company's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). This
statement establishes the standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim reports issued
to shareholders.
This statement requires a public business enterprise to report
financial and descriptive information about its reportable segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources
and in assessing performance. It also requires reporting descriptive
information about the way that the operating segments were determined,
the products and the services provided by the operating segments,
differences between the measurements used in reporting segment
information and those used in the enterprises general purpose financial
statements, and the changes in the measurement of segment amount from
period to period. DFC's management has not yet made a determination on
the business lines of the Company that fulfill the segment definition
described above.
This statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. This statement affects
only financial statement presentation and disclosure and therefore
management understands it will not have a material effect, if any, on
the Company's financial position or results of operations.
Other
Certain amounts reflected in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the presentation for
1997.
F-15
<PAGE> 83
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
3. EXTRAORDINARY ITEM
In connection with the conversion of the 8.25% Convertible Subordinated
Debentures into 8% Convertible Cumulative Preferred Stock discussed in
Note 26, the Company recorded an extraordinary non-cash loss of
approximately $12.3 million on the extinguishment of debt. This
extraordinary non-cash loss was determined based upon the difference
between the estimated fair market value of the Preferred Stock and the
carrying value of the convertible debentures at the time of conversion.
Simultaneously with the extraordinary non-cash loss, the Company's
paid-in capital account was increased by $20.8 million. This increase
represents the sum of the extraordinary non-cash loss and the
indebtedness extinguished, represented by the Convertible Subordinated
Debentures, resulting in a net increase to the Company's stockholders
equity of approximately $8.5 million.
4. REGULATORY REQUIREMENTS
Banking Charter
Effective October 1, 1997, Doral Federal Savings Bank converted its
charter from a federal savings bank to a Puerto Rico commercial bank
under the laws of the Commonwealth of Puerto Rico. Concurrently, it
changed its name to Doral Bank.
Holding Company Requirements
On October 1997, the Company became a bank holding Company subject to
the provisions of the Bank Holding Company Act ("BHC Act"). As a bank
holding company, the Company is subject to supervision and regulation
by the Board of Governors of the Federal Reserve System. The Company's
activities and those of its banking and nonbanking subsidiaries are
limited to the business of banking and activities closely related or
incidental to banking, and the Company may not directly or indirectly
acquire the ownership or control of more than 5% of any class of voting
shares or substantially all of the assets of any company in the United
States, including a bank, without the prior approval of the Federal
Reserve. In addition, bank holding companies are generally prohibited
under the BHC Act from engaging in nonbanking activities, subject to
certain exceptions.
Regulatory Capital Requirements
The Company and Doral Bank are 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 Bank. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, Doral Bank must meet specific capital guidelines
that involve quantitative measures of Doral Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. Doral Bank's capital amounts and classification
are also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
F-16
<PAGE> 84
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Quantitative measures established by regulation to ensure capital
adequacy require Doral Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that Doral Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification is from the OTS,
previous to the conversion to a Puerto Rico commercial bank OTS
categorized Doral Bank as well capitalized under the regulatory
framework for prompt corrective action. As of December 31, 1997, the
FDIC has yet to perform an examination of the Doral Bank's capital
adequacy requirements. To be categorized as well capitalized Doral Bank
must maintain minimum total risk-based, Tier I risk-based, Tier I
leverage ratios as set forth in the table. There are no conditions or
events since the OTS notification that management believes have changed
the institution's category.
DFC's and Doral Bank's actual capital amounts and ratios are also
presented in the table. Totals of $11,717,000 and $846,000,
respectively, were deducted from capital for certain non-allowable
assets in 1997.
(in thousands except percentages)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTIONS PROVISIONS
------------------- ----------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(%) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted
assets):
Consolidated $177,027 18.2 $ 78,044 >8.0 N/A
-
Doral Bank $ 32,316 19.0 $ 13,630 >8.0 $ 17,037 >10.0
Tier I capital (to risk-weighted - -
assets):
Consolidated $175,238 18.0 $ 39,022 >4.0 N/A
-
Doral Bank $ 31,470 18.5 $ 6,815 >4.0 $ 10,222 > 6.0
Tier I capital (to average - -
assets):
Consolidated $175,238 10.1 $ 69,317 >4.0 N/A
-
Doral Bank $ 31,470 9.6 $ 13,173 >4.0 $ 16,466 > 5.0
- -
As of December 31, 1996 (based
on OTS regulation and prior
to being subject to
the BHC Act):
Tangible capital
(to adjusted assets) $ 23,376 8.3 $ 4,206 > 1.5
Tier I risk-based capital -
(to risk-weighted assets) $ 23,376 19.3 -- $ 7,282 > 6.0
Core capital -
(to risk-weighted assets) $ 23,376 8.3 $ 8,412 > 3.0 $ 14,021 > 5.0
Total risk-based capital - -
(to risk-weighted assets) $ 24,095 19.8 $ 9,709 > 8.0 $ 12,137 >10.0
- -
</TABLE>
F-17
<PAGE> 85
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Housing and Urban Development Requirements
The Company's mortgage operation 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 a special assessment by the Federal
Deposit Insurance Corporation due to the enactment of legislation to
recapitalize the Savings Association Insurance Fund.
Registered Broker-Dealer Requirements
Doral Securities 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"). Doral Securities 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, Doral Securities is subject to 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.
5. MONEY MARKET INVESTMENTS
At December 31, money market investments consisted of the following:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Securities purchased under agreements to resell $ 44,862 $ 21,374
Economic Development Bank of Puerto Rico
certificate of indebtedness 42,545 -
Overnight deposits with Federal Home
Loan Bank of New York ("FHLB of N.Y.") 35,000 28,000
FHLB of N.Y. discounted overnight note 19,997 4,999
FHLB term deposits 15,000 15,852
Interest bearing deposits with other banks - 549
======== ========
$157,404 $ 70,774
======== ========
</TABLE>
F-18
<PAGE> 86
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
At December 31, 1997, collateral for securities purchased under
agreements to resell are summarized as follows:
(in thousands)
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE MARKET VALUE
<S> <C> <C>
Mortgage-backed securities $30,676 $25,933
US Government securities 22,588 21,236
Other securities 1,000 995
------- -------
$54,264 $48,164
======= =======
</TABLE>
These securities were held by the dealers that arranged the
transactions.
6. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist of:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Mortgage Loans:
Conventional loans $311,418 $193,645
FHA/VA loans 81,502 62,548
Construction and commercial loans 13,377 5,415
-------- --------
$406,297 $261,608
======== ========
</TABLE>
At December 31, 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> <C>
1997 $406,297 $ 13,877 $(10,967) $409,207
======== ======== ======== ========
1996 $261,608 $ 11,208 $ (7,625) $265,191
======== ======== ======== ========
</TABLE>
Proceeds from sales of mortgage loans held for sale and securities held
for trading during 1997 were approximately $1,160,000,000 (1996 -
$765,195,000, 1995 - $725,236,000). Gross gains of $9,438,000 (1996 -
$33,580,000, 1995 - $42,472,000) and gross losses of $2,930,000 (1996 -
$19,014,000, 1995 - $27,362,000) were realized on those sales.
F-19
<PAGE> 87
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
7. SECURITIES HELD FOR TRADING
Securities held for trading consist of:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Mortgage-backed securities:
GNMA $420,365 $219,324
CMO certificates 157,236 158,110
FHLMC 4,954 6,370
FNMA 3,569 929
Interest-only strips 29,093 24,678
US Treasury Bonds - 10,219
US Treasury Notes - 9,450
US Treasury Bills - 5,095
Other 5,071 1,950
-------- --------
$620,288 $436,125
======== ========
</TABLE>
CMO certificates includes the following:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Certificates of other issuers $139,667 $135,816
Subordinated certificates, CMO's established
by the Company 13,699 14,598
Residual certificates, CMO's established by
the Company 3,870 7,696
-------- --------
$157,236 $158,110
======== ========
</TABLE>
At December 31, 1997, CMO certificates include approximately
$14,310,000 of interest only certificates.
Net unrealized holding (losses) gains on trading securities included in
earnings for the year ended December 31, 1997 amounted to approximately
($2,427,000) (1996 - $2,796,000, 1995 - $4,864,000).
F-20
<PAGE> 88
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. SECURITIES HELD TO MATURITY
Securities held to maturity consist of:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Mortgage backed securities (MBS):
CMO certificates of other issuers $ 50,476 $ 51,489 $ 58,828 $ 59,803
GNMA 5,053 5,077 37,879 38,483
Debt securities:
Farm Credit Notes 40,000 40,100 - -
Federal Home Loan Bank Notes 35,000 35,138 3,493 3,487
PR Housing Bank Note 5,000 4,990 - -
U.S. Treasury Notes 6,989 6,978 6,956 6,976
U.S. Treasury Bills 1,016 1,012 66 69
-------- -------- -------- --------
$143,534 $144,784 $107,222 $108,818
======== ======== ======== ========
</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, a significant
portion of the above securities are held by Doral Bank 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.
As a result of the conversion to a Puerto Rico commercial bank, Doral
Bank reclassified approximately $35 million of GNMA from the held to
maturity category to the available for sale category.
Contractual maturities of securities held to maturity at December 31,
1997 are as follows:
(in thousands)
<TABLE>
<CAPTION>
MBS DEBT SECURITIES
<S> <C> <C>
Within one year $ 4,895 $ 8,005
After 1 year through five years 5,871 -
After 5 years through 10 years 12,483 50,000
After 10 years 32,280 30,000
------- -------
$55,529 $88,005
======= =======
</TABLE>
Expected maturities on mortgage-backed securities and certain debt
securities may differ from contractual maturities because borrowers
have the right to prepay obligations with or without prepayment
penalties. In addition, a significant portion of the debt securities
are callable after one year.
F-21
<PAGE> 89
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Aggregate gross unrealized holding gains and losses are as follows:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
MBS DEBT SECURITIES
<S> <C> <C> <C> <C>
Gross unrealized holding gains $1,040 $1,613 $ 238 $ 23
====== ====== ====== ======
Gross unrealized holding losses $ 3 $ 34 $ 25 $ 6
====== ====== ====== ======
</TABLE>
9. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Mortgage Backed securities:
FNMA $ 2,008 $ 1,959 $ 2,241 $ 2,134
FHLMC 2,155 2,087 2,365 2,277
GNMA 43,375 44,537 7,535 7,596
Debt securities:
Federal Home Loan Bank Notes 166,200 166,713 - -
U.S. Treasury Notes 25,661 25,580 - -
-------- -------- -------- --------
$239,399 $240,876 $ 12,141 $ 12,007
======== ======== ======== ========
</TABLE>
Aggregate gross unrealized holding gains and losses are as follows:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Gross unrealized holding gains $1,675 $ 61
====== ======
Gross unrealized holding losses $ 198 $ 195
====== ======
</TABLE>
The contractual maturity of the securities available for sale at
December 31, 1997 is over ten years.
F-22
<PAGE> 90
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Proceeds from sales of securities available for sale during 1997 were
approximately $199,875,000 (1996 - $6,548,000). Gross gains of $619,000
(1996 - $33,000) were realized on those sales. There were no sales
during 1995.
At December 31, 1997, securities available for sale include
approximately $12,135,000 pledged to secure public funds deposited in
Doral Bank.
10. LOANS RECEIVABLE
Loans receivable are all related of the Company's commercial bank
operation and consisted of:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Residential mortgage loans $ 87,037 $ 91,596
Commercial real estate mortgage loan 19,036 18,462
Consumer - secured by mortgage 7,828 12,207
Construction loans 9,927 2,793
Loans on savings deposits 3,513 1,771
Commercial 3,461 2,047
Consumer - other 2,328 356
Land secured 1,488 814
--------- ---------
Gross loans 134,618 130,046
Less:
Unearned interest and deferred loan fees (322) (561)
Reserve for loan losses (1,241) (719)
--------- ---------
(1,563) (1,280)
--------- ---------
Total loans $ 133,055 $ 128,766
========= =========
</TABLE>
As of December 31, 1997, the Company had loans receivable amounting to
approximately $2,462,000 (1996 - $1,728,000) 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 $201,000 (1996 - $114,000).
Doral Bank originates fixed interest rate loans and to a lesser extent
adjustable 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 Bank pays on the
short-term deposits that have primarily funded these loans.
F-23
<PAGE> 91
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
At December 31, 1997, the composition of loans receivable was as
follows:
(in thousands)
<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 $ 5,450 1 month - 1 year $13,900
1 year - 3 years 3,592 Non-accruing 33
3 years - 5 years 5,975 -------
5 years - 10 years 29,711 $13,933
10 years - 20 years 52,125 =======
More than 20 years 21,403
Non-accruing 2,429
--------
$120,685
========
</TABLE>
11. ALLOWANCES FOR LOSSES
Changes in the allowances for losses were as follows:
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance for accounts receivable and
mortgage servicing advances:
Balance at beginning of period $ 1,433 $ 1,805 $ 1,564
Provision for losses 192 142 242
Losses charged to the allowance - (514) -
------- ------- -------
Balance at the end of period $ 1,625 $ 1,433 $ 1,806
======= ======= =======
Allowance for real estate held for sale:
Balance at beginning of period $ 356 $ 356 $ 356
Provision for losses 787 - -
Losses charged to the allowance (467) - -
------- ------- -------
Balance at the end of period $ 676 $ 356 $ 356
======= ======= =======
Reserve for loan losses (Doral Bank):
Balance at beginning of period $ 719 $ 242 $ 428
Provision for loan losses 600 655 110
Recoveries 46 48 6
Losses charged to the allowance (124) (226) (302)
------- ------- -------
Balance at the end of period $ 1,241 $ 719 $ 242
======= ======= =======
</TABLE>
F-24
<PAGE> 92
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
12. PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and equipment consist of:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Office furniture and equipment $ 8,612 $ 6,764
Leasehold improvements 6,190 5,037
Automobiles 514 335
Office building 364 362
Real estate under rental agreements - 73
-------- --------
15,680 12,571
Less - Accumulated depreciation and amortization (8,039) (6,515)
-------- --------
7,641 6,056
Land 2,957 2,957
Construction in progress 250 347
-------- --------
$ 10,848 $ 9,360
======== ========
</TABLE>
13. SERVICING ASSETS
The changes in servicing assets are shown below:
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of period $ 20,969 $ 11,164 $ 3,543
Capitalization of rights 13,980 10,804 7,901
Rights sold - - (24)
Rights purchased 14,904 - 306
Impairments - - -
Amortization:
Scheduled (3,437) (999) (562)
Unscheduled - - -
-------- -------- --------
Balance at the end of period $ 46,416 $ 20,969 $ 11,164
======== ======== ========
</TABLE>
The Company's servicing portfolio amounted to approximately $4.7
billion and $3.1 billion at December 31, 1997 and 1996, respectively,
including servicing of $265.5 million and $74.4 million respectively,
of loans sold with recourse which are not government guaranteed or
insured.
F-25
<PAGE> 93
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
During the years ended December 31, 1996 and 1995, the Company sold
rights to service loans amounting to approximately $102 million and
$310 million, respectively. There were no such sales during the year
ended December 31, 1997. During the years ended December 31, 1997 and
1995, the Company purchased rights to service loans amounting to
approximately $1 billion and $40 million, respectively. No rights were
purchased during 1996. The carrying amount of those mortgage servicing
rights recorded approximates its fair value.
14. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Amounts retained on mortgage loans,
generally paid within 5 days $ 5,262 $ 3,427
Customer mortgages and closing expenses payable 1,845 2,361
Deferred compensation plan 2,728 2,605
Incentive compensation payable 4,916 5,901
Due to brokers, dealers and customers 19,041 -
Accrued expenses and other payables 23,409 12,698
------- -------
$57,201 $26,992
======= =======
</TABLE>
15. LOANS PAYABLE
At December 31, 1997 and 1996, the Company had several mortgage
warehousing lines of credit and gestation or presale facilities
totaling $702 million and $595 million, 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:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Loans payable resulting from use of
warehousing lines of credit and gestation or
presale facilities due in 1998, at various
variable rates averaging - 7.20% and 6.69%
at December 31, 1997 and 1996, respectively,
and other financing arrangements. $265,306 $186,660
Securities sold short at 7.5% due on January 1997 - 9,983
-------- --------
$265,306 $196,643
======== ========
</TABLE>
F-26
<PAGE> 94
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Maximum borrowings outstanding at any month-end during 1997 and 1996 were
$240 million and $223 million, respectively. The approximate average
outstanding borrowings during the periods were $180 million and $203
million, respectively. The weighted average interest rate of such
borrowings, computed on a monthly basis, was 7.05% in 1997 and 6.71% in
1996.
The Company entered into a Syndicated Credit Agreement (the "Syndicated
Credit Agreement") with five banks providing for credit facilities totaling
up to $110 million, which currently expires on June 27, 1998. The credit
facilities were structured by Bankers Trust Company, as administrative and
syndicate agent. The facilities include: (i) a $100 million secured
one-year revolving warehousing credit facility to finance residential
mortgage loans and mortgage-backed securities; and (ii) a $10 million
secured one-year revolving credit facility to provide financing for
receivables and working capital needs. 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 Company has also entered into a Credit Agreement dated as of
November 5, 1997, with Bankers Trust Company that provides a revolving
credit facility of $25 million for the financing of mortgage servicing
rights and working capital. This credit facility, which expires on October
31, 1998, is secured by the Company's servicing portfolio. As of December
31, 1997, the Company had borrowed $15 million under this credit facility
which are reported as note 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, 1997,
the Company was in compliance with these requirements.
16. Securities Sold Under Agreements To Repurchase
The Company sells mortgage-backed securities and mortgage loans under
agreements to repurchase. The securities underlying the agreements to
repurchase were delivered to, and are being held by, the counterparties
with whom the repurchase agreements were transacted. The counterparties
have agreed to resell to the Company the same or similar securities at the
maturity of the agreements. At December 31, 1997, approximately $738
million matures within 180 days and $100 million have a term between three
to five years. The following summarizes significant data about securities
sold under agreements to repurchase for the years ended December 31, 1997
and 1996:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Average aggregate balance outstanding $550,000 $387,000
======== ========
Maximum amount outstanding at any month-end $850,000 $413,000
======== ========
Weighted average interest rate:
During the year 5.78% 5.45%
======== ========
At year end 5.93% 5.58%
======== ========
</TABLE>
F-27
<PAGE> 95
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
The carrying and market values of the collateral pledged at December 31,
were as follows:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
Repurchase Market Repurchase Market
liability Value liability Value
<S> <C> <C> <C> <C>
Securities underlying agreements:
GNMA $425,936 $440,082 $218,410 $233,612
CMO Certificates 177,213 200,364 162,117 190,160
FHLB Discount Notes 162,637 163,069 158 160
Puerto Rico Government securities 42,542 42,545 - -
FHLMC 5,641 5,918 6,202 6,370
FNMA 3,399 3,472 763 930
Other securities 20,774 20,752 - -
-------- -------- -------- --------
$838,142 $876,202 $387,651 $431,232
======== ======== ======== ========
</TABLE>
F-28
<PAGE> 96
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
17. Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
(in thousands) December 31,
1997 1996
<S> <C> <C>
Demand note, at 9% interest, collateralized by
CMO certificates $ 1,000 $ 1,000
Unsecured notes, payable at interest rates ranging from
6.50% to 9.00%, final payment dates ranging from
August 1998 to May 2001 4,045 4,675
Note payable to bank, collateralized by CMO certificates,
at 8.50% interest rate and due on October 10, 1998 8,756 9,275
Note payable to bank, collateralized by CMO certificates,
at 8.00% interest rate and due on February 15, 1998 2,898 3,281
Term-notes payable to corporate investors, collateralized
by stand-by letters of credit issued by the Federal Home
Loan Bank of New York:
at 6.50% maturing on October 13, 2000 8,100 8,100
at a variable rate (5.23% and 4.67% at December 31, 1997
and 1996, respectively, maturing on November 17, 2000) 5,000 5,000
at 5.70% maturing on November 27, 2000 5,000 5,000
at 6.05% maturing on May 23, 2001 5,000 5,000
at 5.98% maturing on June 19, 2001 10,000 10,000
at 6.30% maturing on September 18, 2001 10,000 10,000
at 6.28% maturing on September 24, 2001 10,000 10,000
Note payable to bank, at 7.40% (1996 - 7.15%) interest
rate due, June 27, 1998 3,000 3,000
7.84% Senior Notes due on October 10, 2006 75,000 75,000
Mortgage note secured by land at 7.88% (1996 - 7.63%)
interest rate and due on December 13, 1998 2,135 2,135
Note payable to bank, collateralized by mortgage
servicing rights held by the Company, at 7.00%
interest rate and due on November 7, 1998 15,000 -
Unsecured medium term notes, at interest rates
ranging from 7.00% to 13.63%, final payment dates
ranging from January to June 1997 - 660
-------- --------
$164,934 $152,126
======== ========
</TABLE>
F-29
<PAGE> 97
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
At December 31, 1997, the scheduled aggregate annual maturities of notes
payable were approximately as follows:
(in thousands)
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 34,574
1999 1,950
2000 18,360
2001 35,050
2002 -
2003 and thereafter $ 75,000
------------
</TABLE>
18. Convertible Subordinated Debentures
The Company issued in 1995 $10 million of 8.25% Convertible Subordinated
Debentures due January 1, 2006 (the "Subordinated Convertible Debentures").
On October 22, 1997, these were converted to Convertible Preferred Stock
pursuant to an extinguishment of debt. See Note 26 for disclosure on the
exchange agreement between Popular, Inc. and the Company.
19. Deposit Accounts
At December 31, deposits and their weighted average interest rates are
summarized as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
Amount % Amount %
<S> <C> <C> <C> <C>
Certificates of deposit $199,326 6.01 $ 99,615 5.87
Regular savings 18,756 4.42 17,055 4.36
NOW accounts 15,755 4.40 6,330 3.46
Non interest-bearing deposits 66,657 - 35,902 -
-------- --------
$300,494 $158,902
======== ========
</TABLE>
At December 31, 1997 and 1996, certificates of deposit over $100,000
amounted to $102,570,000 and $44,025,000, respectively.
F-30
<PAGE> 98
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
A summary of certificates of deposit by maturity as of December 31, 1997
follows:
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
1998 $122,467
1999 37,390
2000 8,168
2001 13,228
2002 16,146
2003 and thereafter 1,927
--------
$199,326
========
</TABLE>
A summary of certificates of deposit by interest rate at December 31, 1997
follows:
(in thousands)
<TABLE>
<CAPTION>
Rate Amount
<S> <C>
2.99% or less $59
From 3.00% to 3.99% 5
From 4.00% to 4.99% 2,112
From 5.00% to 5.99% 61,882
From 6.00% to 6.99% 126,603
From 7.00% to 7.99% 8,575
From 8.00% to 8.99% 90
--------
Total $199,326
========
</TABLE>
At December 31, 1997, Doral Bank had brokered certificates of deposit
amounting to $60,284,000 maturing as follows:
(in thousands)
<TABLE>
<S> <C>
1998 $ 8,055
1999 9,958
2000 17,076
2001 10,295
2002 14,646
2003 and thereafter 254
-------
</TABLE>
$60,284
=======
At December 31, 1997, Doral Bank had deposits from officers, directors,
employees and stockholders of the Company amounting to approximately
$892,000 (1996 - $700,000).
F-31
<PAGE> 99
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
The Company, as a servicer of loans, is required to maintain certain
balances on behalf of the borrowers called escrow funds. At December 31,
1997, escrow funds amounted to approximately $62,280,000 (1996 -
$38,519,000), of which $50,656,000 were deposited with Doral Bank (1996 -
$30,316,000). The remaining escrow funds, $11,624,000 (1996 - $8,203,000)
were deposited with other banks and therefore excluded from the Company's
assets and liabilities.
20. Advances From The Federal Home Loan Bank
At December 31, advances from the Federal Home Loan Bank of New York
("FHLB") consist of the following:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
6.307% due on July 21, 2000 $5,000 $5,000
6.445% due on July 17, 2002 5,000 5,000
5.959% due on January 29, 2003 5,000 5,000
6.454% due on October 10, 2007 10,000 -
6.380% due on December 31, 2007 7,000 -
------- -------
Total $32,000 $15,000
======= =======
</TABLE>
At December 31, 1997, the Company had qualified collateral, in the form of
first mortgage notes and mortgage-backed securities with a market value of
$163,764,000 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 of $53,100,000 shown under notes payable.
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. On July 22, 1997, an amendment to the Puerto Rico Internal Revenue
Code was adopted that modified the tax-exempt treatment of FHA and VA loans
secured by real property in Puerto Rico and GNMA mortgage-backed securities
backed by such loans. Under the terms of the amendment, effective August 1,
1997, only FHA and VA loans used to finance the original acquisition of
newly constructed housing and mortgage-backed securities backed by such
loans qualify for tax-exempt treatment. The amendment grandfathered the
tax-exempt status of FHA and VA loans originated prior to August 1, 1997,
and mortgage-backed securities backed by such loans.
Given the tax characteristics of these assets, 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.
F-32
<PAGE> 100
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
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.
As a Puerto Rico Chartered Commercial Bank
Doral Bank is subject to Puerto Rico income tax on its income derived from
all sources. Doral Bank is also subject to United States income taxes on
certain types of income from such sources and also on income effectively
connected with any trade or business within such jurisdiction. However, any
United States income tax paid by Doral Bank is, subject to certain
conditions and limitations, creditable as a foreign tax credit against its
Puerto Rico income tax liability.
Doral Bank prior to conversion to a Puerto Rico Chartered Commercial Bank
Doral Federal Savings Bank (Doral Federal), as a corporation organized
under the laws of the United States was subject, prior to the conversion to
a Puerto Rico chartered commercial bank, to United States Federal income
tax with respect to all of its income, including income from sources within
Puerto Rico (the "Possession"). For United States income tax purposes Doral
Federal elected to be treated as a possessions corporation pursuant to
Section 936 of the Internal Revenue Code of 1986 (the "Code"). Section 936
of the Code allowed Doral Federal to claim a credit, (the "Section 936
credit"), subject to qualification of the source and nature of the income
and certain other limitations, for the United States income tax on income
derived from sources outside of the United States that was attributable to
the active conduct of a trade or business in the Possession ("Qualifying
Active Income"). The credit granted under Section 936 was a full credit
against the United States income tax imposed on Qualifying Active Income.
The Section 936 credit, as described, has been claimed by Doral Federal for
its taxable years beginning before September 30, 1997 to shelter from
United States income taxation its Qualifying Active Income.
For Puerto Rico income tax purposes Doral Federal was taxed as a foreign
corporation engaged in a trade or business in Puerto Rico. As such, Doral
Federal was subject to Puerto Rico income tax on all of its income from
sources within Puerto Rico and income from sources outside Puerto Rico that
was effectively connected with its Puerto Rico business.
F-33
<PAGE> 101
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
The provision for income taxes of the Company differs from amounts computed
by applying the applicable Puerto Rico statutory tax rate to income before
taxes. A reconciliation of the difference follows:
(amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Income before income taxes $37,797 $31,279 $22,060
</TABLE>
<TABLE>
<CAPTION>
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rates $14,741 39.0 $12,199 39.0 $9,265 42.0
Tax effect of exempt interest
income - net (8,118) (21.5) (8,502) (27.2) (4,590) (20.8)
Tax effect of capital gains (1,500) (4.0) - - - -
Tax effect of amortization of
goodwill, other non-deductible
expenses and other 126 0.4 541 1.7 (280) (1.3)
Tax effect of shares issued
under employment contracts - - - - (1,893) (8.6)
------- ---- ------- ---- ------ ----
Provision for income taxes $ 5,249 13.9 $4,238 13.5 $2,500 11.3
======= ==== ====== ==== ====== ====
</TABLE>
At December 31, the components of the net deferred tax liability are:
(in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax liabilities resulting from:
Untaxed Income $ (17,516) $ (12,990)
Deferred Costs (3,374) (1,643)
--------- ---------
(20,890) (14,633)
Deferred tax assets:
Unrealized losses 7,612 1,570
Undeducted expenses 2,283 3,655
Net operating loss - 773
Reserve for doubtful accounts
and others 1,121 263
--------- ---------
11,016 6,261
--------- ---------
Net deferred tax liability $ (9,874) $ (8,372)
========= =========
</TABLE>
22. Related Party Transactions
Mortgage loans held for sale include approximately $200,000 of loans to
officers, directors and stockholders of the Company at prevailing interest
rates (1996 - $230,000).
The Company paid a computer service bureau, in which it holds a 33%
interest, $1,012,000, $900,000 and $860,000 for services rendered during
the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, the Company's equity in this service bureau
was not significant.
F-34
<PAGE> 102
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
At December 31, 1997 and 1996, accounts receivable include approximately
$1.5 million and $1.8 million, respectively, due from a real estate
partnership in which the Company has a minority interest.
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,
1997, commitments to extend credit to individuals for residential mortgages
amounted to approximately $4,379,000 and commitments to sell
mortgage-backed securities and loans amounted to approximately
$175,000,000. 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.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. A geographic concentration exists within the Company's loan
portfolios 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 counterparties to
meet the terms of their contracts and from movements in securities values
and interest rates. Collateral for securities purchased under agreements to
resell is kept by the seller under custody agreements. Collateral for
securities sold under agreements to repurchase is kept by the purchaser.
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.
F-35
<PAGE> 103
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
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, 1997, 1996
and 1995 amounted to approximately $730,000, $722,000 and $640,000,
respectively.
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,
1997, 1996 and 1995 amounted to approximately $305,000, $232,000 and
$62,000, respectively.
The Company also has incentive compensation arrangements payable currently
with certain employees. The incentive payments are based on the amount of
consolidated net income, after adjustment of certain amounts such as
extraordinary gains or losses, 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, 1997, 1996 and 1995 amounted
to approximately $4,915,000, $6,446,000 and $2,415,000, respectively.
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, 1997 are as follows:
(in thousands)
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1998 $2,239
1999 1,605
2000 518
2001 445
2002 347
2003 and thereafter 1,364
------
$6,518
======
</TABLE>
Total rental expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $2,000,000, $2,100,000 and $2,100,000,
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, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.
F-36
<PAGE> 104
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
From time to time the Company may sell loans or mortgage-backed securities
with put options. At December 31, 1997, the amounts outstanding under these
arrangements were as follows:
(in thousands)
<TABLE>
<CAPTION>
AMOUNT
DATES ON WHICH PUT OPTION EXPIRES OUTSTANDING
<S> <C>
Within one year $ 85,149
One to two years 14,238
Three years and thereafter 76,225
--------
$175,612
========
</TABLE>
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 $2,347,000) without the insurance company approval because
the residual certificates are pledged as collateral to the insurance
company.
26. Capital Stock And Paid-In Capital
The authorized number of shares of common stock was increased during 1997
from 20,000,000 to 50,000,000 shares.
On July 10, 1997, the Board of Directors of the Company declared a
two-for-one stock split of the Company's common stock held by registered
shareholders as of August 18, 1997. The stock split was effected on August
28, 1997. All amounts in the financial statements have been restated to
reflect the split.
Pursuant to the Debenture Agreement (see Note 18), on April 29, 1997,
$1,540,000 of the Convertible Subordinated Debentures were converted into
176,000 shares (after giving effect to the stock split) of the Company's
common stock at a conversion price of $8.75 (after giving effect to the
stock split). On July 9, 1997, the Company entered into an agreement,
subject to regulatory approval, to exchange the remaining Convertible
Subordinated Debentures for 8,460 shares of newly issued 8% Convertible
Cumulative Preferred Stock (liquidation preference $1,000 per share) ("8%
Preferred Stock"). The 8% Preferred Stock is convertible into common stock
at a conversion price of $8.75 (after giving effect to the stock split).
The 8% Preferred Stock will have a preference in liquidation over the
common stock. In addition, the terms of the agreement prohibit the Company
from paying dividends on the common stock if the dividend of the 8%
Preferred Stock is in arrears. The holder of the 8% Preferred Stock will be
entitled to receive cumulative cash dividends when declared by the Board
of Directors at an annual rate 8% of the liquidation
F-37
<PAGE> 105
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
preference. The 8% Preferred Stock is not redeemable prior to January 1,
2001. On or after that date, the 8% Preferred Stock will be redeemable at
the option of the Company at the following redemption prices:
<TABLE>
<CAPTION>
Redemption
Year Price
<S> <C>
2001 $1,020
2002 $1,015
2003 $1,010
2004 $1,005
2005 and thereafter $1,000
</TABLE>
All other terms of the agreement remained unchanged from the original
agreement. On October 22, 1997, after obtaining regulatory approval, the
holder of the Convertible Subordinated Debentures converted the debentures
into 8,460 shares of 8% Preferred Stock with an aggregate liquidation
preference of $8,460,000. In connection with this conversion, the Company
recorded an extraordinary non-cash loss of $12.3 million (see Note 3).
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 500,000 shares of common stock to selected officers. During 1994 and
prior years 355,612 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.
In April 16, 1997, the Company adopted an employee stock option plan. This
plan allows for the granting of up to 1,000,000 shares of Common Stock to
any employee, including officers and directors who are also employees, of
the Company. The Stock-Option Committee of the Board of Directors has sole
authority and absolute discretion as to the number of stock options to be
granted, their vesting rights, and the option exercise price. The vesting
rights, however, cannot exceed ten years and the exercise price may not be
lower than the market value at the date of the grant. In addition, the
stock option plan permits the Stock-Option Committee to grant rights to
optionees ("stock appreciation rights") under which an optionee may
surrender any exercisable stock option in return for payment in cash in an
amount equal to the excess of the fair value of the common stock to which
the option is related at the time of exercise over the option price of the
common stock at grant date. The stock option plan provides for a
proportional adjustment in the exercise price and the number of shares that
can be purchased in the event of a stock split, reclassifications of stock
and a merger or reorganization. No stock options were awarded during 1997
under this plan.
All of the outstanding shares of the Company's 10.5% Cumulative Convertible
Preferred Stock Series A, were redeemed in May 1996.
F-38
<PAGE> 106
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Present regulations limit the amount of dividends that Doral Bank may pay.
Payment of such dividends is prohibited if, among other things, the effect
of such payment would cause the capital of Doral Bank to fall below the
regulatory capital requirements.
In addition, the Federal Reserve Board has issued a policy statement that
provides that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
The 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 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 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-39
<PAGE> 107
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
The reconciliation of the numerator and denominator of the basic and
diluted earnings-per-share follows:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
<S> <C> <C> <C>
As of December 31, 1997:
Income before extraordinary item $ 32,548
Less: Convertible preferred stock dividend (130)
---------
Basic EPS
Income available to common
shareholders 32,418 18,340,079 $ 1.77
--------- ---------- --------
Effect of dilutive securities
Convertible Subordinated Debentures 371 838,813
Convertible Preferred Stock 130 185,424
--------- ----------
Diluted EPS
Income available to common shareholders
plus assumed conversions 32,919 19,364,316 $ 1.70
========= ========== ========
As of December 31, 1996:
Income before extraordinary item 27,041
Less: Serial preferred stock dividend (14)
---------
Basic EPS
Income available to common shareholders 27,027 18,133,122 $ 1.49
--------- ---------- --------
Effect of dilutive securities
Convertible Subordinated Debentures 503 1,142,860
Serial Preferred Stock 14 86,554
--------- ----------
Diluted EPS
Income available to common shareholders
plus assumed conversions 27,544 19,362,536 $ 1.42
========= ========== ========
As of December 31, 1995:
Income before extraordinary item 19,560
Less: serial preferred stock dividend (188)
---------
Basic EPS
Income available to common
shareholders 19,372 14,615,896 $ 1.33
--------- ---------- ========
Effect of dilutive securities
Convertible Subordinated Debentures 87 200,892
Serial Preferred Stock 188 703,482
--------- ----------
Diluted EPS
Income available to common shareholders
plus assumed conversions 19,647 15,520,270 $ 1.27
========= ========== ========
</TABLE>
F-40
<PAGE> 108
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
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:
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Employee costs $37,430 $31,488 $24,395
======= ======= =======
Other expenses $17,384 $13,105 $12,042
======= ======= =======
</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.
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Offset against mortgage loan
sales and fees $29,875 $22,006 $16,398
Capitalized as part of loan inventory 3,613 4,213 5,094
------- ------- -------
$33,488 $26,219 $21,492
======= ======= =======
</TABLE>
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, 1997 and 1996. 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.
F-41
<PAGE> 109
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 17,390 $ 17,390 $ 10,439 $ 10,439
Money market investments 157,404 157,404 70,774 70,774
Mortgage loans held for sale 406,297 409,207 261,608 265,190
Securities held for trading 620,288 620,288 436,125 436,125
Securities held to maturity 143,534 144,784 107,222 108,819
Securities available for sale 240,876 240,876 12,007 12,007
Loans receivable 133,055 133,055 128,766 128,766
Servicing assets 46,416 46,416 20,969 20,969
Financial Liabilities
Loans payable $265,306 $265,306 $196,643 $196,643
Securities sold under agreements
to repurchase 838,142 838,142 387,651 387,651
Deposit accounts 300,494 300,494 158,902 158,902
Notes payable 164,934 164,934 152,126 152,126
Advances from FHLB 32,000 32,000 15,000 15,000
Convertible Subordinated Debentures -- -- 10,000 10,000
</TABLE>
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Cash and due from banks and money market investments: 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.
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.
F-42
<PAGE> 110
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Servicing assets: 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.
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.
F-43
<PAGE> 111
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
29. Quarterly Results Of Operations (Unaudited)
Financial data showing results of the 1997 and 1996 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>
(in thousands, except per share data) Quarters
-------------------------------------------------------------
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
1997
----
Revenue $30,073 $29,834 $34,406 $41,104
Income before extraordinary item 7,121 7,918 8,592 8,916
Extraordinary item - - - 12,317
Net income (loss) 7,121 7,918 8,592 (3,401)
Net income per share:
Basic:
Income before extraordinary item 0.39 0.43 0.47 0.48
Extraordinary item - - - (0.67)
Diluted:
Income before extraordinary item 0.38 0.41 0.45 0.46
Extraordinary item - - - (0.64)
<CAPTION>
Quarters
-------------------------------------------------------------
1st 2nd 3rd 4th
<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:
Basic 0.36 0.39 0.40 0.34
Diluted 0.34 0.37 0.39 0.32
</TABLE>
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.
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. As a result, 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.
F-44
<PAGE> 112
DORAL FINANCIAL CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
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, 1997, the
Company, as a purchaser, had unexpired options where it had the right to
sell bonds and GNMA contracts for a notional amount of $345 million. It
also had rights to buy bonds and GNMA contracts for a notional amount of
$79.5 million. 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 $87 million, and obligations to buy bonds and GNMA
contracts for a notional amount of $200 million. At December 31, 1997 the
Company had approximately $175 million of forward commitments to sell
mortgage-backed securities and loans. In addition, at December 31, 1997,
the Company has outstanding future contracts where the Company has the
obligation to buy GNMA securities amounting to $5 million and the
obligation to buy U.S. Treasury notes amounting to $3 million. Also, the
Company has future contracts where it has the obligation to sell GNMA
securities amounting to $15 million.
Generally, the options purchased or written have expired without being
exercised. In addition, future contracts have been settled prior to
delivery. During the years ended December 31, 1997, 1996 and 1995 (net
losses) net gains from these transactions, amounted to approximately
($5,422,000), $3,100,000 and ($5,400,000), respectively. From the 1997 net
losses, approximately $2,062,000 has been charged to income and is
presented as part of mortgage loan sales and fees and $3,360,000
corresponded to options designated as hedges and is included as part of
mortgage loans held for sale at the end of the year. At December 31, 1997,
mortgage loans held for sale includes capitalized costs of unexpired
options, designated as hedges, of approximately $1,345,000. At December 31,
1997, unrealized net losses on open positions related to unexpired options
and open future contracts, including capitalized costs, amounted to
approximately $1,466,000.
The credit risk of futures contracts is limited, due to daily cash
settlement of the net change in value of open contracts with the exchange
in which the instrument is traded. Forwards have a greater degree of credit
risk, depending on the types of counterparties involved, as daily cash
settlements are not required. Options are contracts that grant the
purchaser, for a premium payment, the right to either purchase from or sell
to the writer of the option a financial instrument at a specified price
within a specified period of time or on a specified date.
The risk that counterparties to both derivative and cash instruments might
default on their obligations is monitored on an ongoing basis. To manage
the level of credit risk the Company deals with counterparties of good
credit standing, enters into master netting agreements whenever possible
and, when appropriate, obtains collateral. Master netting agreements
incorporate rights of set off that provide for the net settlement of
subject contracts with the same counterpart in the event of default.
All derivative financial instruments are subject to market risk, the risk
that future changes in market conditions may make an instrument less
valuable or more onerous. For example, fluctuations in market prices and
interest rates change the market value of the instruments. If the
instruments are recognized at market value, these changes directly affect
reported income. Exposure to market risk is managed in accordance with risk
limits set by senior management by buying or selling instruments or
entering into offsetting positions.
F-45
<PAGE> 113
DORAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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, 1997, the Company had outstanding two interest rate swap
agreements with an investment banker to change the Company's interest rate
exposure. The agreements are for a notional principal amount of $5,000,000
and $50,000,000 covering the Company's interest rate exposure. The
$5,000,000 interest rate swap covers the exposure of a floating rate
term-note amounting to $5,000,000. The interest rate swap with a notional
amount of $50,000,000 is designed to protect Doral Bank from the repricing
of its short-term liabilities. The $5,000,000 interest rate swap ends at
the time the related obligation matures. The $50,000,000 interest rate swap
ends on November 5, 2002. The interest rate to be received on the $5
million swap is 87% of the three-months LIBOR rate minus .125% (4.95% at
December 31, 1997) and the interest rate to be paid is 4.92%. On the $50
million swap, the interest rate to be received is the three-months LIBOR
rate (5.75% at December 31, 1997) and the interest rate to be paid is
6.125%. 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, 1997 was approximately
$2,253,000.
31. SUBSEQUENT EVENT
On February 19, 1998, the Company sold 1,817,000 newly issued shares of its
common stock at a selling price of $24.00. The transaction increased the
capital of the Company by approximately $40.9 million gross of issue costs.
F-46
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 10.28
MORTGAGE LOAN ORIGINATION AND SERVICING AGREEMENT
by and among
PUERTO RICO HOUSING BANK AND FINANCE AGENCY,
DORAL FINANCIAL CORPORATION
and
BANCO POPULAR DE PUERTO RICO
Dated December 23, 1997
--------------------
Affordable Housing Mortgage Subsidy Program
Portfolio IV (Stage 3)
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - DEFINITIONS; REPRESENTATIONS AND WARRANTIES;
FEES; CONDITIONS................................................ 3
Section 1.1 Definitions .................................. 3
Section 1.2 General Representations and Warranties
of Mortgage Lender............................ 3
Section 1.3 Representations and Warranties of
Escrow Agent.................................. 5
Section 1.4 Representations and Warranties
of the Agency................................. 6
Section 1.5 Fees ......................................... 6
Section 1.6 Conditions Precedent ......................... 7
ARTICLE II - ORIGINATION OF MORTGAGE LOANS............................... 8
Section 2.1. Commitment.................................... 8
Section 2.2. Condition Precedent to All
Mortgage Loans................................ 10
Section 2.3. Compliance with Commitment;
Non-Assignability; Progress Reports........... 10
Section 2.4. Developer Responsibilities;
Loan Applications............................. 11
Section 2.5. Origination Fee............................... 12
Section 2.6. Satisfaction of Commitment;
Reduction of Commitment....................... 12
Section 2.7. Delivery Period; Extension of
Origination Period............................ 13
Section 2.8. Acquisition Cost.............................. 15
Section 2.9. Income Limits................................. 15
Section 2.10. Mortgage Terms................................ 15
Section 2.11. Prohibition of Discrimination................. 15
Section 2.12. Mortgage Loan Warranties...................... 16
Section 2.13. FNMA, GNMA and FHLMC Program.................. 18
Section 2.14. Certain Remedies with Respect to
Mortgage Loans................................ 18
Section 2.15. Covenants of the Mortgage Lender.............. 21
Section 2.16. Right to Sell Mortgage Loans
and Mortgage Certificates..................... 22
ARTICLE III - MORTGAGE LENDER DUTIES..................................... 23
Section 3.1. Act 87 Endorsements........................... 23
Section 3.2. Advances by Mortgage Lender of
Act 124 Subsidy Amount........................ 23
Section 3.3. Servicing of Mortgage Loans................... 23
Section 3.4. Pooling of Mortgage Loans; Transfer
to FNMA, GNMA or FHLMC........................ 24
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.5. Disbursement of Funds by Escrow Agent......... 24
Section 3.6. Foreclosure Under Act 87...................... 24
Section 3.7. Subsidy Escrow Account........................ 25
Section 3.8. Form of Mortgage.............................. 25
ARTICLE IV - RESIGNATION AND TERMINATION OF MORTGAGE LENDER.............. 25
Section 4.1. Mortgage Lender Resignation................... 25
Section 4.2. Involuntary Termination of the
Mortgage Lender............................... 26
Section 4.3. Transfer of Terminated Mortgage
Lender's Servicing............................ 28
Section 4.4. Mortgage Lender's Excused Nonperformance...... 29
Section 4.5. Indemnification............................... 29
Section 4.6. No Liability for Removal of the
Mortgage Lender............................... 30
Section 4.7. No Remedy Exclusive........................... 30
ARTICLE V - MISCELLANEOUS................................................ 30
Section 5.1. Notices 30
Section 5.2. Severability.................................. 30
Section 5.3. Further Assurances and Corrective
Instruments................................... 31
Section 5.4. Effect of Covenants; Further Acts............. 31
Section 5.5. No Rights Conferred on Others................. 31
Section 5.6. Limitation on Liability of Parties............ 31
Section 5.7. Survival of Obligations and Covenants......... 31
Section 5.8. Contract Documents............................ 32
Section 5.9. Applicable Law................................ 32
Section 5.10. Assignment.................................... 32
Section 5.11. Successors and Assigns........................ 32
Section 5.12. Counterparts.................................. 33
</TABLE>
Exhibit A - Eligible Projects
B - Form of Opinion of Mortgage Lender Counsel
C - Drawing Schedule
ii
<PAGE> 4
FORM 124-15
PUERTO RICO HOUSING BANK AND FINANCE AGENCY
AFFORDABLE HOUSING MORTGAGE SUBSIDY PROGRAM
PORTFOLIO IV (STAGE 3)
MORTGAGE LOAN ORIGINATION AND SERVICING AGREEMENT
THIS AGREEMENT is entered into as of this 23rd day of December, 1997 by
and among DORAL FINANCIAL CORPORATION, a Puerto Rico corporation (the "Mortgage
Lender"), BANCO POPULAR DE PUERTO RICO, as escrow agent (the "Escrow Agent")
under an escrow agreement related to the Mortgage Loans (as hereinafter defined)
to be originated and serviced under this Agreement, and the PUERTO RICO HOUSING
BANK AND FINANCE AGENCY, a public instrumentality of the Commonwealth of Puerto
Rico and a body corporate and politic duly organized and existing pursuant to
Act No. 146 of the Legislature of Puerto Rico approved on June 30, 1961, as
amended (the "Agency").
WITNESSETH:
WHEREAS, pursuant to Act No. 124 of the Legislative Assembly of Puerto
Rico, approved December 10, 1993, as amended, and Regulation No. 5049, approved
March 15, 1994, as amended ("Act 124"), the Act 124 Affordable Housing Mortgage
Subsidy Program (the "Act 124 Program") was established to help low and moderate
income persons and families defray the cost of acquiring an Eligible Residence
(as hereinafter defined) and to reduce the cost to the homebuyer of the monthly
installments due on mortgage loans that are made to finance the acquisition of
Eligible Residences (the "Mortgage Loans");
<PAGE> 5
WHEREAS, Act No. 47 of the Legislative Assembly of Puerto Rico,
approved June 26, 1987, as amended, and the regulations approved thereunder
provide that developers who construct low and moderate income residences may
qualify to receive tax incentives;
WHEREAS, under Act No. 87 of the Legislative Assembly of Puerto Rico,
approved June 25, 1965, as amended ("Act 87"), and the regulations approved
thereunder, the Agency is authorized to insure Mortgage Loans;
WHEREAS, the Department of Housing has entered or will enter into
certain commitments with Developers (as hereinafter defined) to build or
substantially rehabilitate Eligible Residences in specified Eligible Projects
(as hereinafter defined);
WHEREAS, the Mortgage Lender has agreed to originate and fund SIXTY
MILLION DOLLARS ($60,000,000) aggregate principal amount of Mortgage Loans
required by these Eligible Projects, which, at the option of the Mortgage
Lender, may be packaged by the Mortgage Lender into Mortgage Certificates (as
hereinafter defined); and
WHEREAS, the Mortgage Lender is familiar with the Act 124 Program,
understands its goals and objectives, and is willing to comply with the
obligations imposed upon it hereunder to originate SIXTY MILLION DOLLARS
($60,000,000) aggregate principal amount of Mortgage Loans pursuant to the
requirements of the Program and, at its option, to package them into Mortgage
Certificates;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the undersigned Mortgage Lender, the Escrow Agent,
and the Agency agree as follows:
<PAGE> 6
3
ARTICLE I
DEFINITIONS; REPRESENTATIONS AND WARRANTIES; FEES; CONDITIONS
SECTION I.1. DEFINITIONS. All words and terms defined in the Procedural
Guide dated as of December 1, 1997 adopted for the Act 124 Program Porfolio IV
(Stage 3), which Procedural Guide is incorporated herein by reference, are used
herein as so defined, unless otherwise defined herein.
SECTION I.2. GENERAL REPRESENTATIONS AND WARRANTIES OF MORTGAGE LENDER.
The Mortgage Lender hereby represents and warrants to the Agency and the Escrow
Agent as of the date hereof and as of the date of each Closing as follows:
(a) The Mortgage Lender is a duly organized and existing
mortgage lending institution in good standing under the laws governing its
creation and existence and is in good standing and duly authorized and qualified
to transact in Puerto Rico any and all business contemplated by this Agreement
and possesses all requisite authority, power, licenses, permits and franchises
to conduct its business and to execute, deliver and comply with its obligations
under the terms of this Agreement, the execution, delivery and performance of
which have been duly authorized by all necessary action.
(b) The execution and delivery of this Agreement in the manner
contemplated herein by the Mortgage Lender and the performance and compliance
with the terms hereof by the Mortgage Lender will not violate (i) the
instruments creating the Mortgage Lender or governing its operations, or (ii)
any laws that could have any material adverse effect whatsoever upon the
validity, performance or enforceability of any of the terms of this Agreement
<PAGE> 7
4
applicable to the Mortgage Lender, and will not constitute a material default
thereunder.
(c) The execution and delivery of this Agreement by the
Mortgage Lender in the manner contemplated herein and the performance and
compliance with the terms hereof by it do not require the consent or approval of
any governmental authority or, if such consent or approval is required, it has
been obtained.
(d) This Agreement, when duly executed and delivered by the
Mortgage Lender, will constitute a valid, legal and binding obligation of the
Mortgage Lender, enforceable in accordance with its terms, except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting creditors' rights generally.
(e) The Mortgage Lender (i) is now and will at all times be an
approved mortgagee under Act 87 of June 25, 1965, as amended, and (ii) is now
(1) a FNMA-approved seller and servicer, (2) a GNMA approved issuer and servicer
of GNMA Certificates, or (3) a FHLMC approved seller and servicer.
(f) The Mortgage Lender will comply with the
non-discrimination provisions of (i) the Civil Rights Act of 1964, and the
regulations pursuant thereto, (ii) Executive Order No. 11246, Equal Employment
Opportunity, dated September 24, 1965, (iii) the Equal Credit Opportunity Act,
as amended, and (iv) to the extent applicable, the regulations promulgated by
the Puerto Rico Department of Consumer Affairs, the Puerto Rico Interest Rate
Regulatory Board and the Financial Board.
(g) Except as provided under this Agreement, the Mortgage
Lender has not, directly or indirectly, in connection with the transactions
contemplated by this Agreement, contracted or entered into any agreement with
any other mortgage lender or any
<PAGE> 8
5
other person or institution (except the Agency and the Escrow Agent or its
agents) with respect to any aspect of its participation in the Act 124 Program
other than agreements with Developers designated by the Agency under this
Agreement regarding the commitment hereunder to finance the acquisition of
Eligible Residences located in Eligible Projects constructed or to be
constructed by such Developers. In particular, the Mortgage Lender warrants that
prior to the delivery of this Agreement to the Agency, it has not agreed with
any other mortgage lender or any other person or institution as to the amount of
Mortgage Loans it would commit and agree to originate under the Act 124 Program,
other than as provided in the preceding sentence with respect to agreements with
Developers. Additionally, the Mortgage Lender represents that it has not entered
into any formal or informal agreement or arrangement with any real estate broker
or mortgage broker involving the origination of the Mortgage Loans under the Act
124 Program. In no event will the Agency or the Escrow Agent be liable for any
fees or commissions which may be due to or claimed by any such broker pursuant
to any agreement entered into in contravention of this representation.
(h) No information, officer's certificate, statement furnished
in writing, or report required hereunder, delivered to the Agency or the Escrow
Agent by the Mortgage Lender will, to the knowledge of the Mortgage Lender,
contain any untrue statement of a material fact or omit a material fact
necessary to make the information, certificate, statement or report not
misleading.
SECTION I.3. REPRESENTATIONS AND WARRANTIES OF ESCROW AGENT. The
Escrow Agent hereby represents and warrants to the Agency and the Mortgage
Lender as follows:
(a) The Escrow Agent is duly organized, validly existing and
in good standing under the laws governing its creation and
<PAGE> 9
6
existence and is duly authorized and qualified to conduct business in Puerto
Rico and to perform the duties required of it hereunder.
(b) The execution and delivery of this Agreement by the Escrow
Agent in the manner contemplated herein and the performance and compliance with
the terms hereof by the Escrow Agent will not violate the Escrow Agreement and
do not require the consent or approval of any governmental authority or, if such
consent or approval is required, it has been obtained.
(c) This Agreement has been duly executed and delivered by the
Escrow Agent.
SECTION I.4. REPRESENTATIONS AND WARRANTIES OF THE AGENCY. The Agency
hereby represents and warrants to the Escrow Agent and the Mortgage Lender as
follows:
(a) The Agency is a duly authorized and validly existing
public corporation and instrumentality of Puerto Rico created pursuant to Act
No. 146 of June 30, 1961, and is duly authorized to perform the duties required
of the Agency hereunder.
(b) The execution and delivery of this Agreement by the Agency
in the manner contemplated herein and the performance and compliance with the
terms hereof by the Agency will not violate any applicable laws and regulations.
(c) This Agreement has been duly executed and delivered by the
Agency.
(d) The obligations of the Agency under the Escrow Agreement
and this Agreement are valid, legal and binding obligations of the Agency.
<PAGE> 10
7
SECTION I.5. FEES. Upon the execution of this Agreement and
satisfaction of the conditions set forth in Section 1.6 hereof, the Agency
agrees to pay to the Mortgage Lender a commitment fee in the amount of ONE
MILLION EIGHT HUNDRED THOUSAND DOLLARS ($1,800,000) (the "Commitment Fee") and a
hedging fee in the amount of TWO MILLION SEVEN HUNDRED THOUSAND DOLLARS
($2,700,000) (the "Hedging Fee"). If the Maximum Commitment Amount (as
hereinafter defined) is not used in full by the Developers designated by the
Agency to originate Mortgage Loans under this Agreement during the Origination
Period (including any extensions thereto pursuant to Section 2.7 hereof) for any
reason, within fifteen (15) days after the expiration of the Origination Period,
the Agency shall be entitled to receive a rebate from the Mortgage Lender of the
Commitment Fee in an amount equal to one percent (1%) of such portion of the
Maximum Commitment Amount that is not used to originate Mortgage Loans under
this Agreement. Such amount shall be reimbursed with interest thereon from the
date hereof to the date of reimbursement of such amount at an annual rate of
interest equal to five point eight seven five percent (5.875%). Interest shall
be computed on the basis of a year of three hundred and sixty (360) days
consisting of twelve (12) thirty (30)-day months.
SECTION I.6. CONDITIONS PRECEDENT. The obligations of the Mortgage
Lender and the Agency hereunder are subject to the satisfaction of the
conditions set forth in subsections (a) and (b) below, respectively:
(a) The Mortgage Lender shall have received the following in
form reasonably satisfactory to the Mortgage Lender:
(i) a copy, certified by the Secretary of the Agency, of the
resolution of the Secretary of Housing authorizing the execution of the Escrow
Agreement and this Agreement;
<PAGE> 11
8
(ii) an executed copy of the Escrow Agreement;
(iii) a copy of the Procedural Guide;
(iv) a Subsidy Analysis (as such term is defined in the
Escrow Agreement) dated as of the date hereof;
(v) an executed copy of a letter agreement between the
Agency and Popular Securities, Inc. providing for the payment of a structuring
fee to Popular Securities, Inc. in connection with the transaction contemplated
hereunder;
(vi) an opinion of counsel to the Agency to the effect that
(A) the execution of this Agreement has been duly and validly authorized by the
Agency, and (B) this Agreement is a valid and binding obligation of the Agency
enforceable in accordance with its terms, except as such enforcement may be
limited by laws relating to bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights; and
(vii) a Mortgage Insurance Commitment to the Mortgage Lender
pursuant to Act 87.
(b) The Agency shall have received one or more opinions of
counsel to the Mortgage Lender that together cover the matters set forth in
Exhibit B attached hereto.
ARTICLE II
ORIGINATION OF MORTGAGE LOANS
SECTION II.1. COMMITMENT. Subject to the terms and conditions hereof
and in reliance upon the representations and war-
<PAGE> 12
9
ranties set forth in this Agreement, the Mortgage Lender agrees to make Mortgage
Loans with respect to the Eligible Projects identified in Exhibit A hereto from
time to time during the period from the date hereof up to and including the last
day of the Origination Period (including any extensions thereto pursuant to
Section 2.7), the aggregate principal amount of which shall not be less than the
Commitment Amount for each Eligible Project; provided, however, that the
aggregate principal amount of the Mortgage Loans originated by the Mortgage
Lender with respect to the Eligible Projects that are subject to this Agreement
shall not exceed SIXTY MILLION DOLLARS ($60,000,000) (the "Maximum Commitment
Amount"); provided further, that the Mortgage Lender shall not originate
Mortgage Loans in an aggregate principal amount exceeding the amounts set forth
in Exhibit C hereto sooner that the dates indicated in such Exhibit C and shall
not originate Mortgage Loans in any Subsidy Rate Category in an amount greater
than that contemplated by the Procedural Guide. Each Mortgage Loan made by the
Mortgage Lender under this Agreement shall reduce the amount of the Maximum
Commitment Amount by the original principal amount of such Mortgage Loan. The
Mortgage Loans are to be made by the Mortgage Lender with respect to each
Eligible Project pursuant to this Agreement, after approval by the Agency as
hereinafter required, and shall be in all respects in accordance with the
provisions of the Act 124 Program and the Procedural Guide. No Mortgage Loan
shall be entitled to Act 124 Subsidy under the Act 124 Program unless the
applicable Mortgage File has been submitted to the Agency for its review and the
Mortgage Loan has been approved by the Agency pursuant to Sections 4.12 and 4.13
of the Procedural Guide. The Commitment Amount for each Eligible Project set
forth in Exhibit A is equal to the aggregate original principal balances of the
Mortgage Loans encumbering Eligible Residences in the Eligible Project that are
required to be delivered under the Act 124 Program by the Developer under its
Developer Commitment Letter.
<PAGE> 13
10
During the Origination Period the Agency may substitute any of the
Eligible Projects identified in Exhibit A hereto with other Eligible Projects,
if the Agency determines that the Eligible Project being substituted will not be
able to comply with its commitment to deliver Eligible Residences under the
Program within the applicable Commitment Period; provided, however, that the
aggregate Commitment Amount for the Eligible Projects subject to this Agreement
may never exceed the Maximum Commitment Amount and that the Delivery Period for
each Eligible Project may not extend beyond the end of the Origination Period
(as may be extended by the Agency pursuant to Section 2.7 of this Agreement).
After any such substitution, the Mortgage Lender shall be obligated to make
Mortgage Loans for the Eligible Residences within the Delivery Period with
respect to any new Eligible Project designated by the Agency pursuant to this
Section.
SECTION II.2. CONDITION PRECEDENT TO ALL MORTGAGE LOANS. The obligation
of the Mortgage Lender to make a Mortgage Loan hereunder shall be subject to the
condition precedent that on the Closing Date of such Mortgage Loan the interest
paid or payable on such Mortgage Loan shall be excludable from the gross income
of the recipient thereof under the applicable provisions of Act No. 120 of
October 31, 1994, as amended.
SECTION II.3. COMPLIANCE WITH COMMITMENT; NON-ASSIGNABILITY; PROGRESS
REPORTS. Assuming that the Developer of an Eligible Project completes the
Eligible Residences required by its Developer Commitment Letter, obtains all
required permits for their sale, and identifies a sufficient number of Act 124
Purchasers and Non-Subsidized Purchasers for such Eligible Residences, the
Mortgage Lender shall fulfill its commitment to the Agency to originate Mortgage
Loans by the end of the Delivery Period (as described in
<PAGE> 14
11
Section 2.7 hereof). During the Origination Period, the Mortgage Lender may not,
without the written consent of the Agency and of the corresponding Developer,
assign all or a portion of its rights and obligations to originate Mortgage
Loans hereunder to another mortgage lender for the purpose of ultimately
fulfilling its obligations hereunder. The Mortgage Lender's request for consent
to such assignment shall set forth the terms and conditions of the assignment
and the identity of the proposed assignee or assignees, all of which must be
acceptable to the Agency in its sole and absolute discretion. Such assignment
shall be made in accordance with the Procedural Guide. In no event, without the
written consent of the Agency, may the Mortgage Lender charge or receive any fee
or remuneration with respect to any such assignment.
On the first day of the third month following the date of this
Agreement and within the first five (5) days of each month thereafter, the
Mortgage Lender shall deliver to the Agency an Origination Progress Report
evidencing, with respect to the preceding month, on a cumulative-to-date basis
and by Eligible Project, which shall be completed in a manner satisfactory to
the Agency: (i) the total number and principal amount of Mortgage Loans
originated by the Mortgage Lender under this Agreement, broken down, if
applicable, by Subsidy Rate Category, (ii) the total number and principal amount
of Mortgage Loans originated by the Mortgage Lender that have not yet been
submitted to the Agency for its approval under Sections 4.12 and 4.13 of the
Procedural Guide, broken down, if applicable, by Subsidy Rate Category,(iii) the
number of Mortgage Loan commitments to Act 124 Purchasers and Non-Subsidized
Purchasers, and (iv) such additional information as the Agency may require from
time to time, including information with respect to Developers and Eligible
Projects affecting timely completion of Eligible Residences and timely
origination of Mortgage Loans under this Agreement.
<PAGE> 15
12
SECTION II.4. DEVELOPER RESPONSIBILITIES; LOAN APPLICATIONS. The Agency
hereby represents that the Developer of each Eligible Project has received
approval from the Secretary of Housing for the construction of Eligible
Residences in the Eligible Project under the Act 124 Program. The Developer is
responsible for the construction of the Eligible Residences within a specified
time and must identify Act 124 Purchasers and Non-Subsidized Purchasers for the
completed Eligible Residences. The Mortgage Lender shall cooperate with and
assist the Developer in identifying Act 124 Purchasers and Non-Subsidized
Purchasers. Once a prospective Act 124 Purchaser or Non-Subsidized Purchaser has
been identified, the Mortgage Lender will promptly process all required credit
and loan documents so that the Developer can sell the Eligible Residences
promptly upon completion and so that the Mortgage Lender can originate Mortgage
Loans in the Commitment Amount within the Delivery Period.
SECTION II.5. ORIGINATION FEE. The Mortgage Lender shall be entitled to
charge an Origination Fee with respect to each Mortgage Loan not exceeding two
percent (2%) of the principal amount of each Mortgage Loan. The Origination Fee
will be paid by the Mortgagor as a closing expense.
SECTION II.6. SATISFACTION OF COMMITMENT; REDUCTION OF COMMITMENT. The
making by the Mortgage Lender of Mortgage Loans covering Eligible Residences in
the Eligible Projects identified in Exhibit A hereto having a total aggregate
principal amount that is not less than the Maximum Commitment Amount will be
deemed by the Agency to constitute compliance with the Mortgage Lender's
obligations hereunder; provided, however, that the Mortgage Lender shall not be
required to originate Mortgage Loans under this Agreement to the extent that a
Developer fails to complete the construction of Eligible Residences in an
Eligible Project within
<PAGE> 16
13
the Origination Period or to the extent that sufficient Act 124 Purchasers
within each Subsidy Rate Category and Non-Subsidized Purchasers cannot be
identified by the Developer and the Mortgage Lender for the Eligible Residences
within such period. The Mortgage Lender agrees to use its best efforts to assist
the Developer in identifying sufficient Act 124 Purchases and Non-Subsidized
Purchasers for the Eligible Residences within each Eligible Project. The
Mortgage Lender shall include in each Origination Progress Report delivered to
the Agency pursuant to Section 2.3 any information available to the Mortgage
Lender as to delays encountered by any Developer in completion of construction
of Eligible Residences in Eligible Projects covered by this Agreement.
Should the Agency determine, in its sole discretion, based on
Origination Progress Reports, visual inspection, or otherwise, that the Mortgage
Lender will not be able to fulfill its commitment to originate Mortgage Loans
with respect to such Eligible Residences as a result of any failure by the
Mortgage Lender to duly observe or perform any of the covenants or agreements of
the Mortgage Lender to be observed or performed under this Agreement which
continues unremedied for a period of thirty (30) days after the date on which
written notice of such failure, requiring the same to be remedied, shall have
been given to the Mortgage Lender by the Agency or the Escrow Agent, the Agency
in its sole discretion may reduce the unfunded Maximum Commitment Amount for the
Eligible Projects hereunder with respect to the Mortgage Lender. Such reduction
shall not relieve the Mortgage Lender of any liability for failing to comply
with the terms hereof. In such event the Agency may reassign such unfunded
Commitment Amount to another Eligible Project, Developer or mortgage lender, in
its sole and absolute discretion.
<PAGE> 17
14
SECTION II.7. DELIVERY PERIOD; EXTENSION OF ORIGINATION PERIOD. (a) The
Mortgage Lender shall be obligated to make Mortgage Loans in an aggregate amount
equal to the Eligible Project's Commitment Amount within the applicable Delivery
Period for each Eligible Project, which period shall be the two year period
commencing on the Commitment Date. To the extent that a Developer meets its
responsibilities under Section 2.4 hereof within the applicable Delivery Period,
the Mortgage Lender shall be obligated to originate and fund Mortgage Loans for
the Commitment Amount for the relevant Eligible Project.
If the Mortgage Lender is unable to originate and fund Mortgage
Loans for an Eligible Project within the Delivery Period due to a Developer's
failure to meet its responsibilities as set forth in Section 2.4 (but not as a
result of the Mortgage Lender's delay in processing loan applications and
qualifying Act 124 Purchasers and Non-Subsidized Purchasers or closing Mortgage
Loans) and if such Developer later completes the Eligible Residences and
identifies Act 124 Purchasers and Non-Subsidized Purchasers within the
Origination Period, the Mortgage Lender shall use its best efforts to originate
under this Agreement Mortgage Loans for such Eligible Residences closed after
the Delivery Period and prior to the end of the Origination Period.
(b) The parties hereto hereby agree that the Origination
Period may be extended until December 31, 2000, subject to the following
conditions:
(i) Not less than fifteen (15) days prior to the expiration
of the Origination Period, the Agency shall notify the Mortgage Lender of its
intention to extend the expiration date of the Origination Period, such
notification to include the Eligible Projects that will be subject to such
extension and the aggregate
<PAGE> 18
15
Commitment Amount for such Eligible Projects that the Agency desires to be
available for the origination of Mortgage Loans under this Agreement during the
extension (the "Extension Commitment Amount"); provided, however, that the
Extension Commitment Amount shall not exceed the available balance of the
Maximum Commitment Amount that has not been used as of the last day of the
Origination Period to make Mortgage Loans to finance Eligible Residences within
Eligible Projects that are subject to this Agreement;
(ii) The Mortgage Lender shall have received a fee (the
"Extension Fee") in an amount equal to two percent (2%) of the amount of the
Extension Commitment Amount; and
(iii) The Mortgage Lender will not be obligated to make
Mortgage Loans during the extension of the Origination Period (A) with an
aggregate principal amount exceeding FIFTEEN MILLION DOLLARS ($15,000,000),
during the period commencing on March 1, 2000, and ending on August 31, 2000,
and (B) with an aggregate principal amount exceeding the lesser of (x) the
available balance of such FIFTEEN MILLION DOLLARS ($15,000,000) that has not
been used as of August 31, 2000 to originate Mortgage Loans hereunder and (y)
SIX MILLION DOLLARS ($6,000,000), during the period commencing on September 1,
2000 and ending on December 31, 2000.
SECTION II.8. ACQUISITION COST. The Acquisition Cost limits shall be as
set forth in the Procedural Guide.
SECTION II.9. INCOME LIMITS. The Income Limit to qualify as Act 124
Purchasers and Non-Subsidized Purchasers shall be as set forth in the Procedural
Guide.
SECTION II.10. MORTGAGE TERMS. Each Mortgage Loan shall be made at the
Mortgage Loan Rate of six point five percent (6.50%) per annum and shall have
such other terms and conditions as may be specified in the Procedural Guide.
<PAGE> 19
16
SECTION II.11. PROHIBITION OF DISCRIMINATION. The Mortgage Lender
shall consider all applications for Mortgage Loans for Eligible Project(s) in
the order in which they are received on a fair and equal basis and will not
arbitrarily vary the terms of a loan or the application procedures therefor or
arbitrarily reject a Mortgage Loan applicant because of his race, color,
religion, national origin, age, sex, or marital status. The Mortgage Lender
shall not enter into any agreement or arrangement with any person, firm or
corporation to issue Mortgage Loans for an Eligible Project to prefer any
applicant or group of applicants for Mortgage Loans over any other applicant or
group of applicants for such loans, except as may be required to restrict sales
of Eligible Residences to Act 124 Purchasers and Non-Subsidized Purchasers in
order to meet the objectives of the Act 124 Program. In accepting, evaluating
and acting upon such applications, the Mortgage Lender shall comply, if
applicable, with the Federal Equal Credit Opportunity Act and Regulation B
promulgated thereunder. All applications for Mortgage Loans and evidence of
actions taken with respect thereto shall be retained by the Mortgage Lender for
at least twenty-five (25) months from the date of the application.
SECTION II.12. MORTGAGE LOAN WARRANTIES. The Mortgage Lender shall be
deemed to warrant to the Agency at the time of making of each Mortgage Loan
pursuant to this Agreement that:
(a) to the knowledge of the Mortgage Lender after complying
with the requirements of the Procedural Guide, the Mortgage Loan has been made
to an Act 124 Purchaser or Non-Subsidized Purchaser to finance an Eligible
Residence meeting all the applicable requirements of the Procedural Guide;
<PAGE> 20
17
(b) the Mortgage Loan meets all the terms and conditions for a
Mortgage Loan set forth in the Procedural Guide and has been processed in
accordance with the provisions of the Procedural Guide;
(c) the Mortgage Lender has no knowledge of any material
misstatement or omission in the material provided by the Act 124 Purchaser or
Non-Subsidized Purchaser under the Mortgage Loan or by the Mortgage Lender in
connection with the Mortgage Loan;
(d) the terms and conditions of and descriptions contained in
the Mortgage Note and plat of survey, deed, Mortgage, title insurance policy,
mortgage insurance policy, hazard insurance policies and other related documents
are consistent with the application of the Act 124 Purchaser or Non-Subsidized
Purchaser and with each other, all signatures to such documents are genuine and,
to the knowledge of the Mortgage Lender, the Mortgage Note, Mortgage and all
other contracts or agreements entered into in connection therewith are valid and
binding upon the parties thereto and enforceable against each party in
accordance with their respective terms;
(e) the Mortgage Lender has not advanced funds (or directly or
indirectly induced or solicited any advance of funds by any other person), other
than as permitted by this Agreement and the Procedural Guide, for the payment of
principal, interest, escrow or down payments required to be made pursuant to the
Mortgage Loan;
(f) the unpaid principal balance and interest rate on each
Mortgage Loan and all other information set forth on the Mortgage Submission
Voucher have been accurately stated and the amount of the principal balance and
interest are justly due and owing;
<PAGE> 21
18
(g) the terms, covenants, and conditions of each Mortgage Loan
and Mortgage Note have not been changed in any respect that would materially
affect the value, validity, enforceability or prompt payment of the Mortgage
Loan, or the security of the lien of the Mortgage;
(h) based on the information provided to the Mortgage Lender
by the Mortgagor pursuant to the requirements of the Procedural Guide, the
Mortgagor qualifies for the Act 124 Subsidy or otherwise complies with the
income and purchase price limits of the Act 124 Program as determined by the
Mortgage Lender on the corresponding Housing Subsidy Worksheet;
(i) based on the information provided to the Mortgage Lender
by the Mortgagor pursuant to the requirements of the Procedural Guide, the
Mortgage Loan qualifies for mortgage insurance under Act 87 (whether or not the
Mortgage Loan is insured under Act 87); and
(j) no payment required by the Mortgage Loan is delinquent
and, to the knowledge of the Mortgage Lender, (A) no event of default is
continuing thereunder and (B) no event has occurred that with the passage of
time or giving of notice thereof would constitute an event of default
thereunder.
SECTION II.13. FNMA, GNMA AND FHLMC PROGRAM. The Mortgage Lender may
package, at its option, the Mortgage Loans into FNMA, GNMA or FHLMC
Certificates.
<PAGE> 22
19
SECTION II.14. CERTAIN REMEDIES WITH RESPECT TO MORTGAGE LOANS
(a) In the event that any representation made in this
Agreement proves to have been untrue when made or at the time of origination of
a Mortgage Loan or in the event the Mortgage Lender defaults in the observance
or performance of any covenants or conditions in this Agreement to be observed
or performed by the Mortgage Lender, the Agency may exercise the remedies set
forth below:
(i) If, as a result of such misrepresentation or default, a
Mortgagor shall not be eligible for an Act 124 Subsidy, the Agency may, at its
option, discontinue the Act 124 Subsidy for such Mortgagor and cancel the Act 87
insurance on the Mortgage Loan. Thereafter, such Mortgage Loan shall be the sole
responsibility of the Mortgage Lender without any recourse to the Agency.
(ii) If, as a result of such misrepresentation or default, a
Mortgagor shall not be eligible for the particular Act 124 Subsidy Monthly
Installment Subsidy granted to him, but would have been entitled to a Monthly
Installment Subsidy in a lower Subsidy Rate Category, the Mortgage Lender shall
so advice the Mortgagor and will take the required action to have the Agency
amend the Mortgagor's Act 124 Subsidy Certificate and to recover from the
Mortgagor any excess subsidy payment made by the Agency. If the Mortgage Lender
is unable to recover such excess subsidy payment within six (6) months after
notice from the Agency requiring recovery, the Mortgage Lender shall reimburse
in full such amount to the Agency and the Agency will assign to the Mortgage
Lender its rights against the Mortgagor.
(iii) If, irrespective of such misrepresentation or default,
the Mortgagor is an Act 124 Purchaser entitled to the Act 124 Subsidy, the
Agency will not take any action to discontinue the Act 124 Subsidy, but if the
Mortgage Loan goes into default, the Agency may, at its option, cancel the Act
87 insurance on the Mortgage Loan if the misrepresentation or default would have
made the Mortgage Loan ineligible for Act 87 insurance.
<PAGE> 23
20
(iv) Declare the right of the Mortgage Lender to make
Mortgage Loans hereunder to be terminated in whole or in part, whereupon the
same shall forthwith terminate.
(b) Following the Closing of any Mortgage Loan, if the Agency
determines that any documents constituting a part of the Mortgage File of the
applicable Mortgage Loan are, in the judgment of the Agency, defective or
inaccurate in any material respect, or any representation or warranty of the
Mortgage Lender is, in the judgment of the Agency, untrue as to any material
matter, the Mortgage Lender shall cure the defect within a period of sixty (60)
days from the time it receives notice from the Agency of the existence of the
defect or inaccuracy or such shorter period as may be required by law. The
Mortgage Lender hereby agrees that, if any material defect or inaccuracy is not
cured within such sixty (60)-day period, or such shorter period, if applicable,
the Agency may, at its option, discontinue the Act 124 Subsidy for such
Mortgagor and cancel the Act 87 insurance; provided, however, that such event
shall not affect the Agency's obligation to continue to make Act 124 Subsidy
payments if the Mortgagor was and continues to be entitled to such payments.
(c) Notwithstanding anything to the contrary in this
Agreement, for the purposes of this Section, the falsity of a representation by
a Mortgagor respecting some fact or facts that (i) is of such nature that
although false, security for the payment of the pertinent Mortgage Loan is not
thereby adversely affected and (ii) is relied upon by the Mortgage Lender in
prudent good faith, subject to its obligations under the Procedural Guide, shall
not be deemed a material defect or inaccuracy or be deemed to constitute a
misrepresentation or default by Mortgage Lender hereunder.
<PAGE> 24
21
(d) If a Mortgagor transfers the property to a person not
qualified by the Agency under the Act 124 Program (such qualification to be
evidenced through the Agency's being a party to the Deed of Transfer) to receive
Act 124 Subsidy benefits equal to or greater than those that were being received
by the original beneficiary, the obligation secured by the Mortgage shall
thereupon become due and payable and the Mortgage Lender shall require immediate
payment in full of all sums secured by the Mortgage or such Mortgagor's Act 124
Subsidy Certificate may be cancelled.
(e) The Mortgage Lender hereby waives any statute of
limitations or other law that might otherwise be raised in defense to any remedy
hereunder.
(f) With respect to any misrepresentation or default by the
Mortgage Lender affecting a Mortgage Loan under this Section, the Mortgage
Lender will indemnify and hold harmless the Agency and the Escrow Agent for any
expenses incurred by them in connection with the affected Mortgage Loan arising
or resulting from such misrepresentation or default.
(g) In addition to the remedies set forth above, the Agency
shall have all remedies available at law or in equity including, but not limited
to, rescission of this Agreement and equitable relief by way of injunction
(mandatory or prohibitory) to prevent the breach or threatened breach of any
provisions of this Agreement, or to enforce performance thereof. Upon
termination of this Agreement or cancellation of the Maximum Commitment Amount,
the Mortgage Lender shall have no further rights hereunder, other than with
respect to any Mortgage Loan that has been properly funded; but no such
termination shall affect the rights of the Agency pursuant to this Section.
<PAGE> 25
22
(h) All of such remedies shall be cumulative, and the exercise
by the Agency of any one or more of them shall not in any way alter or diminish
the rights of the Agency to any other remedy provided in this Agreement or by
law. In the event of any such default and/or breach by the Mortgage Lender of
this Agreement, the Agency shall be entitled to reimbursement from the Mortgage
Lender of all of its costs and expenses in enforcing any of such terms,
including any reasonable or necessary attorneys' fees. A certificate as to the
amount of such loss or expense submitted to the Mortgage Lender by the Agency,
absent manifest error, shall be conclusive and binding for all purposes.
SECTION II.15. COVENANTS OF THE MORTGAGE LENDER. So long as any
Mortgage Loan is outstanding and during the Origination Period, the Mortgage
Lender covenants and agrees as follows:
(a) The Mortgage Lender agrees to comply with all applicable
federal or Commonwealth statutes, rules or regulations governing the origination
and servicing of residential mortgage loans, including all applicable rules,
regulations, policies and guidelines of GNMA and all applicable Act 124 and Act
87 regulations.
(b) The Mortgage Lender will report information relating to
the Mortgage Loans to the Agency and the Escrow Agent from time to time, as more
fully set forth in this Agreement and in the Procedural Guide, and will do every
act and thing that may be necessary or required to perform its duties under this
Agreement.
(c) The Mortgage Lender agrees that, so long as it shall
continue to serve in the capacity contemplated under the terms of
<PAGE> 26
23
this Agreement, it will remain in good standing under the laws governing its
creation and existence and remain qualified under the laws of Puerto Rico to do
business in Puerto Rico.
(d) In the event that, prior to the termination of the
Origination Period, the Mortgage Lender shall propose to take any action with a
view to its dissolution or liquidation, or shall propose to merge or consolidate
with or into, or to sell substantially all its assets to, another entity, and
the resulting, surviving or transferee entity, (i) shall not have assumed in
writing all the obligations of the Mortgage Lender under this Agreement or (ii)
shall have a stockholders equity of less than SEVENTY MILLION DOLLARS
($70,000,000) or (iii) shall not be qualified under the laws of Puerto Rico to
do business in Puerto Rico and have all necessary approvals required of the
Mortgage Lender under this Agreement to perform the obligations of such parties
under this Agreement, then the Mortgage Lender shall be required to deposit in
escrow with the Agency the unfunded Maximum Commitment Amount, such amount to be
used by the Agency to finance the origination of Mortgage Loans pursuant to the
terms of this Agreement and the Procedural Guide.
SECTION II.16. RIGHT TO SELL MORTGAGE LOANS AND MORTGAGE CERTIFICATES.
Anything herein to the contrary notwithstanding, the Mortgage Lender may from
time to time at its option sell any of the Mortgage Loans originated under this
Agreement or any Mortgage Certificate owned by the Mortgage Lender that are
backed by such Mortgage Loans; provided, however, that the sale of the right to
service the Mortgage Loans originated hereunder shall be subject to the prior
written consent of the Agency, which consent shall not be unreasonably withheld
or denied, so long as the Agency shall have determined that the purchaser of
such rights has the financial resources and technical capabilities to comply
with its obligations
<PAGE> 27
24
to service the Mortgage Loans pursuant to the terms and conditions of this
Agreement and the Procedural Guide.
ARTICLE III
MORTGAGE LENDER DUTIES
SECTION III.1. ACT 87 ENDORSEMENTS The Mortgage Lender shall be
authorized by the Agency pursuant to Act 87 and the Mortgage Insurance
Commitment issued by the Agency to the Mortgage Lender to close Mortgage Loans
hereunder which are to be insured under Act 87. Mortgage Insurance Certificates
shall be issued by the Agency as provided in Sections 4.12 and 4.13 of the
Procedural Guide. The Closing by the Mortgage Lender of a Mortgage Loan that
fails to meet the requirements of the Act 124 Program or of Act 87 shall entitle
the Agency to exercise its remedies available to it under Section 2.14 hereof.
SECTION III.2. ADVANCES BY MORTGAGE LENDER OF ACT 124 SUBSIDY AMOUNT.
The Mortgage Lender shall, upon the closing of any Act 124 Mortgage Loan (i)
advance for the account of the Agency the Down Payment Assistance with respect
to the purchase by the Mortgagor of the mortgaged property, and (ii) make
payment to the owner of the Mortgage Loan (which owner may include the Mortgage
Lender) for the account of the Agency of Mortgagee Advances constituting the
Monthly Installment Subsidy that become due with respect to the Mortgage Loan.
The Mortgage Lender shall be entitled to receive reimbursement or payment, as
applicable, of such Mortgagee Advances from the moneys available under the
Escrow Agreement in accordance with Article IV of the Procedural Guide.
<PAGE> 28
25
SECTION III.3. SERVICING OF MORTGAGE LOANS.
(a) After the origination of any Mortgage Loan, the Mortgage
Lender shall service and administer the Mortgage Loans it originates in
accordance with the Procedural Guide and the then applicable mortgage loan
servicing requirements of GNMA.
(b) The Mortgage Lender will provide prompt monthly principal
and interest payments with respect to each Mortgage Loan and will render
reports, as required under the Procedural Guide and the applicable Guide and as
may be reasonably requested by the Agency with respect to the status of the Act
124 Program. The Mortgage Lender shall provide to the Escrow Agent, in
conjunction with each payment under a Mortgage Loan, a statement identifying any
funds reimbursed by the Mortgagor to the Escrow Agent or the Agency in
accordance with Act 124.
(c) The Mortgage Lender may charge and retain such late
payment charges as may be authorized by the applicable Guide and regulations.
SECTION III.4. POOLING OF MORTGAGE LOANS; TRANSFER TO FNMA, GNMA OR
FHLMC. Upon originating sufficient Mortgage Loans for pooling into a Mortgage
Certificate, the Mortgage Lender, at its option, may pool Mortgage Loans and
transfer them to FNMA, GNMA or FHLMC for issuance and/or guarantee of a Mortgage
Certificate. Any transfer to GNMA, FNMA or FHLMC will be made on such terms and
conditions as the Mortgage Lender may negotiate with FNMA, GNMA or FHLMC.
SECTION III.5. DISBURSEMENT OF FUNDS BY ESCROW AGENT. . Under the
provisions of Section 2.01(b) of the Escrow Agreement, the Escrow Agent is
required to limit the Monthly Installment Subsidy to be paid to the Mortgage
Lender with respect to each Subsidy Rate Category, on an Eligible Project basis,
to the maximum permitted
<PAGE> 29
26
Monthly Installment Subsidy in that Subsidy Rate Category for each Eligible
Project. Neither the Escrow Agent nor the Agency shall have any liability to the
Mortgage Lender as a result of the application of the limitation described in
this paragraph.
SECTION III.6. FORECLOSURE UNDER ACT 87. Any Act 87 insured Mortgage
Loan that goes into default shall be foreclosed by the Mortgage Lender and the
mortgaged property transferred to the Agency in accordance with the procedures
established in Act 87. If a defaulted Mortgage Loan has been pooled into a
Mortgage Certificate, the Mortgage Lender shall first reacquire the Mortgage
Loan, unless the Agency otherwise determines.
SECTION III.7. SUBSIDY ESCROW ACCOUNT. Whenever amounts payable on
Mortgage Loans and representing Monthly Installment Subsidies are to be paid to
the Mortgage Lender by or on behalf of the Commonwealth and through the Escrow
Agent, the Mortgage Lender hereby agrees that such amounts shall be paid solely
from the Contribution Account established in Section 2.01 of the Escrow
Agreement. The Escrow Agent shall provide the Mortgage Lender with all reports
reasonably required for the purpose of enabling the Mortgage Lender to ascertain
the amounts representing Monthly Installment Subsidies and payable on Mortgage
Loans that are on deposit in the Contribution Account.
SECTION III.8 FORM OF MORTGAGE. The form of Mortgage to be used for the
Mortgage Loans shall comply with the requirements of Section 4.08(g) of the
Procedural Guide, providing that the Mortgage Loan shall become due upon any
transfer of the Eligible Residence subject to the Mortgage Loan without the
approval of the Agency.
<PAGE> 30
27
ARTICLE IV
RESIGNATION AND TERMINATION OF MORTGAGE LENDER
SECTION IV.1. MORTGAGE LENDER RESIGNATION. The Mortgage Lender may not
resign from the obligations and duties hereby imposed on it, except that it may
assign its servicing rights and obligations as provided in the Procedural Guide
or as otherwise contemplated under Section 2.16 of this Agreement. Except as
permitted by Sections 2.3, 2.16 and 5.10 of this Agreement, the Mortgage Lender
shall not assign or transfer its rights and obligations under this Agreement and
such rights and obligations shall continue until this Agreement shall have been
terminated, as provided herein, and shall survive the exercise by the Agency or
Escrow Agent of any right or remedy under this Agreement.
SECTION IV.2. INVOLUNTARY TERMINATION OF THE MORTGAGE LENDER. The
Agency may terminate this Agreement with respect to the Mortgage Lender upon the
happening of any one or more of the following events:
(a) any representation or warranty of the Mortgage Lender to
the Agency shall be false or misleading in any material respect;
(b) failure of the Mortgage Lender as servicer of the Mortgage
Loans to remit to the appropriate party any amounts due on a Mortgage Loan;
(c) failure of the Mortgage Lender to duly observe or perform
any other covenant, condition or agreement in this Agreement or the Procedural
Guide to be observed or performed by the Mortgage Lender in any material respect
for a period of thirty (30) days after a written notice is given to the Mortgage
Lender from the Agency specifying such failure and requesting that it be
<PAGE> 31
28
remedied; provided, however, that if the failure stated in the notice cannot be
corrected within the applicable period, the party giving such notice shall
consent to a reasonable extension of time if corrective action is instituted by
the Mortgage Lender within the applicable period and diligently pursued until
such failure or defect is fully corrected;
(d) issuance of a decree or order of a court, agency or
supervisory authority having jurisdiction in the premises appointing a
conservator, receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceeding affecting the
Mortgage Lender or substantially all of its properties, or for the winding-up or
liquidation of its affairs, if such decree or order shall have remained in force
undischarged or unstayed for a period of thirty (30) days;
(e) consent by the Mortgage Lender to the appointment of a
conservator, receiver or liquidator in any insolvency, readjustment of debt,
marshalling or assets and liabilities or similar proceeding affecting the
Mortgage Lender or substantially all of its properties;
(f) admission in writing by the Mortgage Lender of its
inability to pay debts generally as they mature, or the filing of a petition to
take advantage of any applicable bankruptcy or insolvency statute, or the making
of an assignment for the benefit of creditors;
(g) involuntary termination by GNMA of the Mortgage Lender's
right to act as issuer and servicer under the GNMA Program; and
(h) the Mortgage Lender's Consolidated Stockholders Equity
shall be reduced below SEVENTY MILLION DOLLARS ($70,000,000)
<PAGE> 32
29
as reflected in any audited or unaudited consolidated financial statement of the
Mortgage Lender.
If any of the events specified in (d), (e), (f), (g) or (h)
shall occur, the Mortgage Lender shall give written notice of such occurrence to
the Agency within two (2) days of the happening of such event.
In the event that the Agency terminates this Agreement as
aforesaid, the Mortgage Lender shall upon demand pay to the Agency the
following:
(a) With respect to the Commitment Fee, an amount equal to 2%
of the unfunded portion of the Maximum Commitment Amount as of the date of the
termination of this Agreement plus interest at 5.875% from the date of this
Agreement to such termination date, plus
(b) With respect to the Hedging Fee, an amount equal to (i)
the Hedging Fee less (ii) the product of (a) the Hedging Fee divided by
twenty-four, multiplied by (b) the number of calendar months remaining under the
Origination Period (without taking into account any extensions thereto pursuant
to Section 2.7), but not less than zero, plus
(c) With respect to the Extension Fee, an amount equal to 2%
of the unused portion of the Extension Commitment Amount, plus
(d) $67,000.
SECTION IV.3. TRANSFER OF TERMINATED MORTGAGE LENDER'S SERVICING. Upon
termination of this Agreement, the Mortgage Lender shall, within ten (10) days,
assign and deliver to another mortgage
<PAGE> 33
30
lender designated by the Agency and the corresponding Developer (i) all
commitments to make Mortgage Loans with respect to Eligible Projects covered by
this Agreement, (ii) all credit information, materials and files pertaining to
buyers and potential buyers in such Eligible Projects, (iii) the Mortgage
Lender's commitment with each Developer, (iv) all deposits and other funds held
with respect to Act 124 Purchasers, Non-Subsidized Purchasers, Mortgagors and
Mortgage Loans, and (v) all Mortgage Loans closed but not packaged into Mortgage
Certificates. The only obligation of the transferee mortgage lender in such
event shall be to pay to the Mortgage Lender the outstanding principal balance
of the Mortgage Loans being acquired plus accrued interest thereon. With respect
to Mortgage Loans which have been pooled into Mortgage Certificates, upon
instructions of the issuers and/or guarantors of the Mortgage Certificates, the
Mortgage Lender shall deliver or cause to be delivered to another servicer
approved by such issuers and/or guarantors all files of such Mortgage Lender
related to such serviced Mortgage Loans. The Mortgage Lender agree to indemnify
and hold the Agency harmless from any and all costs and expenses that the Agency
or the Escrow Agent may incur in securing the delivery of all such files in the
case of an involuntary termination of the Mortgage Lender pursuant to Section
4.2 hereof.
SECTION IV.4. MORTGAGE LENDER'S EXCUSED NONPERFORMANCE. Notwithstanding
anything in this Agreement to the contrary, the Mortgage Lender shall not be
terminated or liable under this Agreement as a result of its failure to duly
observe or perform in any material respect any covenant, condition or agreement
to be observed or performed by the Mortgage Lender, if the failure on the part
of the Mortgage Lender is directly caused by the failure of the Agency or the
Escrow Agent or a Developer to duly observe or perform in any material respect
any covenant, condition, or agreement to be observed or performed by the Agency
or the Escrow Agent under this Agreement, or by the Developer under the
Developer Commitment Letter.
<PAGE> 34
31
SECTION IV.5. INDEMNIFICATION. If it is determined in a judicial
proceeding that the Mortgage Lender has failed to perform under any provision of
this Agreement, and if the Agency or the Escrow Agent shall employ attorneys or
incur other expenses for the enforcement, performance or observance of the terms
of this Agreement on the part of the Mortgage Lender, then the Mortgage Lender
shall indemnify the Agency or the Escrow Agent, as the case may be, on demand,
for reasonable attorneys' fees and other out-of-pocket expenses incurred in
connection with such judicial proceeding. In addition, the Mortgage Lender shall
indemnify the Agency and the Escrow Agent and hold them harmless from any loss,
damage or expense that the Agency or the Escrow Agent may sustain as a result of
any failure on the part of the Mortgage Lender properly to perform its duties
and obligations under this Agreement and the Procedural Guide.
SECTION IV.6. NO LIABILITY FOR REMOVAL OF THE MORTGAGE LENDER.
Notwithstanding any provision in this Agreement to the contrary, neither the
Agency nor the Escrow Agent shall be liable in any respect for the termination
of, or owe any duty to, the Mortgage Lender if terminated for cause pursuant to
Section 4.2 of this Agreement.
SECTION IV.7. NO REMEDY EXCLUSIVE. Unless otherwise expressly provided,
no remedy herein conferred upon or reserved to any party is intended to be
exclusive of any other available remedy, but each remedy shall be cumulative and
shall be in addition to other remedies given under this Agreement or existing at
law or in equity. No delay or omission to exercise any right or power accruing
under this Agreement shall impair any such right or
<PAGE> 35
32
power or shall be construed to be a waiver thereof, but any such right and power
may be exercised from time to time and as often as may be deemed expedient.
ARTICLE V
MISCELLANEOUS
SECTION V.1. NOTICES. All notices, certificates or other communications
hereunder shall be deemed given when delivered or five (5) days after mailing by
certified or registered mail, postage prepaid, return receipt requested,
addressed to the appropriate Notice Address. The Agency, the Escrow Agent or the
Mortgage Lender may, by notice given hereunder, designate any further or
different address to which subsequent notices, certificates and other
communications shall be sent.
SECTION V.2. SEVERABILITY. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof, except to the extent that the provisions held invalid or unenforceable
materially affect the economic substance of the transactions contemplated by
this Agreement.
SECTION V.3. FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS. To the
extent permitted by law, the Agency, the Escrow Agent and the Mortgage Lender
agree that each will, from time to time, execute, acknowledge and deliver, or
cause to be executed, acknowledged or delivered, such supplements hereto and
such further instruments as may reasonably be required or appropriate to further
express the intention of, or to facilitate the performance of, this Agreement.
<PAGE> 36
33
SECTION V.4. EFFECT OF COVENANTS; FURTHER ACTS. All of the Mortgage
Lender's representations, warranties and agreements contained in this Agreement
will remain operative and in full force and effect regardless of (i) any
investigations made by or on behalf of the Agency; (ii) any payment made in
respect of any Mortgage Loan; and (iii) any termination hereof. The Mortgage
Lender agrees that it will, at its own expense, execute all other documents and
take all other steps necessary and requested from time to time by the Agency to
perform its covenants, representations and warranties contained in this
Agreement.
SECTION V.5. NO RIGHTS CONFERRED ON OTHERS. Nothing in this Agreement
shall confer any right upon any person other than the parties to this Agreement.
SECTION V.6. LIMITATION ON LIABILITY OF PARTIES. The parties to this
Agreement shall be liable under this Agreement only to the extent that
obligations are explicitly imposed upon and undertaken by the party against whom
enforcement is sought.
SECTION V.7. SURVIVAL OF OBLIGATIONS AND COVENANTS. The termination or
resignation of the Mortgage Lender under this Agreement shall not affect any
obligation of the Mortgage Lender under Sections 2.14 and 4.5 hereof or
otherwise available at law.
SECTION V.8. CONTRACT DOCUMENTS. All transactions hereunder will be on
a contractual basis, the contract consisting of: (i) this Agreement, and (ii)
the provisions and requirements of the Procedural Guide as in effect on the date
hereof. The Mortgage Lender agrees that the Agency has the right from time to
time to amend and supplement the Procedural Guide, provided that no such
amendment or supplement may adversely affect or impose additional material
obligations on the Mortgage Lender. In the event of any conflict between this
Agreement and the Procedural Guide as so amended or supplemented, this Agreement
shall govern.
<PAGE> 37
34
SECTION V.9. APPLICABLE LAWS. This Agreement is made and entered into
in the Commonwealth and all questions relating to the validity, construction,
performance, and enforcement hereof shall be governed by the laws of Puerto
Rico. The Mortgage Lender hereby consents to the jurisdiction of the courts of
Puerto Rico for any proceeding in connection with this Agreement.
SECTION V.10. ASSIGNMENT. This Agreement shall not be assignable by the
Mortgage Lender without the written consent of the Agency, its successors or
assigns, as provided in Sections 2.3 and 2.16, and in the event of any attempted
assignment thereof without such written consent such attempted assignment shall
be null and void and the Agency may, at its option, terminate this Agreement,
provided that this Agreement may be assigned in connection with a consolidation,
merger or conveyance made in accordance with Section 2.15(d) hereof.
SECTION V.11. SUCCESSORS AND ASSIGNS. This Agreement and all
obligations and rights arising hereunder shall bind and inure to the benefit of
the Escrow Agent, the Agency and the Mortgage Lender and their respective
successors in interest and permitted assigns.
SECTION V.12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be an original; but such counterparts
shall together constitute but one and the same Agreement.
<PAGE> 38
35
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the date hereof.
DORAL FINANCIAL CORPORATION
By: /s/ Mario S. Levis
--------------------------------------
Name: Mario S. Levis
Title: Executive Vice President
Date: December 23, 1997
PUERTO RICO HOUSING BANK AND
FINANCE AGENCY
By: /s/ Mildred I. Goyco
--------------------------------------
Name: Mildred I. Goyco
Title: President
Date: December 23, 1997
BANCO POPULAR DE PUERTO RICO,
as Escrow Agent
By: /s/ Luis R. Cintron
--------------------------------------
Name: Luis R. Cintron
Title: Senior Vice President
Date: December 23, 1997
<PAGE> 39
EXHIBIT A
<TABLE>
<CAPTION>
ELIGIBLE DELIVERY NUMBER OF ELIGIBLE COMMITMENT AMOUNT FOR
--------
PROJECT PERIOD RESIDENCES MORTGAGE LOANS
-------- -------- ------------------ ---------------------
<S> <C> <C> <C>
</TABLE>
Total Commitment Amount $__________
For All Eligible Projects
<PAGE> 40
EXHIBIT B
FORM OF OPINION OF MORTGAGE LENDER COUNSEL
December 23, 1997
Puerto Rico Housing Bank and Finance Agency
Juan C. Cordero Davila Building
606 Barbosa Avenue
Hato Rey, Puerto Rico 00919
Gentlemen:
I have acted as counsel to Doral Financial Corporation (the "Mortgage
Lender") in connection with the authorization, execution and delivery by the
Mortgage Lender of the Mortgage Loan Origination and Servicing Agreement (the
"Agreement") dated as of December 23, 1997, by and among the Mortgage Lender,
Puerto Rico Housing Bank and Finance Agency and Banco Popular de Puerto Rico, as
Escrow Agent under an Escrow Agreement dated December 23, 1997.
I have reviewed the organizational documents of the Mortgage Lender and
all corporate proceedings in connection with the authorization, execution and
delivery of the Agreement, and I have examined such other documents and
instruments and satisfied myself as to such other matters as I have deemed
necessary as a basis for the conclusions of law contained in the opinions set
forth below.
On the basis of the foregoing, I am of the opinion that:
(a) The Mortgage Lender is a duly organized and existing
mortgage lending institution in good standing under the laws governing its
creation and existence and is in good standing and duly authorized and qualified
to transact in the Commonwealth of Puerto Rico any and all business contemplated
by the Agreement, and possesses all requisite authority, power, licenses,
permits and franchises to conduct its business and to execute, deliver and
comply with its obligations under the terms of the Agreement, the execution,
delivery and performance of which have been duly authorized by all necessary
action;
<PAGE> 41
2
(b) the execution and delivery of the Agreement in the manner
contemplated therein by the Mortgage Lender and the performance and compliance
with the terms thereof, will not violate (i) the instruments creating the
Mortgage Lender, or governing its operations; (ii) any laws that could have any
material adverse effect whatsoever on the validity, performance or
enforceability of any of the terms of the Agreement applicable to the Mortgage
Lender and will not constitute a material default (or an event that, with notice
or lapse of time, or both, would constitute a default) under or result in a
breach of, any material contract, agreement or other instrument to which the
Mortgage Lender is a party or that may be applicable to the Mortgage Lender or
any of its assets;
(c) the execution and delivery of the Agreement by the
Mortgage Lender in the manner contemplated therein and the performance and
compliance with the terms thereof by it do not require the consent or approval
of any governmental authority or, if such consent or approval is required, it
has been obtained;
(d) the Agreement, when duly executed and delivered by the
Mortgage Lender will constitute a valid, legal and binding obligation of the
Mortgage Lender, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization or
other laws affecting creditors' rights generally; and
(e) the Mortgage Lender is an approved mortgagee under Act 87
of June 25, 1965, as amended.
Very truly yours,
<PAGE> 42
EXHIBIT C
<TABLE>
<CAPTION>
MAXIMUM
ORIGINATION CUMULATIVE
DATE MONTH DRAW
- --------------- ------------- ----------------
<S> <C> <C>
July 1, 1998 8 $ 6,000,000
October 1, 1998 11 12,000,000
January 1, 1999 14 18,000,000
April 1, 1999 17 24,000,000
July 1, 1999 20 36,000,000
October 1, 1999 23 48,000,000
January 1, 2000 26 60,000,000
</TABLE>
<PAGE> 1
EXHIBIT 10.65
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 25th day of February, 1998, by and among DORAL FINANCIAL CORPORATION, a
Puerto Rico corporation (which, together with any successor thereto, is
hereinafter referred to as the "Company") and FREDERICK C. TEED (the
"Employee").
WHEREAS, the Board of Directors of the Company believes that it is in
the best interests of each such entity to enter into this Agreement with the
Employee in order to assure the services of an executive with the experience and
abilities of the Employee; and
WHEREAS, the Board of Directors of the Company has authorized the
execution of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is agreed as
follows:
1. Employment. (a) The Employee is hereby employed as an Executive Vice
President of the Company with primary responsibility for supervising banking
operations, relations with holding company and banking regulators and strategic
expansion of such operations within and outside Puerto Rico. The Employee shall
also assist the Company as directed by the Chief Executive Officer of the
Company, with capital raising initiatives, maintaining relationships with
shareholders, lenders, investors and government sponsored mortgage agencies as
well as with helping oversee the implementation of corporate-wide programs to
address year 2000 issues. The Employee shall have such other powers and duties
as may from time to time may be prescribed by the Board of Directors of the
Company. In the performance of such duties the Employee shall report to the
Chairman of the Board and Chief Executive Officer of the Company.
<PAGE> 2
2
(b) To the extent requested to do so by the Board of Directors
of Doral Bank (the "Bank"), the Employee also agrees to serve as an officer
and/or directors of the Bank and to serve on the Asset and Liability,
Management, Compliance, Credit, Electronic Data Processing and CRA Committees of
the Bank and to otherwise, provide assistance on regulatory matters and
strategic planning.
(c) The Employee shall devote his best efforts and
substantially all business time and attention to the business and affairs of the
Company and its subsidiaries and affiliated companies.
2. Competitive Activities.
(a) The Employee agrees that during the term of his employment
hereunder, except with the express consent of the Board of Directors of the
Company, he will not, directly or indirectly, engage or participate in, become a
director of, accept employment from, or render advisory or other services for,
or in connection with, or become interested in, or make any financial investment
in any firm, corporation, business entity or business enterprise competitive
with any business of the Company (which for purposes of this Section 2 includes
any subsidiaries of the Company) or the Bank; provided, however, that the
Employee shall not thereby be precluded or prohibited from owning passive
investments, including investments in the securities of other financial
institutions, so long as such ownership does not require him to devote
substantial time to the management or control of the business or activities in
which he has invested.
(b) The Employee agrees and acknowledges that, by virtue of
his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Company and its subsidiaries, including trade
secrets and other confidential matters. As a result, and also because of the
special, unique and extraordinary
<PAGE> 3
3
services that the Employee is capable of performing for the Company and the Bank
or their competitors, the Employee recognizes that the services to be rendered
by him hereunder are of a character giving them a peculiar value, the loss of
which cannot be adequately or reasonably compensated for by damages. The
Employee therefore agrees that if he fails to render to the Company any of the
services required hereunder, the Company shall be entitled to immediate
injunctive or other equitable relief to restrain the Employee from failing to
render his services hereunder, in addition to any other remedies to which the
Company may be entitled under law; provided, however, that the right to such
injunctive or other equitable relief shall not survive the termination by the
Company of the Employee's employment.
3. Compensation.
(a) Salary. During the term of this Agreement, the Employee
shall be entitled to an annual salary established by the Board of Directors. The
annual salary hereunder as of the Commencement Date (as defined in Section 5
hereof) shall be equal to $120,000. The Employee's salary shall be payable not
less frequently than bi-weekly. Any adjustments in salary or other compensation
shall in no way limit or reduce any other obligation of the Company hereunder.
The Employee's salary in effect hereunder from time to time shall not thereafter
be reduced.
(b) Discretionary year-end Bonus. The Employee shall also be
eligible an receive to annual year-end bonus, the amount of which is to be
fixed, at the discretion of the Board of Directors of the Company, based on the
goals assigned to the Employee by the Board of Directors of the Company. The
bonus, if any to be payable within 30 days of the filing by the Company of its
Annual Report on Form 10-K with the Securities and Exchange Commission.
<PAGE> 4
4
(c) Automobile. The Company will provide the Employee with a
monthly car allowance of $750.00 to be used to lease an automobile for use in
the affairs and business of the Company and to cover related gasoline and
insurance expenses related to the use of such automobile.
(d) Expenses. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him in performing services hereunder, provided that the
Employee properly accounts therefor in accordance with the then existing policy
of the Company. Nothing contained herein shall authorize the Employee 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, kick-back or otherwise an improper
payment or contribution under existing law or under the Company's policy or
practice and no portion of the compensation payable hereunder is for such
purpose.
(e) Withholding. Payments of any compensation under this
Agreement shall be subject to reduction by the amount of any applicable federal,
Commonwealth of Puerto Rico, 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. No additional compensation
shall be due to Employee for services performed of offices held in any other
subsidiary, division, affiliate, or venture of the Company, including, but not
limited to, the Bank.
4. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled while employed hereunder to
<PAGE> 5
5
participate in, and receive benefits under, all plans relating to pension,
thrift, profit-sharing, group life insurance, education, cash or stock bonuses,
and other retirement or employee benefits or combinations thereof, that are
maintained for the benefit of the Company's executive employees or for its
employees generally and that are made available to employees located in the
continental United States.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefits programs which are or may become applicable to the Company's
executive employees or to its employees generally and that are made available to
employees located in the Continental United States.
(c) Medical Coverage. During the term of this Agreement, the
Company shall provide coverage to the Employee under the Company's existing
medical insurance plan.
5. Term. The term of employment under this Agreement shall be a
period of twenty-four months commencing on February 25, 1998 (the "Commencement
Date") and ending on February 25, 2000, subject to earlier termination as
provided herein.
6. Vacations. The Employee shall be entitled, without loss of
pay, to absent himself voluntarily from the performance of his employment under
this Agreement, all such voluntary absences to count as vacation time, provided
that:
(a) During the term of employment under this Agreement, the
Employee shall be entitled to paid vacation equivalent to 18 working days to be
taken in accordance with the plans, policies, programs or practices of the
Company as in effect from time to time; and
<PAGE> 6
6
(b) The timing of vacations shall be scheduled in a reasonable
manner by the Employee subject to approval by the Chief Executive Officer of the
Company.
7. Termination of Employment; Death.
(a) The Company may terminate the Employee's employment at any
time, but any termination by the Company other than termination for cause, shall
not prejudice the Employee's right to compensation or other benefits under this
Agreement. If the employment of the Employee is involuntarily terminated, other
than for "cause" as provided in this Section 7(a) or by reason of death or
disability as provided in Sections 7(c) or 8, the Company shall pay the Employee
his salary (but shall not be obligated to pay any bonus) and provide to the
Employee the same insurance benefits as he was receiving before the date of
termination through the remaining term of this Agreement.
The terms "termination" or "involuntarily terminated" in this
Agreement shall refer to the termination of the employment of Employee without
his express written consent.
In case of termination of the Employee's employment for cause,
the Company shall pay the Employee his salary through the date of termination,
and the Company shall have no further obligation to the Employee under this
Agreement. For purposes of this Agreement, termination for "cause" shall include
termination for personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty, insubordination, failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar minor offenses) or final cease-and-desist order, or material breach of
any provision of this Agreement.
<PAGE> 7
7
(b) (i) The Employee's employment may be terminated by the
Employee upon a failure of the Company to comply with any material provision of
this Agreement, which failure has not been cured within ten (10) days after a
notice pursuant to Section 10 of such non-compliance has been given by the
Employee to the Company.
(ii) The Employee may terminate his employment hereunder if a
"change in control" occurs with respect to the Company.
For purposes of this Agreement, a "change in control of the
Company" shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") or successor provisions to such sections in the event such
sections have been superseded), becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing more than 50% of the combined voting power of the Company's
then outstanding securities, or (ii) as a result of, or in connection with, any
cash tender or exchange offer, merger or other business combination, sale of
assets or contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Company before the
Transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor of the Company.
If the Employee shall terminate his employment pursuant to
this subsection 7(b)(ii) following a change of control of the Company, the
Company shall pay as severance to Employee an amount equal to the amount of
annual salary provided in Section 3(a) hereof for the remaining term of the
Agreement; such payment to be made in a lump sum on or before the 15th day
following the date of termination.
<PAGE> 8
8
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Company the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Company's or the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal
Deposit Insurance Act ("FDIA"), 12 U.S.C. ?1818(e)(3); (g)(1), the Company's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Company may in its discretion (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of its obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Company's or the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12
U.S.C. ?1818(e)(4) or (g)(1), all obligations of the Company under this
Agreement shall terminate, as of the effective date of the order, but vested
rights of the contracting parties hereto shall not be affected.
8. Disability. If the Employee shall become disabled as
defined in the Company's then current disability plan or if the Employee shall
be otherwise physically unable to serve, the Employee shall be entitled to
receive group and other disability income benefits of the type then provided by
the Company for other
<PAGE> 9
9
executive employees, of the Company. However, the Company shall be obligated to
pay the Employee compensation pursuant to Sections 3(a) and (b) hereof only to
the extent the Employee's salary would exceed the disability income benefits
received pursuant to this Section. In addition, the Company shall have the
right, upon resolution of its Board of Directors, to discontinue paying cash
compensation pursuant to Sections 3(a) and (b) beginning six months following a
determination that the Employee qualifies for the foregoing disability income
benefits.
9. No Assignments. (a) This Agreement is personal to each of
the parties hereof, and neither party may assign or delegate any of its rights
or obligations hereunder without first obtaining the written consent of the
other party; provided, however, that if the Company merges or consolidates into
another entity controlled by it or any affiliate of any of the Company, or
enters into a reorganization transaction in which the shareholder of the Company
immediately prior to any such transaction become the shareholders of the
resulting entity, then this Agreement maybe transferred to such resulting
entity.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts (including that portion of the 1996 bonus
which was earned but defined pursuant to Section 3(c)(ii) hereof), unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Employee's devisee, legatee or other designee or if there is no
such designee, to the Employee's estate.
<PAGE> 10
10
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the last known
respective address of the party hereto (provided that all notices to the Company
shall be directed to the attention of the Chief Executive Officer of the Company
with a copy to the Secretary of such entity), or to such other address as either
party may have furnished to the other in writing in accordance herewith.
11. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
12. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience of reference and shall not affect, or be
used in connection with, the interpretation of this Agreement.
13. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or unenforceability of the other provisions hereof.
14. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico.
15. Other Matters. (a) Except as provided in Section 9(b), any amounts
payable hereunder are personal to the Employee and are not transferable or
assignable either by the Employee's act or by operation of law, and no assignee,
trustee in bankruptcy, receiver or other party whomsoever shall have any right
to demand any such amounts or any other right with respect thereto.
<PAGE> 11
11
(b) 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 the Company or any
committee appointed to consider such matters, or, in the event the Company 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 shall be conclusive and binding up. The Employee understands that
payment of any amounts hereunder, including any bonus, is not held or set aside
in trust and that (1) the Company may seek to retain, offset, attach or
similarly place a lien on such funds in circumstances where the Employee has
been discharged for cause and, in addition, shall be entitled to do so for (x)
malfeasance damaging to the Company, (y) conversion by the Employee of an
opportunity of the Company, or (z) a violation of the Company's conflict of
interest policy, in each case as determined in the sole discretion of the
Company's Board of Directors and (2) in the event the Company is unable to make
any payment under this Agreement because of receivership, insolvency, bankruptcy
or similar status or proceedings, the Employee will be treated as a general
unsecured creditor of the Company and may be entitled to no priority under
applicable law with respect to such payments.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Juan, Puerto Rico, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.
<PAGE> 12
12
17. Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
SECTION 16 OF THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION
WHICH MAY BE ENFORCED BY THE PARTIES.
DORAL FINANCIAL CORPORATION
By: /S/ Salomon Levis
-----------------------------------------
Salomon Levis
Chairman of the Board and
Chief Executive Officer
/S/ Frederick C. Teed
------------------------------------------
Frederick C. Teed
<PAGE> 1
Exhibit 10.73
CREDIT AGREEMENT
Dated as of November 5, 1997
Between
DORAL FINANCIAL 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.......................................................................11
ARTICLE 2
AMOUNTS AND TERMS OF LOANS.......................................................................................12
Section 2.1 Commitments...........................................................................12
Section 2.2 Method of Borrowing and of Conversions/Continuations..................................12
Section 2.3 Conversions/Continuations of Loans....................................................13
Section 2.4 Disbursement of Funds.................................................................13
Section 2.5 Notes.................................................................................14
Section 2.6 Interest..............................................................................15
Section 2.7 Termination or Reduction of Commitments...............................................15
Section 2.8 Mandatory Repayments..................................................................15
Section 2.9 Optional Prepayments..................................................................16
Section 2.10 Fees..................................................................................16
Section 2.11 Payments, Etc,........................................................................16
Section 2.12 Eurodollar Rate Not Determinable; Illegality or Impropriety...........................18
Section 2.13 Reserve Requirements; Change in Circumstances.........................................18
Section 2.14 Indemnity.............................................................................20
Section 2.15 Taxes.................................................................................20
Section 2.16 Sharing of Setoffs....................................................................21
ARTICLE 3
CONDITIONS TO LOANS..............................................................................................22
Section 3.1 Conditions to Loans...................................................................22
ARTICLE 4
REPRESENTATIONS AND WARRANTIES...................................................................................24
Section 4.1 Corporate Existence; Compliance with Law and
Contractual Obligations..............................................24
Section 4.2 Corporate Power; Authorization; Enforceable Obligations...............................25
Section 4.3 No Legal or Contractual Bar...........................................................25
Section 4.4 Financial Information.................................................................25
Section 4.5 No Material Litigation................................................................26
Section 4.6 Taxes.................................................................................26
Section 4.7 Investment Company Act................................................................26
Section 4.8 Subsidiaries..........................................................................26
Section 4.9 Use of Proceeds.......................................................................26
Section 4.10 ERISA.................................................................................27
Section 4.11 Security Interests....................................................................27
Section 4.12 Agency Approvals......................................................................27
Section 4.13 Solvency..............................................................................27
</TABLE>
<PAGE> 3
- ii -
<TABLE>
<S> <C> <C>
Section 4.14 Pledged Servicing Portfolio...........................................................27
ARTICLE 5
COVENANTS........................................................................................................28
Section 5.1 Affirmative Covenants.................................................................28
Section 5.2 Negative Covenants of Each Borrower...................................................33
Section 5.3 Additional Negative Covenants.........................................................36
ARTICLE 6
EVENTS OF DEFAULT................................................................................................36
Section 6.1 Events of Default.....................................................................36
ARTICLE 7
THE AGENT........................................................................................................39
Section 7.1 Appointment of Agent..................................................................39
Section 7.2 Nature of Duties of Agent.............................................................39
Section 7.3 Lack of Reliance on Agent.............................................................40
Section 7.4 Certain Rights of Agent...............................................................40
Section 7.5 Reliance by Agent.....................................................................40
Section 7.6 Indemnification of Agent..............................................................41
Section 7.7 Agent in its Individual Capacity......................................................41
Section 7.8 Holders of Notes......................................................................41
Section 7.9 Successor Agent.......................................................................41
ARTICLE 8
MISCELLANEOUS PROVISIONS.........................................................................................42
Section 8.1 Notices...............................................................................42
Section 8.2 Amendments, Etc.......................................................................43
Section 8.3 No Waiver; Remedies Cumulative........................................................43
Section 8.4 Payment of Expenses, Etc..............................................................43
Section 8.5 Right of Setoff.......................................................................44
Section 8.6 Benefit of Agreement..................................................................44
Section 8.7 GOVERNING LAW; SUBMISSION TO JURISDICTION.............................................46
Section 8.8 Counterparts..........................................................................47
Section 8.9 Headings Descriptive..................................................................47
Section 8.10 Survival of Representations and Indemnities...........................................47
Section 8.11 Severability..........................................................................47
Section 8.12 Indemnification of Collateral Agent...................................................48
Section 8.13 Joint and Several Nature of the Obligations...........................................48
Section 8.14 Certain Waivers.......................................................................48
Section 8.15 Subrogation, Etc......................................................................49
Section 8.16 Confidentiality.......................................................................50
Section 8.17 Integration...........................................................................50
Section 8.18 WAIVER OF JURY TRIAL..................................................................50
</TABLE>
EXHIBITS
Exhibit A Form of Note
<PAGE> 4
- iii -
Exhibit B Security and Collateral Agency Agreement
Exhibit C Form of Opinion of Borrowers' Counsel
Exhibit D-1 Officer's Certificate (DFC)
Exhibit D-2 Officer's Certificate (DMC)
Exhibit E Notice of Borrowing
Exhibit F Notice of Conversion/Continuation
Exhibit G Form of Power of Attorney
Exhibit H Addresses for Notices
Exhibit I Material Litigation
Exhibit J Form of Confidentiality Agreement
Exhibit K Permitted Subordinated Indebtedness
Exhibit L Form of Pledged Servicing Portfolio Report
Exhibit M [Reserved]
Exhibit N Authorized Officers
Exhibit O Form of Assignment and Acceptance
<PAGE> 5
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and dated as of November 5,
1997, by and between the Lenders party hereto from time to time, BANKERS TRUST
COMPANY, a New York banking corporation, as agent for the Lenders, DORAL
FINANCIAL CORPORATION, a corporation organized under the laws of the
Commonwealth of Puerto Rico ("DFC"), and DORAL MORTGAGE CORPORATION, a
corporation organized under the laws of the Commonwealth of Puerto Rico, and a
wholly-owned subsidiary of DFC ("DMC", and together with DFC, each a "BORROWER"
and collectively, the "BORROWERS"). Capitalized terms not otherwise defined
herein are defined in Article I.
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINED TERMS.
For purposes of this Agreement, the terms set forth below
shall have the following meanings:
"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 or any other 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) one percent
(1.0%) 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)(i)
thirty-five percent (35%) of the amount of "interest only strip
securities", (ii) all purchased loan administration contracts and
(iii) 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.
"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
<PAGE> 6
- 2 -
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.
"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.
"AUTHORIZED OFFICERS" shall mean those officers identified on
Exhibit N attached hereto; provided that DFC 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.
"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 3750 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 3750, 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 NET WORTH" shall mean (a) the sum of (i) the net worth,
determined in accordance with GAAP consistently applied, of (A) DFC on
a non-consolidated basis, (B) DMC, (C) Centro Hipotecaro de Puerto
Rico, Inc. and (D) other Subsidiaries of DFC engaged primarily in the
business of mortgage banking (as reasonably determined by the Agent,
but excluding Doral Bank and Doral Securities) and (ii) the amount of
intercompany payables between DFC and DMC, less (b) the sum of (i) the
amount of intercompany receivables between DFC and DMC and (ii)
investments by DFC 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 DFC dated as of December 31,
1996) 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.
<PAGE> 7
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"BORROWER" and "BORROWERS" shall have the meaning given such
terms in the introductory paragraph of this Agreement.
"BORROWING" shall mean a borrowing pursuant to a Notice of
Borrowing consisting of Loans made concurrently by all of the Lenders.
"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.
"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 have the meaning given such term in
Section 1 of the Security Agreement.
"COLLATERAL AGENT" shall mean initially Bankers Trust
Company, in its capacity as "Collateral Agent" under the Security
Agreement, and any successor collateral agent thereto acceptable to
the Required Lenders and the Borrowers and designated as the
"Collateral Agent" under the Security Agreement.
"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) one percent (1.0%) 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, provided
that no collateral value shall be attributed to the FNMA servicing
rights or the FHLMC servicing rights relating to the FNMA/FHLMC
Servicing Portfolio until a duly executed Acknowledgment Agreement
from FNMA or FHLMC, respectively, has been received by the Collateral
Agent, and provided further, that if no Pledged Servicing Valuation
Report has been delivered to the Agent in accordance with Section
5.1(a)(ix)(B) or 5.1(a)(ix)(C), then the Collateral Value of the
Pledged Servicing Portfolio shall be an amount determined by the Agent
in its sole discretion).
"COMMITMENT" shall mean, with respect to each Lender, the
commitment of such Lender to make Loans hereunder as set forth in
Section 2.1, as such commitment may be reduced pursuant to Section
8.6(c).
"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.
"CONVERSION/CONTINUATION DATE" shall mean (a) any date on
which the Lenders, pursuant to Sections 2.2 and 2.3, convert Loans to
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 Prime
<PAGE> 8
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Loans into Eurodollar Loans or the continuation of a Eurodollar Loan)
and (b) the last day of each Eurodollar Interest Period in the case of
a Eurodollar Loan.
"DEFAULT RATE" shall have the meaning given such term in
Section 2.6(c).
"DEFAULTING LENDER" shall have the meaning given such term in
Section 2.4(b).
"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.
"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 one, two or three months 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 Loan bearing interest at the
rate set forth in Section 2.6(a).
"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.
"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
<PAGE> 9
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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.
"FNMA" shall mean the Federal National Mortgage Association
and any successor thereto.
"FNMA/FHLMC SERVICING PORTFOLIO" shall mean the portfolio of
outstanding Mortgage Loans (other than Mortgage Loans owned by either
Borrower or its Affiliates that are not covered by a Permitted
Affiliate Servicing Agreement) 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.
"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 SERVICING PORTFOLIO" shall mean the portfolio of
outstanding Mortgage Loans (other than Mortgage Loans owned by either
Borrower or its Affiliates that are not covered by a Permitted
Affiliate Servicing Agreement) 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.
"HUD" shall mean the Department of Housing and Urban
Development and any successor thereto.
"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
<PAGE> 10
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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).
"INTERCREDITOR AGREEMENT" shall mean an Intercreditor
Agreement between the Agent, the Lenders, and each of the Warehouse
Secured Parties providing for, among other things, the Warehouse
Lenders' agreement to the granting to the Secured Parties of a first
priority security interest in the Collateral, which agreement shall be
in form and substance acceptable to the Agent and the Lenders in their
sole discretion.
"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" shall mean a loan made by a Lender pursuant to Section
2.1 for the purposes set forth in Section 4.9.
"LOAN DOCUMENTS" shall mean this Agreement, the Security
Agreement, 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.
"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, or the rights 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 DFC delivered to the
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Lenders and used in DFC'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 October 30, 1998.
"MORTGAGE LOAN" shall mean a one- to four-family residential
real estate-secured loan.
"MORTGAGE-BACKED SECURITY" shall mean any security (including
a participation certificate) issued by FHLMC, FNMA or any other
Person, or guaranteed by GNMA, that represents an interest in a pool
of Mortgage Loans.
"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.
"NOTE" shall have the meaning given such term in Section 2.5.
"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, collectively, the unpaid principal
of and interest on the Loans and any Notes and all other obligations
and liabilities of each of the Borrowers to the Agent, the Collateral
Agent and the other Secured Parties (including, without limitation,
interest accruing at the then applicable rate provided in the Credit
Agreement after the maturity of the Loans and interest accruing at the
then applicable rate provided in the Credit Agreement after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to either Borrower,
whether or not a claim for post-filing or post-petition interest is
allowed in such proceeding), whether direct or indirect, absolute or
contingent, due or to become due, voluntary or involuntary, whether or
not jointly owed with others, liquidated or unliquidated, or now
existing or hereafter incurred, and whether or not from time to time
decreased or extinguished and later increased, created or incurred,
which may arise under, out of, or in connection with, this Agreement,
the Loans, any Notes, the Security Agreement, the other Loan Documents
or any other document made, delivered or given in connection
therewith, in each case whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses or
otherwise (including, without limitation, all fees and disbursements
of counsel to any of the Agent, the Collateral Agent or any of the
other Secured Parties that are required to be paid by the Borrowers
pursuant to the terms of this Agreement, the Security Agreement or any
other Loan Document).
"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.
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"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any
successor thereto.
"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 any
Indebtedness incurred by each Borrower (other than the Obligations)
that is subordinated to the Obligations in accordance with the
criteria set forth on Exhibit K attached hereto.
"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 PORTFOLIO" shall mean the FNMA/FLHMC
Servicing Portfolio and the GNMA Servicing Portfolio, in each case
with respect to 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 L.
"PLEDGED SERVICING VALUATION REPORT" shall mean a report
prepared by a nationally recognized mortgage servicing broker
acceptable to the Agent and the Borrowers and 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 and the GNMA 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 G 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.
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"PRIME LOAN" shall mean any Loan bearing interest at the rate
set forth in Section 2.6(b).
"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 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.
"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.
"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.
"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.
"REQUIRED 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 Loans or, if no Loans 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
<PAGE> 14
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member bank of the Federal Reserve System, in respect of eurocurrency
or eurodollar funding, lending or liabilities.
"SECURED PARTIES" shall have the meaning given such term in
the Security Agreement.
"SECURITY AGREEMENT" shall mean the Security and Collateral
Agency Agreement substantially in the form of Exhibit B, as amended,
modified or supplemented from time to time 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.
"SERVICING PORTFOLIO" shall mean, at any time, the portfolio
of outstanding 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.
"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.
"TAXES" shall have the meaning given such term in Section
2.15.
"TELERATE PAGE 3750" shall mean the display designated as
"Page 3750" on the Associated Press-Dow Jones Telerate Service (or
such other page as may replace Page 3750 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 3750
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 Bank and Doral Securities) 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.
"VA" shall mean the Veterans Administration and any successor
thereto.
"WAREHOUSE CREDIT AGREEMENT" shall mean the First Amended and
Restated Credit Agreement, dated as of September 25, 1996, between the
Borrowers, Bankers Trust Company, as Agent, and the lenders party
thereto from time to time, as amended, supplemented or otherwise
modified from time to time.
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"WAREHOUSE EVENT OF DEFAULT" shall mean an "Event of Default"
as such term is defined in the Warehouse Credit Agreement.
"WAREHOUSE FACILITY 1 COMMITMENTS" shall mean the "Facility 1
Commitments" as such term is defined in the Warehouse Credit
Agreement.
"WAREHOUSE FACILITY 2 LOANS" shall mean the "Facility 2
Loans" as such term is defined in the Warehouse Credit Agreement.
"WAREHOUSE LENDERS" shall mean the "Lenders" as such term is
defined in the Warehouse Credit Agreement.
"WAREHOUSE SECURED PARTIES" shall mean the "Secured Parties"
as such term is defined in the Warehouse Servicing Security Agreement.
"WAREHOUSE SERVICING SECURITY AGREEMENT" shall mean the
"Servicing Security Agreement" as such term is defined in the
Warehouse Credit Agreement.
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, 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
SECTION 2.1 COMMITMENTS.
Subject to and upon the terms and conditions herein set
forth, each Lender agrees, severally and not jointly, at any time and from time
to time from the date of this Agreement up to but excluding the date upon which
the Commitments are terminated, to make Loans to the Borrowers in an aggregate
principal amount at any time outstanding not to exceed the Commitment set forth
opposite such 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 Loans plus the aggregate principal amount of
Warehouse Facility 2 Loans outstanding at any time shall not exceed the then
current Collateral Value of the Pledged Servicing Portfolio. Subject to Section
2.12, each Loan shall be a Eurodollar Loan or a Prime Loan. Each Borrowing
shall be made ratably by
<PAGE> 16
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the Lenders in proportion to their respective Commitments. Within the foregoing
limits and subject to the conditions set forth in Article III, the Borrowers
may borrow and reborrow Loans under Section 2.2 and prepay Loans under Section
2.9.
SECTION 2.2 METHOD OF BORROWING AND OF CONVERSIONS/CONTINUATIONS.
(a) Whenever the Borrowers desire to make a Borrowing hereunder,
to convert any Loan pursuant to Section 2.3 or to continue any 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 Prime Loans or a conversion of
Eurodollar Loans into Prime 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
Prime 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 E or F, as the case may be. Notwithstanding
any other provision hereof to the contrary, (i) no more than three (3)
Eurodollar Interest Periods for Loans may be in effect hereunder at any time;
and (ii) no Borrowing shall be in an aggregate principal amount of less than
$5,000,000.
(b) Without in any way limiting the Borrowers' obligation to
deliver to the Agent a copy of any written Notice of Borrowing or Notice of
Conversion/Continuation, the Agent may act without liability upon the basis of
any telephonic Notice of Borrowing or Notice of Conversion/Continuation
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
or Notice of Conversion/Continuation given by telephone.
(c) 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 telefacsimile notice of each
proposed 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.
(d) Unless otherwise specified in a Notice of Borrowing, each
Loan to be made as part of a Borrowing shall be made as a Prime 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 Prime 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.
<PAGE> 17
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(e) 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, 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.
(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 Lender agrees to convert outstanding Loans that
are Prime Loans into Eurodollar Loans and Eurodollar Loans into Prime Loans and
to continue 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 Prime Loans or Eurodollar Loans, as the case may
be, being converted or Eurodollar Loans, as the case may be, being continued;
provided that no Lender shall convert any 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.
SECTION 2.4 DISBURSEMENT OF FUNDS.
(a) No later than 2:00 p.m. (New York City time) on the date of
each Borrowing, each Lender 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
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 Lender before 2:00
p.m. (New York City time) on the date of a proposed Borrowing that such Lender
does not intend to make available to the Agent on such date such Lender's
portion of such Borrowing, the Agent may assume that such Lender will make such
amount available to the Agent 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.
<PAGE> 18
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(c) 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.
SECTION 2.5 NOTES.
(a) Each Borrower's joint and several obligation to pay the
principal of and interest on the Loans made by each Lender shall be evidenced
by a promissory note (each a "NOTE" and collectively the "NOTES") substantially
in the form of Exhibit A, with blanks appropriately completed in conformity
therewith and payable to the order of such 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 the Loan 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.
SECTION 2.6 INTEREST.
(a) 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 one and
one-quarter percent (1.25%) per annum plus the Eurodollar Rate for such
Eurodollar Interest Period.
(b) The Borrowers agree to pay interest in respect of the unpaid
principal amount of each Prime Loan for each day such Prime Loan is outstanding
at a rate per annum equal to one-quarter percent (0.25%) per annum plus the
Prime Rate.
(c) 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").
(d) 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 (e) 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.
(e) 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 statement shall set forth the interest
accrued on the Loans for such month; provided that any failure
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or delay in delivering such interest billing statement or any inaccuracy
therein shall not affect the Obligations.
SECTION 2.7 TERMINATION OR REDUCTION OF COMMITMENTS.
The Commitments shall automatically terminate on the earliest
of: (i) Maturity Date, and (ii) the date on which the Borrowers terminate or
fail to renew the Warehouse Facility 1 Commitments, in each case subject to
earlier termination pursuant to Section 6.1. The 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.
SECTION 2.8 MANDATORY REPAYMENTS.
(a) The Borrowers shall repay all outstanding Loans on the
Maturity Date.
(b) On any date upon which the aggregate principal amount of the
outstanding Loans plus the aggregate principal amount of the outstanding
Warehouse Facility 2 Loans exceeds the Collateral Value of the Pledged
Servicing Portfolio, the Borrowers shall repay on such date the aggregate
principal amount of the Loans as shall be necessary so that the aggregate
principal amount of outstanding Loans plus the aggregate principal amount of
the outstanding Warehouse Facility 2 Loans does not exceed the Collateral Value
of the Pledged Servicing Portfolio.
(c) All repayments of the Loans of any Lender under this Section
2.8 shall be applied first to such Lender's Loans that are Prime Loans and
second, to such Lender's 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 accordance with the provisions of Section
2.6.
SECTION 2.9 OPTIONAL PREPAYMENTS.
The Borrowers shall have the right at any time and from time
to time to prepay outstanding Loans, 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 Prime Loans; provided that each partial
prepayment of any Loan shall be in an aggregate principal amount of $100,000 or
any multiple of $50,000 in excess thereof. All prepayments of the Loans of any
Lender under this Section 2.9 shall be applied first, to such Lender's Loans
that are Prime Loans, and second, to such Lender's 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 a facility fee in the
amount and on the date separately agreed to by the Agent and the Borrowers.
(b) The fees set forth in this Section 2.10, once paid, shall not
be refundable under any circumstances.
<PAGE> 20
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SECTION 2.11 PAYMENTS, ETC,
(a) Except as otherwise specifically provided herein, all
payments by the Borrowers under this Agreement 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 Company 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 Loan to the Lenders ratably in accordance with the aggregate
principal amount of the Loans of such Lenders, (ii) Fees ratably to the Lenders
and (iii) 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 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 is payable. Each determination by the Agent of an
interest rate hereunder shall be conclusive and binding absent manifest error.
(d) Prior to the maturity of the Loans (whether upon
acceleration, upon any date that the Commitments are terminated pursuant to
Section 2.7 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 the Loans or under the Security Agreement
in respect of the Collateral described therein shall be applied by the Agent as
follows: first, ratably to the Lenders in accordance with the aggregate
principal amounts of their respective outstanding Loans, to repay the aggregate
principal amount of Loans due and payable on such day pursuant to Section 2.8;
second, ratably to the Lenders in accordance with the aggregate principal
amounts of their respective outstanding Loans, to prepay outstanding 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 Loans hereunder, then the Agent shall not release any such
amounts to the Borrowers until the earlier of (x) the cure of any Potential
Default or Event of Default or (y) the acceleration of the Loans, and if the
event described in clause (x) occurs first, the amounts shall be released to
the Borrowers as described in this subsection (d), and if the event described
in clause (y) occurs first, then such amounts shall be applied in accordance
with Section 2.11(e).
<PAGE> 21
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(e) Upon the maturity of the Loans and all other Obligations
pursuant to Section 6.1 or otherwise, all amounts received by the Agent on
account of the Obligations shall be disbursed by the Agent as follows: first,
ratably to the Collateral Agent in accordance with the amounts due to it, to
reimburse it 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 Collateral Agent under the Security 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 Lenders in accordance with the amount of
interest due to each Lender, to pay all accrued and unpaid interest due
hereunder; fourth, ratably to the Lenders in accordance with the aggregate
principal amounts of their respective outstanding Loans, to repay all
outstanding Loans; fifth, ratably to the Lenders in accordance with their
respective unpaid Obligations, to pay all remaining unpaid Obligations; and
sixth, to the Borrowers by transfer to such account as the Borrowers may direct
in writing for such purpose.
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 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 Prime 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 Prime 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 to
another Lender (if any other Lender agrees, in its sole and absolute
discretion, to purchase such Loans) or to any other financial institution
reasonably acceptable to the Agent that is willing to make and maintain
Eurodollar Loans. The purchase price
<PAGE> 22
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for such Loans 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.
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 any
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, and the result of any of the
foregoing is to increase the cost to such Lender of making or maintaining any
Eurodollar Loan, 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.
<PAGE> 23
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(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 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 date of this Agreement the applicable conditions
set forth in Article III, (ii) 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, (iii) 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, (iv) any default in payment or prepayment of the principal amount of
any Eurodollar Loan 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 (v) 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.
(b) 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.
<PAGE> 24
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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, the
Collateral Agent and each Lender, net income taxes and franchise taxes (imposed
in lieu of net income taxes) imposed on the Agent, the 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, the Collateral Agent or such Lender (excluding a connection
arising solely from the Agent, the 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, the Collateral Agent or any Lender
hereunder or under other Loan Documents, the amounts so payable to the Agent,
the Collateral Agent or such Lender shall be increased to the extent necessary
to yield to the Agent, the 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 the 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 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, the 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
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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 LOANS
SECTION 3.1 CONDITIONS TO LOANS.
(a) As conditions precedent to the initial disbursement of the
Loans 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;
(B) each of the Security Agreements 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 Note for each Lender;
(D) duly executed documents, instruments,
agreements and financing statements, 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;
(E) 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;
(F) 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 date of this Agreement;
(G) an opinion of counsel for the Borrowers in
the form of Exhibit C and covering such other matters as the
Agent may reasonably request, in each case dated the date of
this Agreement;
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(H) 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;
(I) a copy of the Bylaws of the Borrowers,
certified by the Secretary or an Assistant Secretary or other
appropriate officer of each such party as of the date of this
Agreement as being accurate and complete;
(J) a certificate of an executive officer of
each of the Borrowers, in the form of Exhibits D-1 and D-2,
respectively, dated the date of this Agreement;
(K) duly executed acknowledgment agreements
from each of FNMA and FHLMC relating to the validity of the
Secured Parties' security interest in the Pledged Servicing
Portfolio;
(L) 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;
(M) 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 Attachment 2 to the Security Agreement;
(N) a schedule of servicing rights included in
the Pledged Servicing Portfolio, including the owner of such
servicing rights and otherwise in form and substance
acceptable to the Agent;
(O) a duly executed Intercreditor Agreement;
and
(P) a waiver under the Warehouse Credit
Agreement duly executed by each of the Warehouse Lenders..
(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, 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.
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(iv) The Borrowers shall have paid all Fees required to
have been paid under the Loan Documents prior to or on the date of
this Agreement.
(b) As additional conditions precedent to the disbursement of all
Loans (including the initial Loans hereunder), at and as of the date of such
disbursement:
(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 disbursement 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, the
aggregate principal amount of Loans outstanding hereunder shall not
exceed the limitations set forth in Sections 2.1 and 2.8.
(iv) Since December 31, 1996, no material adverse change
shall have occurred in the business, financial condition or results of
operations of DFC 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 to the Agent hereunder for any Loan, 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 Loan.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
As an inducement to the Agent and each Lender to enter into
this Agreement and to make Loans as provided herein, each of the Borrowers
represents and warrants to the Agent and each Lender that:
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.
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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
Agreement, 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.
SECTION 4.4 FINANCIAL INFORMATION.
(a) The consolidated balance sheet of DFC and its consolidated
Subsidiaries as at December 31, 1996 and the related consolidated 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 consolidated financial
condition of DFC and its consolidated Subsidiaries as at the date thereof and
the consolidated 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, 1997, 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 DFC, 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 DFC 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 this Agreement, 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
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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, 1996, no material adverse change has
occurred in the business, financial condition or results of operations of DFC
and its Subsidiaries, taken as a whole.
SECTION 4.5 NO MATERIAL LITIGATION.
Except as set forth on Exhibit I, 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.
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.
DFC has no Subsidiaries as of the date of this Agreement
other than DMC, Doral Bank, Centro Hipotecario de Puerto Rico, Inc., First
Florida Realty Corporation and Doral Securities. DFC 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. DMC has no Subsidiaries as of the date of
this Agreement.
SECTION 4.9 USE OF PROCEEDS.
The proceeds of all Loans shall be used by the Borrowers
solely for the purpose of financing the Borrowers' servicing portfolios and the
purchase of 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
<PAGE> 30
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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.
SECTION 4.11 SECURITY INTERESTS.
The security interests created in favor of the Secured
Parties under the Security Agreement constitute valid and perfected first
priority security interests in the Collateral, and the 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 DFC 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.
SECTION 4.14 PLEDGED SERVICING PORTFOLIO
As of the date of this Agreement, the Mortgage Loans in the
Pledged Servicing Portfolio have an aggregate outstanding principal balance of
not less than $2,500,000,000.
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:
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(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 DFC, a consolidated balance sheet of DFC and its consolidated
Subsidiaries as at the end of such year and the related consolidated
statements of income, retained earnings and cash flows of DFC 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 consolidated financial condition as at the end of such
fiscal year, and the consolidated results of operations and cash flows
for such fiscal year, of DFC and its consolidated Subsidiaries in
accordance with GAAP consistently applied;
(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 DFC, a consolidated and consolidating balance sheet
of DFC 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 DFC 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 DFC
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 DFC and its consolidated Subsidiaries in accordance with
GAAP consistently applied, subject to normal year-end adjustments;
(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 DFC 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 DFC 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 DFC 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 DFC 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 DFC (A) to the
effect that, based upon a review of the activities of DFC 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
<PAGE> 32
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(B) demonstrating in reasonable detail compliance with Section 5.3 as
at the end of such fiscal year or such fiscal quarter, as applicable;
(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
DFC specifying the nature thereof and DFC's or DFC'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) 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;
(viii) 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;
(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;
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(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;
(ix) Servicing Reports.
(A) 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;
(B) As soon as available and in any event no
later than forty-five (45) days after the date of the initial
disbursement of the Loans, a Pledged Servicing Valuation Report, dated
as of a recent date;
(C) As soon as available and in any event no
later than forty-five (45) days after the end of each six-month period
ended June 30 and December 31 of each year, commencing with the
six-month period ending June 30, 1998, 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
Pledged Servicing Valuation Reports at such times as it deems
necessary or desirable, which reports shall be prepared at the expense
of the Lenders; and
(D) Promptly upon the request of the Agent, a
schedule of servicing rights then included in the Pledged Servicing
Portfolio, including the owner of such servicing rights and otherwise
in form and substance acceptable to the Agent; and
(x) Other Information. Promptly, such additional
financial and other information, including financial statements of the
Borrowers or any of its Subsidiaries, 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
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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(j), 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 DFC, 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 DFC or DMC shall have been
given the right upon reasonable notice to be present by phone or in person),
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
Secured Parties' security interest in the GNMA Servicing Portfolio, if and when
requested by the Administrative Agent in its sole discretion.
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(g) Further Documents. Execute and deliver or to cause to be
executed and delivered to the Agent or the Collateral Agent 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.
(h) 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 pay any and all fees and charges in connection therewith.
(i) Recourse/Purchase Obligations. If (i) DFC sells
Mortgage-Backed Securities or Mortgage Loans and the terms of such sale
obligate DFC to repurchase (whether conditionally or unconditionally) such
Mortgage-Backed Securities or Mortgage Loans or if DFC has retained recourse
obligations with respect thereto and (ii) the then aggregate amount of all such
repurchase and recourse obligations of DFC (in connection with the contemplated
transaction and all previous transactions) exceeds $250,000,000, then DFC shall
give notice thereof to the Agent within five (5) Business Days of such sale. If
DFC shall have assumed recourse obligations with respect to Mortgage-Backed
Securities or Mortgage Loans included in its Servicing Portfolio and the
aggregate amount of such recourse obligations of DFC with respect to
Mortgage-Backed Securities or Mortgage Loans included in its Servicing
Portfolio exceeds $250,000,000, then DFC shall give notice thereof to the Agent
within five (5) Business Days after such assumption. Notwithstanding the
foregoing, DFC 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 DFC, such transaction (or the aggregate of such
transaction with all previous transactions for which obligations still exist)
could result in a decrease in DFC'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 now owned or hereafter acquired, except in favor of the Secured
Parties under the Security Agreement, 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) 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
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acknowledgment agreements with such Agencies and the interests of GNMA
as set forth in the GNMA Guide;
(iv) 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; and
(vi) a second priority Lien in favor of the Warehouse
Secured Parties under the Warehouse Servicing Security Agreement.
(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 any related financial
service business or permit any of DFC's Subsidiaries to engage in any type of
business other than financial services (including, without limitation, any
activity permitted for banks, 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 banks, 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 Purchase, Servicing and Collections Agreement dated as
of September 15, 1993 with Doral Bank, the Amended and Restated Master
Production Agreement among DFC, DMC and Doral Bank dated as of October 1, 1995,
as amended by the First Amendment to Master Production Agreement, dated as of
March 1, 1996 and the Master Servicing and Collection Agreement between DFC and
Doral Bank, dated as of October 1, 1995, as amended by the First Amendment to
Master Servicing and Collection Agreement, dated as of March 1, 1996, each as
in effect on such respective 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 that results in either Borrower becoming a
Subsidiary of a regulated banking entity (other than of DFC), 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:
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(A) the Borrowers may merge or consolidate with
another Person where DFC 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,
subject to Section 2.8, 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 (g) and the Security Agreement). Notwithstanding the
foregoing, DMC may be merged into, become consolidated with or become
a Subsidiary of any Person (other than DFC) that is a regulated
banking entity so long as (x) DFC (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; and
(C) the Borrowers may sell all of the
outstanding stock or assets of Centro Hipotecario de Puerto Rico, Inc.
(f) 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.
(g) 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 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;
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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 DFC and (III) DFC may make capital investments
in its Subsidiaries.
(h) Subsidiaries. Form or cause to be formed after the date
hereof any Subsidiaries of the Borrowers without prior notice to the Agent.
(i) Margin Regulations. Use any or all of the proceeds of any
Loan (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.
(j) 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 thereto of the Agent and Lenders, which
consent shall not be unreasonably withheld as long as no Material Adverse
Effect would result therefrom.
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 DFC 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", (B) "Mortgage-backed securities held for
trading" (but excluding "interest only securities" included therein), and (C)
"U.S. Treasury & Other AAA Rated Investments that are held to maturity"; (iii)
ninety percent (90%) of "Accrued interest receivable"; (iv) eighty percent
(80%) of the sum of (A) Mortgage- backed securities held to maturity", (B)
"Accounts receivable and mortgage servicing advances", and (C) "Mortgage-backed
securities available for sale"; (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"; (vii) sixty-five percent (65%) of "interest only
securities"; and (viii) one percent (1.0%) of the principal amount of Mortgage
Loans owned by Persons not affiliated with DFC or DMC or any of their
Affiliates (unless covered by a Permitted Affiliate Servicing Agreement) for
which DFC 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 DFC 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 $100,000,000.
(c) Book Net Worth. Permit Book Net Worth at any time to be less
than $106,000,000.
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(d) Servicing Portfolio. Permit DFC on a consolidated basis
(excluding any Subsidiaries that are not primarily engaged in the business of
mortgage banking as reasonably determined by the Agent) to maintain a Servicing
Portfolio of Mortgage Loans with an aggregate outstanding principal balance of
less than $2,500,000,000 or such lesser amount as shall be agreed by the
Lenders in their sole discretion.
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 (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;
(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 or 5.3; 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 and the existence of such Lien
will not have a Material Adverse Effect);
(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) or 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 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
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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 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
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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;
(l) Security Interests. The Secured Parties shall cease for any
reason to have a valid, perfected, first priority security interest in the
Collateral, or any Person shall take any action to discontinue or to assert the
invalidity or unenforceability of such security interest; or
(m) Warehouse Event of Default. A Warehouse Event of Default
shall occur;
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 Borrowers, 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 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 .
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,
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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 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 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; 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 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 DFC, which
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consent shall not be unreasonably withheld, counsel for DFC or DMC),
independent public accountants (including those retained by DFC or DMC if a
representative of DFC 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
DFC or DMC, each Lender will reimburse and indemnify the Agent, in proportion
to its respective Commitment (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, as evidenced
by a final judgment of a court of competent jurisdiction.
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," "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
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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 as evidenced by a final
judgment of a court of competent jurisdiction and (ii) has failed to cure 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 H 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
either Borrower, it being the intent that notice
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to either Borrower is effective notice to the other Borrower. In connection
therewith, each Borrower hereby irrevocably appoints the other Borrower 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 interest on, the Notes, (iv) postpone any date fixed for any
payment in respect of principal of, or interest on, the Notes, or waive any
Event of Default under Section 6.1(a), (v) change the percentage of the
Commitments, the definitions of "Required Lenders," or "Collateral Value of the
Pledged Servicing Portfolio" (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
Agreement or (vii) amend this Section 8.2 or Section 8.6; and (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.
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, and (ii) pay all
reasonable out-of-pocket costs and expenses of the Agent and each Lender in the
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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 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,
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 as evidenced by a final judgment of a court of competent
jurisdiction. 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.
<PAGE> 47
- 43 -
(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.
(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, (i) 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, and
(ii) Bankers Trust Company may assign its rights and delegate its obligations
under this Agreement and the other Loan Documents to any Warehouse Lender with
prior notice to the Borrowers but without consent by the Borrowers or any other
Person. Each assignment by a Lender hereunder shall be made pursuant to an
Assignment and Acceptance in substantially the form of Exhibit O hereto. In the
case of an assignment by a Lender, upon the effective date of such assignment
as set forth in the Assignment and Acceptance executed by such Lender, 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 or Commitments or postpone the payment of any
thereof or (z) release any collateral under the Security Agreement. 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 DFC,
<PAGE> 48
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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 J 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 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.
<PAGE> 49
- 45 -
(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.
(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 the
Loan Documents and each Lender's obligations under Sections 7.6 and 8.12 and
under any other indemnification provisions of the Loan Documents 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 AGENT.
To the extent that the Collateral Agent is not reimbursed and
indemnified by the Borrowers pursuant to the Security Agreement, each Lender
will reimburse and indemnify the Collateral Agent, in proportion to its
respective Loans, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
(including
<PAGE> 50
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reasonable attorneys' fees and disbursements) or disbursements of any kind or
nature whatsoever that may be imposed on, incurred by or asserted against the
Collateral Agent in 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 the Collateral Agent's gross negligence or willful misconduct as
evidenced by a final judgment of a court of competent jurisdiction. The
Collateral Agent shall be entitled to rely on the provisions of this Section
8.12 as if they were a party 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;
<PAGE> 51
- 47 -
(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;
(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 any 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 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
<PAGE> 52
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other advisers retained by such Lender; and (e) to the Agent or the Collateral
Agent as contemplated 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 8.16, (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 8.17 INTEGRATION
This Agreement and the other Loan Documents represent the
entire agreement of the Borrowers, the Agent and the Lenders with respect to
the subject matter hereof and thereof, and there are no promises, undertakings,
representations or warranties by the Agent or any Lender relative to the
subject matter hereof or thereof not expressly set forth or referred to herein
or in the other Loan Documents.
SECTION 8.18 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.
<PAGE> 53
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above written.
DORAL FINANCIAL CORPORATION,
as a Borrower
By: /S/ Mario S. Levis
----------------------------------------
Mario S. Levis
Executive Vice President and Treasurer
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /S/ Mario S. Levis
----------------------------------------
Mario S. Levis
Vice President
Commitment: $25,000,000 BANKERS TRUST COMPANY,
as Agent and as a Lender
By: /S/ Kevin M. McCann
----------------------------------------
Kevin M. McCann
Vice President
<PAGE> 54
EXHIBIT A
PROMISSORY NOTE
New York, New York
November __, 1997
FOR VALUE RECEIVED, DORAL FINANCIAL CORPORATION, a corporation
organized under the laws of the Commonwealth of Puerto Rico, and DORAL MORTGAGE
CORPORATION, a corporation organized under the laws of the Commonwealth of
Puerto Rico (each a "Borrower" and jointly and severally, the "Borrowers"),
hereby jointly and severally and unconditionally promise to pay to the order of
___________________ (the "Lender") the unpaid principal amount of each Loan made
by the Lender to the Borrowers pursuant to the Credit Agreement referred to
below on the Maturity Date. Each Borrower further jointly and severally and
unconditionally promises to pay interest on the unpaid principal amount of each
Loan on the dates and at the rate or rates provided for in the Credit Agreement.
All such payments of principal and interest shall be made in lawful money of the
United States in immediately available funds at the office of BANKERS TRUST
COMPANY (the "Agent"), located at One Bankers Trust Plaza, New York, New York,
or at such other office as the Agent may designate in writing from time to time.
The Lender is hereby authorized to record the date and amount
of each Loan, each payment and prepayment of principal of any such Loan, each
payment of interest on such Loan, whether such Loan is a Prime Loan or a
Eurodollar Loan and other information with respect thereto on the schedule
annexed to and constituting a part of this Note (or on a continuation of such
schedule attached hereto and made a part hereof), or otherwise to record such
information in the Lender's internal records, and any such recordation shall
absent manifest error constitute prima facie evidence of the accuracy of the
information so recorded; provided that the failure to make a notation or the
inaccuracy of any notation shall not limit or otherwise affect the Obligations.
This Note is one of the Notes referred to in, and is entitled
to all the benefits of the Notes referred to in, the Credit Agreement dated as
of November 5, 1997 between the Borrowers, the lenders party thereto, and the
Agent (as amended, modified or supplemented from time to time, the "Credit
Agreement"). Reference is hereby made to the Credit Agreement for rights and
obligations of payment and prepayment, collateral security, Events of Default
and the rights of acceleration of the maturity hereof. Any capitalized terms not
otherwise defined herein are used with the meanings given such terms in the
Credit Agreement.
A-1
<PAGE> 55
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK.
DORAL FINANCIAL CORPORATION
By:
----------------------------------------
Mario S. Levis
Executive Vice President and Treasurer
DORAL MORTGAGE CORPORATION
By:
----------------------------------------
Mario S. Levis
Vice President
A-2
<PAGE> 56
Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Name Prime Loan Amount Amount of Notations
of or of Principal Made
Date Borrower Eurodollar Loan Loan Repaid By
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
A-3
<PAGE> 57
EXHIBIT B
SECURITY AND COLLATERAL AGENCY AGREEMENT
THIS SECURITY AND COLLATERAL AGENCY AGREEMENT (as amended,
modified or supplemented from time to time, this "AGREEMENT") is made and dated
as of November 5, 1997 by and between DORAL FINANCIAL CORPORATION, a corporation
duly organized under the laws of the Commonwealth of Puerto Rico, and DORAL
MORTGAGE CORPORATION, a corporation duly organized under the laws of the
Commonwealth of Puerto Rico, jointly and severally as debtor (each a "GRANTOR"
and jointly, severally and collectively, the "GRANTORS"), BANKERS TRUST COMPANY,
a New York banking corporation, as Agent for the Lenders under the Credit
Agreement dated as of November 5, 1997 between the Grantors, the Agent and the
Lenders (as amended, modified or supplemented from time to time, the "CREDIT
AGREEMENT"), and BANKERS TRUST COMPANY, as collateral agent under this Agreement
(the "COLLATERAL AGENT"). Any capitalized terms not otherwise defined herein are
used with the same meaning given such terms in the Credit Agreement.
To induce the Lenders to enter into the Credit Agreement and
to make Loans thereunder and as a condition precedent to the making of such
Loans, the Grantors have agreed to enter into this Agreement, pursuant to which
the Grantors shall grant to the Collateral Agent, on behalf of and for the
benefit of each and all of the Lenders, the Agent, and the Collateral Agent
(collectively, the "SECURED PARTIES"), a security interest in and lien upon
certain property of the Grantors described more particularly herein.
Accordingly, the parties hereto hereby agree as follows:
1. Defined Terms. Terms defined in the UCC (as
hereinafter defined) are used herein as therein defined. As used in this
Agreement, capitalized terms defined in the Credit Agreement and not otherwise
defined herein have the meanings given such terms in the Credit Agreement, and
the following terms have the meanings specified below (such meanings being
equally applicable to both the singular and plural forms of the terms defined):
"COLLATERAL" shall have the meaning set forth in Section 2 of this
Agreement.
"PROCEEDS" shall mean "proceeds," as such term is defined in Section
9-306(1) of the UCC, and, in any event, includes, without limitation, (a) any
and all proceeds of any insurance, indemnity, warranty or guaranty payable to
either Grantor from time to time with respect to any of the Collateral, (b) any
and all payments (in any form whatsoever) made or due and payable to either
Grantor from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
Governmental Authority (or any Person acting under color of Governmental
Authority), and (c) any and all other amounts from time to time paid or payable
under or in connection with any of the Collateral.
"SERVICING CONTRACT" shall mean each of the contracts or other
agreements to which either Grantor is a party pursuant to which such Grantor
holds Servicing Rights, in each case as amended, supplemented or otherwise
modified from time to time, including, without limitation, (a) all rights of
such Grantor to receive moneys due and to become due to it thereunder or in
connection therewith (other than any portion of principal and interest payable
under the related Mortgage Loans to the
B-1
<PAGE> 58
extent not attributable to servicing fees payable to such Grantor under such
Servicing Contracts), whether on account of the performance of services, upon
the termination of such servicing rights or otherwise (including, without
limitation, payments due from mortgagors and proceeds of FHA mortgage insurance
and VA guarantee claims or other proceeds of foreclosure or other realization or
recoveries on defaulted Mortgage Loans as reimbursement for any advances made by
the Grantors with respect to the payment of principal and interest to investors,
the payment of taxes and insurance and other advances made by the Grantors in
connection with the servicing of such Mortgage Loans), (b) all rights of such
Grantor to damages arising out of, or for, breach or default in respect thereof,
and (c) all rights of such Grantor to perform and to exercise all remedies
thereunder.
"SERVICING RIGHTS" shall mean the rights of either Grantor to (a)
service or administer Mortgage Loans, including, without limitation, the
Mortgage Loans described on Attachments 1-A and 1-B hereto, for or on behalf of
the owner or holder of such Mortgage Loans (including investors in
Mortgage-Backed Securities) pursuant to a direct agreement between such Grantor
and FHLMC, FNMA or GNMA, together with the legal titles, mortgagor files,
escrows and records relating to such Mortgage Loans and the right to receive
servicing fee income and any other income arising from or in connection with
such Mortgage Loans, including late charges, termination fees and charges and
all other incidental fees and charges, and (b) subservice or administer Mortgage
Loans for or on behalf of the legal title holder of the direct servicing rights
in respect of, or the owner or holder of, such Mortgage Loans, pursuant to a
subservicing agreement in form and substance satisfactory to the Agent between
the Grantor and the legal title holder of the related direct servicing rights,
together with the legal titles, mortgagor files, escrows and records relating to
such Mortgage Loans and the right to receive servicing or subservicing fee
income and any other income arising from or in connection with such Mortgage
Loans, including late charges, termination fees and charges and all other
incidental fees and charges.
"UCC" shall mean the Uniform Commercial Code as the same may, from time
to time, be in effect in the State of New York; provided, however, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of the Collateral Agent's and the other Secured Parties'
security interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than the State of New York, the term "UCC"
shall mean the Uniform Commercial Code as in effect in such other jurisdiction
for purposes of the provisions hereof relating to such attachment, perfection or
priority and for purposes of definitions related to such provisions.
2. Grant of Security Interest. As collateral security
for the full and prompt payment when due (whether as stated maturity, by
acceleration or otherwise) of, and the performance of, all the Obligations and
to induce the Lenders to make the Loans pursuant to the Credit Agreement, each
of the Grantors hereby assigns, conveys, mortgages, pledges, hypothecates and
transfers to the Collateral Agent, on behalf and for the ratable benefit of the
Secured Parties, and hereby grants to the Collateral Agent, on behalf and for
the ratable benefit of the Secured Parties, a security interest in, all of such
Grantor's right, title and interest in, to and under the following, whether now
owned or hereafter acquired, whether now in existence or hereafter arising (all
of which being herein collectively called the "COLLATERAL"):
(a) all (i) Servicing Rights, (ii) Servicing Contracts and (iii) rights
to receive payments in connection with Servicing Contracts and Servicing Rights,
whether on account of the performance of services, upon the termination of
Servicing Rights, Servicing Contracts or otherwise (including, without
limitation, all deeds, contracts, agreements, instruments of title and other
documents
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received or receivable in respect thereof), and (iv) rights with respect to the
placement of escrow deposits associated with such Servicing Rights and Servicing
Contracts and all rights to the payment of money or provision of concessions or
services with respect thereto;
(b) all files, documents, agreements, instruments, deeds, chattel
paper, inventory consisting of Servicing Rights, insurance policies, personal
property, contract rights, accounts, general intangibles, records, surveys,
certificates, correspondence, appraisals, computer records, tapes, discs, cards,
accounting records and other books, records, information and data of such
Grantor relating to the Collateral (including all such items necessary or
helpful in the administration or servicing of the Collateral) of whatever kind
or nature whatsoever relating to the Servicing Rights or any other Collateral,
and all other documents or instruments delivered to the Collateral Agent in
respect of the Collateral, including, without limitation, the right to receive
all insurance proceeds and condemnation awards which may be payable in respect
of any of the Collateral;
(c) All right to control the custodial accounts of the Grantors
held by the Collateral Agent and all other rights of the Grantors therein, any
and all funds at any time held in any of the above accounts, and any and all
rights of the Grantors to insurance payments made in respect of such accounts;
and
(d) to the extent not otherwise included, all Proceeds of each of the
foregoing and all accessions to, substitutions and replacements for, and rents,
profits and products of, each of the foregoing.
Simultaneously with the execution and delivery of this Agreement, the Grantors
shall execute and send notices in the form attached hereto as Attachment 2 to
each party to any contract (other than the Grantors) which is assigned to the
Secured Parties pursuant to this Agreement as part of the Collateral and deliver
copies of such notices together with evidence of delivery thereof to the Agent.
3. Appointment of Collateral Agent. The Agent hereby appoints the
Collateral Agent to act as agent and secured party for the exclusive benefit of
the Secured Parties with respect to the Collateral. The Collateral Agent hereby
accepts such appointment and agrees to maintain and hold all Collateral at any
time delivered to it as agent and secured party for the exclusive benefit of the
Secured Parties. The Collateral Agent acknowledges and agrees that it is acting
and will act with respect to the Collateral for the exclusive benefit of the
Secured Parties and is not, and shall not at any time in the future be, subject,
with respect to the Collateral, in any manner or to any extent, to the direction
or control of the Grantors except as expressly permitted hereunder and under the
Credit Agreement. The Collateral Agent agrees to act in accordance with this
Agreement and in accordance with any written instructions from the Required
Lenders. Under no circumstances shall the Collateral Agent release any
Collateral from the Lien created hereby, except in accordance with the express
terms of this Agreement or otherwise upon the written instruction of the Agent
acting at the direction of all of the Lenders.
4. Release of Servicing Rights.
(a) From time to time upon the request of either
Borrower, the Collateral Agent (at the direction of the Agent) may release the
Lien of the Secured Parties on servicing rights being sold by such Borrower, and
the Agent shall consent to such release if, after giving effect to such release,
(i) the Borrowers shall be in compliance with Sections 2.1 and 2.8 of the Credit
Agreement, and (ii) no Potential Default or Event of Default of any other type
has occurred and is continuing. The Borrowers agree that the Agent may, prior to
directing the Collateral Agent to
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release the Lien of the Secured Parties on any of the Servicing Rights, require
the Borrowers to arrange for the delivery to the Agent of a Pledged Servicing
Valuation Report that gives effect to such release and to all recent or
simultaneous additions of Servicing Rights to and deletions of Servicing Rights
from the Pledged Servicing Portfolio. In addition, such Pledged Servicing
Valuation Report shall show the changes to any valuations of Servicing Rights
set forth in most recent Pledged Servicing Valuation Report delivered to the
Agent.
(b) Upon the request of the Borrowers, if the
Commitments have been terminated by the Borrowers and all Loans and other
Obligations shall have been paid and performed, the Collateral Agent (at the
direction of the Agent) shall release the Lien of the Secured Parties on the
Collateral. The Agent shall direct the Collateral Agent to provide such release
if the Commitments have been terminated and all Loans and other Obligations have
been paid and performed.
5. Standard of Care of Collateral Agent; Duties;
Indemnification.
The Collateral Agent shall exercise reasonable care in the
performance of its duties hereunder. Notwithstanding anything to the contrary
contained herein:
(a) The provisions of this Agreement set forth
the exclusive duties of the Collateral Agent and no implied duties or
obligations shall be read into this Agreement against the Collateral Agent. The
Collateral Agent shall not be bound in any way by any agreement or contract
other than this Agreement and any other agreement to which it is a party. The
Collateral Agent shall not be required to ascertain or inquire as to the
performance or observance of any of the conditions or agreements to be performed
or observed by any other party, except as specifically provided in this
Agreement. The Collateral Agent disclaims any responsibility for the validity or
accuracy of the recitals to this Agreement and any representations and
warranties contained herein, unless specifically identified as recitals,
representations or warranties of the Collateral Agent.
(b) Throughout the term of this Agreement, the
Collateral Agent shall have no responsibility for ascertaining the value,
collectability, insurability, enforceability, effectiveness or suitability of
any Collateral, the title of any party therein, the validity or adequacy of the
security afforded thereby, or the validity of this Agreement (except as to
Collateral Agent's authority to enter into this Agreement and to perform its
obligations hereunder).
(c) The Collateral Agent shall not be under any
duty to examine or pass upon the genuineness, validity or legal sufficiency of
any of the documents constituting part of any Collateral, and shall be entitled
to assume that all documents constituting part of such Collateral are genuine
and valid and that they are what they purport to be, and that any endorsements
or assignments thereof are genuine and valid. The Collateral Agent may rely upon
and shall be protected in acting in good faith upon any notice, resolution,
request, consent, order, certificate, report, statement or other paper or
document appearing on its face to be genuine and to have been signed or
presented by the proper party or parties or by a person or persons authorized to
act on behalf of the proper party or parties. The Collateral Agent shall not be
liable for any action or omission to act except for its own gross negligence or
willful misconduct.
(d) No provision of this Agreement shall require
the Collateral Agent to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder or in the
exercise of any of its rights or powers, if, in its judgment, it shall
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believe that repayment of such funds or adequate indemnity against such risk or
liability is not assured to it.
(e) The Collateral Agent is not responsible for
preparing or filing any reports or returns relating to federal, state or local
income taxes with respect to this Agreement, other than for the Collateral
Agent's compensation or for reimbursement of expenses.
(f) The Grantors agree to reimburse and hold
harmless the Collateral Agent, its directors, officers, employees and agents
from and against any and all liability, loss and expense, including reasonable
counsel fees, arising from or connected with the Collateral Agent's execution
and performance of this Agreement including but not limited to the claims of any
third parties, including any assignee, and including any liabilities of the
Collateral Agent under acknowledgment agreements executed in connection with the
Servicing Contracts, except in the case of loss, liability or expense resulting
from gross negligence or willful misconduct on the part of the Collateral Agent.
Notwithstanding anything to the contrary contained herein, this provision shall
survive the termination of this Agreement.
6. Fees and Expenses of Collateral Agent. The Collateral
Agent shall notify the Grantors of all expenses and charges of the Collateral
Agent incurred in connection with the enforcement of any of the rights of the
Secured Parties hereunder, including realization upon the Collateral or any
breach by their Grantors of their obligations under this Agreement, and such
expenses and charges shall be paid promptly by the Grantors or, if already paid
by the Collateral Agent, the Grantors promptly shall reimburse the Collateral
Agent therefor. The Collateral Agent may employ, at the Grantors' expense, such
legal counsel and other experts as it reasonably deems necessary in connection
with such enforcement or breach described in the preceding sentence under this
Agreement.
7. Resignation of Collateral Agent. The Collateral Agent
may, at any time, effective upon ninety (90) days' prior written notice to the
Grantors and the Lenders, terminate its agreement to act as the Collateral Agent
hereunder. Upon the effective date of any such termination, the Collateral Agent
shall promptly deliver the Collateral then held by it and any and all books and
records (or copies thereof) relating thereto, to the Agent or to such other
person or entity as the Agent may direct in writing.
8. Availability of Documents. Each of the Lenders and
its agents, accountants, attorneys and auditors will be permitted during normal
business hours at any time and from time to time upon reasonable notice to the
Collateral Agent to examine (to the extent permitted by applicable law) the
files, documents, records and other papers in the possession or under the
control of the Collateral Agent relating to any or all of the Collateral and to
make copies thereof. As long as no Event of Default has occurred and is
continuing, any such activity will be at no cost or expense to the Grantors; if
an Event of Default has occurred and is continuing, all costs and expenses
associated with the exercise by any Lender of its rights under this Section 8
shall be paid by the Grantors within fifteen (15) days of receipt by the
Grantors from such Lender of a statement setting forth in reasonable detail the
amount thereof.
9. Representations and Warranties of Grantors. Each
Grantor, with respects to itself, hereby represents and warrants that: (a) the
Grantors are the sole owner of the Collateral (or, in the case of after-acquired
Collateral, at the time the Grantors acquire rights in the Collateral, will be
the sole owner thereof); (b) except for the security interest granted hereunder
to the Secured Parties and other Liens permitted by Section 5.2(a) of the Credit
Agreement, no Person has (or, in
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the case of after-acquired Collateral, at the time such Grantor acquires rights
therein, will have) any right, title, claim or interest (by way of security
interest or other lien or charge or otherwise) in, against or to the Collateral;
(c) all information heretofore, herein or hereafter supplied to the Collateral
Agent, the Agent or the Lenders by or on behalf of such Grantor with respect to
the Collateral is or will be accurate and complete in all material respects; (d)
all of the servicing rights in which a security interest is granted hereby
constitute direct servicing rights; (e) each Servicing Contract is in full force
and effect, each Servicing Contract is legal, valid and enforceable in
accordance with its terms and, to the best knowledge of such Grantor after due
inquiry, no default by any party thereto has occurred and is continuing
thereunder; (f) each right to the payment of money under the Servicing Contracts
is genuine and enforceable in accordance with its terms against the parties
obligated to pay the same (each an "OBLIGOR"), which terms have not been
modified or waived in any respect or to any extent; (g) to the best of such
Grantor's knowledge, the amount represented by such Grantor to the Collateral
Agent as owing by an Obligor under each Servicing Contract and the Mortgage Loan
related thereto is the correct amount actually owing by such Obligor; (h) to the
best of such Grantor's knowledge, no Obligor has any defence, set off, claim or
counterclaim against such Grantor that can be asserted against any Secured
Party, whether in any proceeding to enforce the Secured Parties' rights in the
related Servicing Contract or the Mortgage Loan related thereto or otherwise;
(i) such Grantor has not sold, assigned or otherwise transferred any rights
associated with any Servicing Contract or the Mortgage Loan related thereto
including, without limitation, any rights to place escrow deposits with respect
thereto; (j) except for the acknowledgment agreements referred to in clause (k)
below, no consent of any Obligor or any other Person is required for the grant
of the security interest provided herein by such Grantor in any of the
Collateral including, without limitation, the Servicing Contracts, other than
consents that have been obtained, nor will any such consent need to be obtained
upon the occurrence of an Event of Default for the Secured Parties to exercise
their rights with respect to any of the Collateral except as set forth in such
acknowledgment agreements; and (k) the representations and warranties of the
Grantors contained in any Acknowledgment Agreement delivered to the Agent are
true and correct as of the date hereof (or as of the date delivered to the Agent
if subsequent to the date hereof).
10. Covenants of Grantors. The Grantors hereby agree: (a)
to procure, execute and deliver from time to time any and all endorsements,
assignments, financing statements and continuation statements under the UCC, and
other writings deemed necessary or appropriate by the Collateral Agent or the
Agent to perfect, maintain and protect its security interest hereunder and the
priority thereof and to deliver promptly to the Collateral Agent all originals
of Collateral or Proceeds consisting of chattel paper or instruments, and hereby
authorize the Collateral Agent to file any financing statement or continuation
statement without the signature of either Grantor to the extent permitted by
applicable law; (b) except as permitted under Section 4 of this Agreement, not
to surrender or lose possession of (other than to the Collateral Agent), sell,
encumber, or otherwise dispose of or transfer, any Collateral or right or
interest therein; (c) at all times upon the request of the Collateral Agent, to
account fully for and promptly to deliver to the Collateral Agent, in the form
received, all Collateral or Proceeds received, endorsed to the Collateral Agent
as appropriate and accompanied by such assignments and powers, duly executed, as
the Collateral Agent shall request, and until so delivered all Collateral and
Proceeds shall be held in trust for the Collateral Agent, separate from all
other property of the Grantors and identified as being subject to the interest
of the Collateral Agent; (d) at any reasonable time, upon twenty-four (24) hours
notice by the Collateral Agent, to exhibit and to allow inspection by the
Collateral Agent (or Persons designated by the Collateral Agent including,
subject to the Credit Agreement, the Lenders) of the Collateral and the records
concerning the Collateral (at no cost to the Grantors unless an Event of Default
has occurred and is continuing); (e) to keep the Collateral insured against
loss, damage, theft and other risks customarily covered by insurance; (f) to do
all acts that a prudent investor would deem necessary
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or desirable to maintain, preserve and protect the Collateral; (g) not knowingly
to use or permit any Collateral to be used unlawfully or in violation of any
provision of this Agreement or any applicable statute, regulation or ordinance
or any policy of insurance covering the Collateral; (h) to pay (or require to be
paid) prior to their becoming delinquent all taxes, assessments, insurance
premiums, charges, encumbrances and liens now or hereafter imposed upon or
affecting any Collateral; (i) to notify the Collateral Agent before any such
change shall occur of any change in any Grantor's name, identity or structure
through merger, consolidation or otherwise; (j) to appear in and defend, at the
Grantors' cost and expense (unless such action or proceeding arises solely from
an act or failure to act by a Secured Party which act or failure to act is
determined to be gross negligence or willful misconduct), any action or
proceeding that may affect its title to or the Secured Parties' interest in the
Collateral; (k) to keep accurate and complete records of the Collateral and to
provide the Collateral Agent with such records and such reports and information
relating to the Collateral as the Collateral Agent may reasonably request from
time to time; (l) to comply with all laws, regulations and ordinances relating
to the possession, maintenance and control of the Collateral; and (m) to do all
acts that may be necessary to keep the Servicing Contracts in full force and
effect.
11. Collection of Collateral Payments.
(a) Each of the Grantors shall, at its sole cost
and expense, endeavor to obtain payment, when due and payable, of all sums due
or to become due with respect to any Collateral ("COLLATERAL PAYMENTS" or a
"COLLATERAL PAYMENT"), including, without limitation, the taking of such action
with respect thereto as the Collateral Agent may reasonably request, or, in the
absence of such request, as such Grantor may reasonably deem advisable; provided
that neither Grantor shall, without the prior written consent of the Agent,
grant or agree to any rebate, refund, compromise or extension with respect to
any Collateral Payment. Upon the request of the Required Lenders following the
occurrence of an Event of Default, each of the Grantors shall notify and direct
any party who is or might become obligated to make any Collateral Payment with
respect to the Collateral, to make payment thereof to the Collateral Agent at
such address as the Collateral Agent may designate. The Grantors will reimburse
the Collateral Agent promptly upon demand for all out-of-pocket costs and
expenses, including reasonable attorneys' fees and litigation expenses, actually
incurred by the Collateral Agent in seeking to collect any Collateral Payment.
(b) If an Event of Default has occurred and is
continuing, upon the request of the Required Lenders, the Grantors shall,
immediately upon receipt, transmit and deliver to the Collateral Agent, in the
form received, all cash, checks, drafts and other instruments for the payment of
money (properly endorsed if required so that such items may be collected by the
Collateral Agent) that may be received by the Grantors at any time as payment on
account of any Collateral Payment with respect to the Collateral and if such
request is made, until delivery to the Collateral Agent, such items shall be
held in trust for the Collateral Agent and shall not be commingled by the
Grantors with any of its other funds or property. Thereafter, the Collateral
Agent is hereby authorized and empowered to endorse the name of the Grantors on
any check, draft or other instrument for the payment of money received by the
Collateral Agent on account of any Collateral Payment if the Collateral Agent
believes such endorsement is necessary or desirable for purposes of collection.
(c) The Grantors shall indemnify and save
harmless the Collateral Agent from and against all liabilities and reasonable
expenses on account of any adverse claim asserted against the Collateral Agent
relating to any moneys received by the Collateral Agent on account of any
Collateral Payment except to the extent caused by the gross negligence or
willful misconduct of the Collateral Agent and such obligation of the Grantors
shall survive the termination of this Agreement and the release of the security
interest granted in Section 2 above.
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12. Authorized Action by Collateral Agent. Each Grantor
hereby irrevocably appoints the Collateral Agent as its attorney-in-fact,
coupled with an interest, to do (but the Collateral Agent shall not be obligated
to and shall incur no liability to the Grantors or any third party for failure
so to do), at the request and direction of the Required Lenders at any time
while an Event of Default has occurred and is continuing, any act that any
Grantor is obligated by this Agreement to do, and to exercise such rights and
powers as the Grantors might exercise with respect to the Collateral, including,
without limitation, the right to (a) collect by legal proceedings or otherwise
and endorse, receive and receipt for all interest, payments, proceeds and other
sums and property now or hereafter payable on or on account of the Collateral;
(b) enter into any extension, reorganization, deposit, or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for, the Collateral; (c) insure, process and preserve the Collateral;
(d) transfer the Collateral to the Collateral Agent's own name or its nominee's
name; (e) sell or otherwise dispose of the Collateral, as provided in Section 13
hereof; (f) take all actions necessary to effect the sale, transfer, or other
disposition of the Collateral, including without limitation to submit to FNMA,
FHLMC or GNMA a request to effect the sale, transfer, or other disposition of
the Collateral, and to execute with FNMA, FHLMC or GNMA a transfer or other
agreement or to take any other action contemplated under acknowledgment
agreements with FNMA, FHLMC or GNMA; (g) submit to FNMA, FHLMC or GNMA a request
to obtain any proceeds and fees otherwise payable to the Grantors upon the
termination of any Servicing Contracts; and (h) make any compromise or
settlement, and take any other action it deems advisable with respect to the
Collateral. Notwithstanding anything contained herein, in no event shall the
Collateral Agent be required to make any presentment, demand or protest, or give
any notice, and the Collateral Agent need not take any action to preserve any
rights against any prior party or any other Person in connection with the
Obligations or with respect to the Collateral.
13. Default and Remedies. Upon the occurrence of an Event
of Default and following the acceleration of the Obligations as provided in
Article VI of the Credit Agreement, the Collateral Agent shall at the request
and direction of the Required Lenders without notice to or demand upon the
Grantors (to the extent permitted by applicable law): (a) foreclose or otherwise
enforce the Secured Parties' security interest in the Collateral, in any manner
permitted by law or provided for hereunder; (b) sell or otherwise dispose of the
Collateral, or any part thereof at one or more public or private sales, whether
or not such Collateral is present at the place of sale, for cash or credit or
future delivery (without the assumption of any credit risk), on such terms and
in such manner as the Collateral Agent may determine (taking into account the
circumstances under which the Collateral is being sold); (c) require the
Grantors to assemble the Collateral, and/or books and records relating thereto
and all equipment, files, documents, instruments, surveys, certificates,
correspondence, appraisals, computer programs, tapes, discs, cards, accounting
records and other books, records, information and data of Grantors relating to
the Collateral and make such available to the Collateral Agent at a place to be
designated by the Collateral Agent; (d) enter onto property where any
Collateral, or books and records relating thereto and other collateral described
in the preceding clause (c) are located and take possession thereof with or
without judicial process; and (e) prior to the disposition of the Collateral,
prepare it for disposition in any manner and to the extent the Collateral Agent
deems appropriate. Upon any sale or other disposition pursuant to this
Agreement, the Collateral Agent shall have the right to deliver, assign and
transfer to the purchaser thereof the Collateral or portion thereof so sold or
disposed of and all proceeds thereof shall be promptly transmitted to the Agent
as provided in the Credit Agreement. Each purchaser at any such sale or other
disposition shall hold the Collateral free from any claim or right of whatever
kind, including any equity or right of redemption of the Grantors, and the
Grantors specifically waives (to the extent permitted by law) all rights of
redemption, stay or appraisal that it has or may have under any rule of law or
statute now existing or hereafter adopted. In furtherance and not in limitation
of
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the rights of the Collateral Agent set forth in this Section 13, upon the
occurrence of any Event of Default and following the acceleration of the
Obligations as provided in Article VI of the Credit Agreement, the Collateral
Agent may, in addition to any other rights it may have, do one or more of the
following, subject to the terms of the relevant Servicing Contract and the
Acknowledgment Agreements (it being understood that if there is any conflict
between this Agreement and any Acknowledgment Agreement or the GNMA Guide, the
applicable Acknowledgment Agreement or GNMA Guide shall prevail): (i) succeed
the Grantors as servicer of the Mortgage Loans under any or all of the Servicing
Contracts as absolute assignee thereof and not merely as security, (ii) appoint
a third party as successor servicer of the Mortgage Loans under any or all of
the Servicing Contracts, (iii) sell to a third party or itself or otherwise
transfer any of the Grantors' right, title, interest, or obligations with
respect to the Mortgage Loans under any or all of the Servicing Contracts,
including without limitation the right to hold the escrow deposits associated
therewith or (iv) require the Grantors, notwithstanding any action taken by the
Collateral Agent under clause (iii), to remain as servicer of the Mortgage Loans
under any such Servicing Contract. The Collateral Agent's rights under clauses
(i), (ii) and (iii) shall respectively include, without limitation, the right to
succeed the Grantors as servicer, appoint a successor servicer or transfer any
or all of its rights with respect to the Mortgage Loans if the Grantors, or any
successor to the Grantors in bankruptcy or similar proceedings, rejects any
Servicing Contracts. As successor servicer under clause (i), the Collateral
Agent shall notify all interested Persons thereof and take such further action
as it shall deem necessary or appropriate. Upon the Collateral Agent's (x)
succeeding the Grantors as servicer under clause (i), (y) appointing a third
party as a successor servicer of the Mortgage Loans under any Servicing Contract
under clause (ii), or (z) transferring any of the Grantors' rights, title,
interest and obligations under clause (iii), the Grantors shall have no further
rights under or with respect to the Mortgage Loans (or to such rights, title,
interest or obligations in the case of a transfer under clause (iii)), to any
other documents pertaining thereto or to the related escrow deposits. Upon the
exercise by the Collateral Agent of any option hereunder, the Grantors shall (A)
upon request of the Collateral Agent, deliver to the Collateral Agent all
computer software, tapes, records, documents, escrow deposits and other deposits
in its possession or under its control relating to the Collateral, and (B)
cooperate with the Collateral Agent in every respect in effecting such
succession. If the Collateral Agent or any appointee of the Collateral Agent
succeeds the Grantors as successor servicer of the Mortgage Loans under any
Servicing Contract, the Collateral Agent or the appointee, as the case may be,
shall only assume those obligations which a successor servicer of the Mortgage
Loans under such Servicing Contract is obligated to assume; provided that
neither the Collateral Agent nor its appointee shall be liable for any failure
of the Grantors to perform its obligations under any Servicing Contract or for
any other breach thereof. Nothing herein contained shall be construed as an
assumption by the Collateral Agent or its appointee of any liability of the
Grantors with respect to any of the Collateral, and the Grantors shall be and
remain responsible for all such liabilities.
14. Cumulative Rights. The rights, powers and remedies of
the Collateral Agent and the Secured Parties under this Agreement shall be in
addition to all rights, powers and remedies given to the Collateral Agent and
the Secured Parties by virtue of any statute or rule of law, the Credit
Agreement or any other agreement, all of which rights, powers and remedies shall
be cumulative and may be exercised successively or concurrently without
impairing the Secured Parties' security interest in the Collateral.
15. Acknowledgment Agreements.
(a) Notwithstanding anything contained herein or
in any of the other Loan Documents, the Agent and the Collateral Agent, by
executing this Agreement, and each of the Lenders, by executing the Credit
Agreement, acknowledge that (i) each Grantor is entitled to
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servicing income with respect to any GNMA pool of Mortgage Loans only so long as
such Grantor is a GNMA Issuer/Servicer in good standing; (ii) upon such
Grantor's loss of such good standing status, the Secured Parties' rights to any
such servicing income also terminate; and (iii) the pledge of rights to
servicing income with respect to any GNMA pool of Mortgage Loans hereunder
conveys no rights (such as the right to become a substitute servicer) that are
not otherwise specifically provided for in the applicable GNMA Guide.
(b) The security interest referred to in this
Agreement is subject and subordinate in each and every respect (a) to all
rights, powers and prerogatives of one or more of FNMA, FHLMC and GNMA (the
"Investors"); and (b) to all claims of any such a arising out of any and all
defaults and outstanding obligations of the Grantor to the Investor. Such
rights, powers and prerogatives of the Investors may include, without
limitation, one or more of the following: the right of an Investor to disqualify
the debtor from participating in a mortgage selling or servicing program or a
securities guaranty program with the Investor; the right to terminate contract
rights of the Grantor relating to such a mortgage selling or servicing program
or securities guaranty program; and the right to transfer and sell all or any
portion of such contract rights following the termination of those rights.
16. Waiver. Any waiver, forbearance, failure or delay by
the Collateral Agent or the Secured Parties in exercising, or the exercise or
beginning of exercise by the Collateral Agent or the Secured Parties of, any
right, power or remedy, simultaneous or later, shall not preclude the further,
simultaneous or later exercise thereof, and every right, power or remedy of the
Collateral Agent or the Secured Parties shall continue in full force and effect.
17. Binding Upon Successors. All rights of the Collateral
Agent and the Secured Parties under this Agreement shall inure to the benefit of
the Collateral Agent and the Secured Parties and their successors and assigns,
and all obligations of the Grantors shall bind its successors and assigns.
18. Entire Agreement; Severability. This Agreement
contains the entire security agreement and agency agreement, with respect to the
Collateral, between the Collateral Agent, the Agent and the Grantors. All
waivers by the Grantors provided for in this Agreement have been specifically
negotiated by the parties with full cognizance and understanding of their
rights. If any of the provisions of this Agreement shall be held invalid or
unenforceable, this Agreement shall be construed as if not containing such
provisions, and the rights and obligations of the parties hereto shall be
construed and enforced accordingly.
19. Choice of Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York except with
respect to the perfection and enforcement of the security interests created
hereby which perfection and enforcement shall be construed in accordance with
and governed by the laws of the Commonwealth of Puerto Rico (other than with
respect to perfection and enforcement of accounts which are to be located in New
York which will be governed by New York law).
20. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by the Grantors or the
Collateral Agent herefrom, shall be effective unless the same shall have been
effected in accordance with Section 8.2 of the Credit Agreement.
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21. Place of Business; Records. Each Grantor represents
and warrants that its chief executive office is at the address set forth on
Exhibit H to the Credit Agreement, and that its books and records concerning the
Collateral are kept at such location. Each Grantor agrees not to move its chief
executive office or such books and records unless it has given the Agent and the
Collateral Agent at least thirty (30) days' prior written notice thereof.
22. Notice. Any written notice, consent or other
communication provided for in this Agreement shall be delivered or sent as
provided in Section 8.1 of the Credit Agreement.
23. Execution in Counterparts. This Agreement may be
executed in counterparts, each of which when so executed shall be deemed to be
an original and all of which when taken together shall constitute one and the
same agreement.
24. Joint and Several Nature of the Obligations. The
Grantors agree that any and all of the Obligations of the Grantors 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.
25. SUBMISSION TO JURISDICTION; WAIVER OF DAMAGES. (a)
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS TO WHICH EITHER GRANTOR 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 GRANTORS 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
GRANTORS 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.
(b) EACH OF THE GRANTORS 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 GRANTOR AT ITS SAID ADDRESS, SUCH
SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. IN ADDITION,
EACH GRANTOR 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 GRANTOR WILL PROMPTLY NOTIFY
THE AGENT AND WITHIN THIRTY (30) DAYS APPOINT A SUBSTITUTE PROCESS AGENT
ACCEPTABLE TO THE AGENT.
B-11
<PAGE> 68
(c) 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 GRANTOR IN ANY OTHER
JURISDICTION.
(d) 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 25, ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. THIS WAIVER IS MADE
KNOWINGLY AND VOLUNTARILY.
26. Limitation on Liability of Secured Parties. It is
expressly agreed by the Grantors that, anything herein to the contrary
notwithstanding, the Grantors shall remain liable to observe and perform all the
conditions, duties and obligations to be observed and performed by them relating
to the Collateral, and the Grantors shall perform all of their duties and
obligations thereunder, all in accordance with and pursuant to the terms and
provisions relating thereto. Neither the Collateral Agent nor any other Secured
Party shall have any obligation or liability under any instrument, agreement,
contract or other document by reason of or arising out of this Agreement or the
granting of a security interest in any instrument, agreement, contract or other
document to the Collateral Agent on behalf and for the ratable benefit of the
Secured Parties or the receipt by the Collateral Agent or any other Secured
Party of any payment relating to any of the foregoing pursuant hereto, nor shall
the Collateral Agent or any other Secured Party be required or obligated in any
manner to perform or fulfill any of the obligations of the Grantors thereunder,
or to make any payment, or to make any inquiry as to the nature or the
sufficiency of any payment received by it or the sufficiency of any performance
by any party thereunder, or to present or file any claim, or to take any action
to collect or enforce any performance or the payment of any amounts which may
have been assigned to it or to which it may be entitled at any time or times.
27. Survival of Representations. All covenants,
agreements, representations and warranties made herein 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
Collateral Agent or any of the other Secured Parties and of the Collateral
Agent's and the other Secured Parties' access to any information and shall
continue in full force and effect so long as any Obligation is unpaid or
unperformed.
28. 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.
EXECUTED the day and year first above written.
Grantors:
---------
DORAL FINANCIAL CORPORATION
By:
------------------------------
B-12
<PAGE> 69
Mario S. Levis
Executive Vice President and Treasurer
DORAL MORTGAGE CORPORATION
By:
------------------------------
Mario S. Levis
Vice President
Agent:
------
BANKERS TRUST COMPANY
By:
------------------------------
Kevin M. McCann
Vice President
Collateral Agent:
-----------------
BANKERS TRUST COMPANY
By:
------------------------------
Kevin M. McCann
Vice President
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 Financial 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),
B-13
<PAGE> 70
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
B-14
<PAGE> 71
ATTACHMENT 1-A
TO SECURITY AGREEMENT
SERVICED MORTGAGE LOANS
FNMA/FHLMC
All Mortgage Loans in the FNMA/FHLMC Servicing Portfolio
(whether or not included in Mortgage Loan pools) now existing or hereafter
originated or acquired with respect to which either of the Grantors have
servicing rights, including, without limitation, Mortgage Loans serviced by
either of the Grantors pursuant to:
(i) the Mortgage Selling and Servicing Contract
and all applicable Pool Purchase Contracts between FNMA and the
Grantors and the FNMA Selling Guide and Servicing Guide, as amended
from time to time; and
(ii) the Unitary, Indivisible Master Servicing
Contract between the Grantors and FHLMC, as described in the FHLMC
Sellers' and Servicers' Guide, as amended from time to time.
B-15
<PAGE> 72
ATTACHMENT 1-B
TO SECURITY AGREEMENT
SERVICED MORTGAGE LOANS
GNMA
All Mortgage Loans in the GNMA Servicing Portfolio (whether or
not included in Mortgage Loan pools) now existing or hereafter originated or
acquired with respect to which either of the Grantors have servicing rights,
including, without limitation, Mortgage Loans serviced by either of the Grantors
pursuant to servicing contracts between such Grantor and any issuer of
GNMA-guaranteed Mortgage-Backed Securities.
B-16
<PAGE> 73
ATTACHMENT 2
TO SECURITY AGREEMENT
[LETTERHEAD OF APPLICABLE GRANTOR]
[Reference title of Contract]
[DATE]
Certified Mail
Return Receipt Requested
TO: ___________________
___________________
___________________
We hereby notify you that we have assigned our interest in [describe
contract] (the "Contract") to ________________, as [collateral/security] agent
for the Secured Parties pursuant to that certain Credit Agreement dated as of
November 5, 1997 among Doral Financial Corporation, Doral Mortgage Corporation,
Bankers Trust Company, as agent, and the Lenders party thereto (as amended,
modified or supplemented from time to time, the "Credit Agreement") and loan
documents related thereto, as security for the obligations described therein.
This notice shall be evidence of the above-described assignment, which
shall remain in full force and effect until terminated in accordance with the
Credit Agreement and the other loan documents.
[DORAL FINANCIAL CORPORATION]
By:__________________________________________
Name:________________________________________
Title:_______________________________________
or
[DORAL MORTGAGE CORPORATION]
By:__________________________________________
Name:________________________________________
Title:_______________________________________
Acknowledged By:
- ----------------------
Contract Party
B-17
<PAGE> 74
EXHIBIT C
FORM OF OPINION OF BORROWERS' COUNSEL
<PAGE> 75
EXHIBIT D-1
OFFICER'S CERTIFICATE
(Doral Financial Corporation)
I, Mario S. Levis, on behalf of Doral Financial Corporation
("DFC"), DO HEREBY CERTIFY as follows:
1. The representations and warranties set forth in the
Credit Agreement, dated as of November 5, 1997, between DFC, Doral Mortgage
Corporation ("DMC"), Bankers Trust Company, as Agent, and the lenders named
therein (the "AGREEMENT"), and in the Security Agreement referred to therein,
are accurate and complete in all material respects on and as of the date hereof
both before and after giving effect to the making of any Loans to occur on such
date.
2. DFC and DMC are each in compliance with all the terms
and provisions set forth in the Agreement on its part to be observed and
performed, and no Event of Default or Potential Default (as those terms are
defined in the Agreement) has occurred and is continuing.
3. The aggregate principal amount of Loans to be
borrowed on the date hereof will not exceed the limitations set forth in
Sections 2.1 and 2.8 of the Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto signed his
name this __ day of November, 1997.
By:
----------------------------
Mario S. Levis
Executive Vice President and Treasurer
<PAGE> 76
EXHIBIT D-2
OFFICER'S CERTIFICATE
(Doral Mortgage Corporation)
I, Mario S. Levis, on behalf of Doral Mortgage Corporation
("DMC"), DO HEREBY CERTIFY as follows:
1. The representations and warranties set forth in the
Credit Agreement, dated as of November 5, 1997, between DMC and Doral Financial
Corporation ("DFC"), Bankers Trust Company, as Agent, and the lenders named
therein (the "AGREEMENT"), and in the Security Agreement referred to therein,
are accurate and complete in all material respects on and as of the date hereof
both before and after giving effect to any Loans to be made on such date.
2. DMC and DFC are each in compliance with all the terms
and provisions set forth in the Agreement on its part to be observed and
performed, and no Event of Default or Potential Default (as those terms are
defined in the Agreement) has occurred and is continuing.
3. The aggregate principal amount of Loans to be
borrowed on the date hereof will not exceed the limitations set forth in
Sections 2.1 and 2.8 of the Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto signed his
name this __ day of November, 1997.
By:
---------------------------
Mario S. Levis
Vice President
<PAGE> 77
EXHIBIT E
NOTICE OF BORROWING
1. We refer to the Credit Agreement (as amended,
modified or supplemented from time to time, the "CREDIT AGREEMENT") dated as of
November 5, 1997 by and between Doral Financial Corporation and Doral Mortgage
Corporation, the Lenders party thereto and Bankers Trust Company, as Agent.
Capitalized terms used herein without definitions shall have the respective
meanings set forth in the Credit Agreement.
2. The undersigned, [Doral Financial Corporation] [Doral
Mortgage Corporation], a corporation duly organized under the laws of the
Commonwealth of Puerto Rico ("BORROWER"), hereby requests a Borrowing in the
aggregate principal amount of $__________(1) to be made on ________________,
199_.(2) [Such Borrowing shall consist of [Prime] [Eurodollar] Loans.] [After
giving effect to the Borrowing requested hereby, no more than 3 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 aggregate principal amount of the Loans
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, 1996, no material adverse change
has occurred in the business, financial condition or results of operations of
DFC and its Subsidiaries, taken as a whole.
Date: _________ __, 199_.
[DORAL FINANCIAL CORPORATION
By:
-----------------------------------
Name:
-----------------------------------
Title: ]
-----------------------------------
or
[DORAL MORTGAGE CORPORATION
By:
-----------------------------------
Name:
-----------------------------------
Title: ]
-----------------------------------
- ------------------------
(1) Minimum amount of $5,000,000 for each Borrowing.
(2) Must be a Eurodollar Business Day for a Borrowing of Eurodollar Loans
and a Business Day for a Borrowing of Prime Loans.
<PAGE> 78
EXHIBIT F
NOTICE OF CONVERSION/CONTINUATION
1. We refer to the Credit Agreement (as amended,
modified or supplemented from time to time, the "CREDIT AGREEMENT") dated as of
November 5, 1997, by and between Doral Financial 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, [Doral Financial Corporation] [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 Loans that constitute [Prime] [Eurodollar] Loans
equal to $__________(3) to [Prime] [Eurodollar] Loans] [continue an aggregate
principal amount of Loans that constitute Eurodollar Loans equal to
$_____________] on ________________, 199_.(4) [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 3 Eurodollar Interest Periods will
be in effect.]]
3. The aggregate principal amount of the Loans
outstanding after giving effect to the [conversion] [continuation] hereunder
will not exceed the maximum amounts permitted under Section 2.1 and 2.8 of the
Credit Agreement.
- ------------------------
(3) Minimum amount of $5,000,000 for a conversion of Prime Loans into
Eurodollar Loans.
(4) 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 Prime Loans.
<PAGE> 79
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.(5)
Date: _________ __, 199_.
[DORAL FINANCIAL CORPORATION
By:
-----------------------------------
Name:
-----------------------------------
Title: ]
-----------------------------------
or
[DORAL MORTGAGE CORPORATION
By:
-----------------------------------
Name:
-----------------------------------
Title: ]
-----------------------------------
- ------------------------
(5) Only required for a conversion into or a continuation of a Eurodollar
Loan.
<PAGE> 80
EXHIBIT G
FORM OF POWER OF ATTORNEY
THIS POWER OF ATTORNEY is entered into as of this __ day of November,
1997 by [DORAL FINANCIAL CORPORATION] [DORAL MORTGAGE CORPORATION], a
corporation organized under the laws of the Commonwealth of Puerto Rico
(["DFC"]["DMC"]), for the benefit of Bankers Trust Company, as Agent, and the
other Secured Parties as defined in the Credit Agreement dated as of the date
hereof among [DFC and Doral Mortgage Corporation] [DMC and Doral Financial
Corporation] (collectively, the "BORROWERS"), the Agent and the Lenders (the
"CREDIT AGREEMENT"). Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Credit Agreement which is attached
hereto as Schedule A.
[DFC][DMC] hereby irrevocably appoints the Collateral Agent as its
attorney-in-fact, coupled with an interest, to do (but the Collateral Agent
shall not be obligated to and shall incur no liability to the Borrowers or any
third party for failure so to do) at the request and direction of the Required
Lenders, at any time while an Event of Default has occurred and is continuing,
any act that either Borrower is obligated by the Security Agreement to do, and
to exercise such rights and powers as the Borrowers might exercise with respect
to the Collateral, including, without limitation, the right to (a) collect by
legal proceedings or otherwise and endorse, receive and receipt for all
interest, payments, proceeds and other sums and property now or hereafter
payable on or on account of the Collateral; (b) enter into any extension,
reorganization, deposit or other agreement pertaining to, or deposit, surrender,
accept, hold or apply other property in exchange for, the Collateral; (c)
insure, process and preserve the Collateral; (d) transfer the Collateral to the
Collateral Agent's own name or to its nominee's name; (e) sell or otherwise
dispose of the Collateral, as provided in the Security Agreement; (f) take all
actions necessary to effect the sale, transfer, or other disposition of the
Collateral, including without limitation to submit to FNMA, FHLMC or GNMA a
request to effect the sale, transfer, or other disposition of the Collateral, if
applicable, and to execute with FNMA, FHLMC or GNMA a transfer or other
agreement or to take any other action contemplated under acknowledgement
agreements with FNMA, FHLMC or GNMA, if applicable; (g) submit to FNMA, FHLMC or
GNMA a request to obtain any proceeds and fees otherwise payable to either or
both of the Borrowers upon the termination of any Servicing Contracts, if
applicable; and (h) make any compromise or settlement, and take any other action
it deems advisable with respect to the Collateral. Notwithstanding anything
contained herein, in no event shall the Collateral Agent be required to make any
presentment, demand or protest, or give any notice, and the Collateral Agent
need not take any action to preserve any rights against any prior party or any
other Person in connection with the Obligations or with respect to the
Collateral.
<PAGE> 81
Executed as of the day and year first above written.
DORAL FINANCIAL CORPORATION
By:
---------------------------------------
Mario S. Levis
Executive Vice President and Treasurer
DORAL MORTGAGE CORPORATION
By:
---------------------------------------
Mario S. Levis
Vice President
<PAGE> 82
EXHIBIT H
ADDRESSES FOR NOTICES
Borrowers: Doral Financial Corporation
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Attn: Mario S. Levis
Telephone: (809) 749-7108
Fax: (809) 792-4025
Doral Mortgage Corporation
650 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Attn: Nelson Santoya
Telephone: (809) 756-1790
Fax: (809) 756-1792
Agent and
Collateral Agent: Bankers Trust Company
130 Liberty Street, 25th Floor
Mail Stop 2252
New York, New York 10006
Attn: Alec Alenstein
Telephone: (212) 250-2306
Fax: (212) 669-0738
Lenders: Bankers Trust Company
130 Liberty Street, 25th Floor
Mail Stop 2252
New York, New York 10006
Attn: Kevin M. McCann
Telephone: (212) 250-2304
Fax: (212) 669-0738
<PAGE> 83
EXHIBIT I
MATERIAL LITIGATION
SOCORRO MILAGROS RIVERA
V.
DORAL MORTGAGE CORPORATION AND MANUEL VARGAS
Civil No. KDP94-0216
Superior Court of Puerto Rico, San Juan Part
This a tort action filed on or about February 25,
1994. Plaintiff alleges that Manuel Vargas Colon, Vice President of Doral
Mortgage, sexually harassed her. Plaintiff initially claimed a total of
$7,020,000 excluding attorneys' fees, interest and costs. Plaintiff has amended
the complaint to add an additional cause of action which increased her total
claims by $1,000,000.
The case is still pending at the discovery stage. In
the opinion of counsel handling this case the liability, if any, of Doral has
been grossly exaggerated. The Plaintiff has made an offer to settle the case for
$900,000 which has been turned down by Doral. Counsel believes that Doral has
meritorious defenses to such action.
Doral has filed a complaint against its insurance
carrier for insurance coverage.
<PAGE> 84
EXHIBIT J
FORM OF CONFIDENTIALITY AGREEMENT
[Letterhead of Participant or Assignee]
[DATE]
Doral Financial Corporation
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Attention: Mario S. Levis
Doral Mortgage Corporation
650 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Attention: Nelson Santoya
Dear Sirs:
In connection with our proposed purchase of a participation in
or assignment of outstanding loans and commitments under the Credit Agreement
(as amended, modified or supplemented from time to time, the "Credit Agreement")
dated as of November 5, 1997 between Doral Financial Corporation, a corporation
organized under the laws of Puerto Rico, and Doral Mortgage Corporation, a
corporation organized under the laws of Puerto Rico (jointly and severally, the
"Borrowers"), the lenders party thereto and Bankers Trust Company, as Agent, we
may acquire from time to time certain information concerning the business of the
Borrowers and their Affiliates which, pursuant to Section 8.16 of the Credit
Agreement, the Borrowers or any Affiliate thereof has marked "confidential"
(collectively, the "Confidential Information"). Capitalized terms used in this
letter without definitions shall have the meanings set forth in the Credit
Agreement.
We hereby agree that we will not disclose Confidential
Information to any Person other than (a) our Affiliates or as otherwise
permitted under Section 8.6 of the Credit Agreement, (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
undersigned in the ordinary course of its business; (c) our counsel in
connection with the transactions contemplated by this Agreement and the other
Loan Documents; (d) independent auditors and other advisers retained by the
undersigned; and (e) the Agent or the Collateral Agents as contemplated by this
Agreement and the other Loan Documents. In addition, unless specifically
prohibited by applicable law or court order, the undersigned shall, to the
extent practicable, 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 the undersigned 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
<PAGE> 85
the foregoing, the undersigned 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 the undersigned in
violation of this Agreement, (ii) is available to the undersigned on a
non-confidential basis prior to its disclosure to the undersigned by the
Borrower or, the Lender who [assigned its interest] [sold a participation] to
the undersigned, or (iii) becomes available to the undersigned on a
non-confidential basis from a source other than the Borrower or, the Lender who
[assigned its interest] [sold a participation] to the undersigned; and any
Lender and the undersigned may disclose any such information in connection with
any litigation to which such Lender or the undersigned is party relating to this
Agreement or any of the other Loan Documents.
Very truly yours,
<PAGE> 86
EXHIBIT K
PERMITTED SUBORDINATED INDEBTEDNESS
Subordinated indebtedness shall be permitted if:
(a) the subordinated indebtedness and all obligations thereunder
are fully subordinated to the Indebtedness and all Obligations
under the Credit Agreement;
(b) the documents evidencing the subordinated indebtedness (the
"SUBORDINATE DEBT DOCUMENTS") shall include the following
terms and conditions:
(i) No prepayment or amortization of the subordinate debt
(the "SUBORDINATE DEBT") shall be permitted;
(ii) Prior to an Event of Default regularly scheduled
interest payments on the Subordinate Debt shall be
permitted provided such payments would not otherwise
cause an Event of Default under the Loan Documents;
(iii) The Subordinate Debt shall be unsecured;
(iv) The maturity date of the Subordinate Debt (whether
upon the scheduled maturity date or upon acceleration
or otherwise) may not occur earlier than the Maturity
Date; and
(v) The holder of the Subordinate Debt shall be required
to "standstill" when and if the Agent, the Collateral
Agent or the Lenders are enforcing their rights under
the Loan Documents; and
(c) copies of such Subordinate Debt Documents and all amendments,
modifications and supplements thereto shall have been
delivered to the Agent prior to the incurrence of such
Subordinate Debt together with a certification from an
Authorized Officer of each Borrower stating that the attached
documents are true, correct and complete copies of the
Subordinate Debt Documents.
<PAGE> 87
EXHIBIT L
FORM OF PLEDGED SERVICING PORTFOLIO REPORT
<PAGE> 88
EXHIBIT M
[Reserved]
<PAGE> 89
EXHIBIT N
AUTHORIZED OFFICERS
DORAL FINANCIAL CORPORATION
Salomon Levis
Mario S. Levis
Zoila Levis
Shirley Ejarque
Ernesto Carattini
DORAL MORTGAGE CORPORATION
Salomon Levis
Angel Gonzalez
Alfredo Casals
Edison Velez
<PAGE> 90
EXHIBIT O
FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement dated as of November
5, 1997 (as amended, supplemented or otherwise modified from time to time, the
"CREDIT AGREEMENT"), between (i) DORAL FINANCIAL CORPORATION, a Puerto Rico
corporation, and DORAL MORTGAGE CORPORATION, a Puerto Rico corporation, as
Borrowers (collectively, the "BORROWERS"), (ii) the Lenders party thereto from
time to time, and (iii) BANKERS TRUST COMPANY, as Agent (in such capacity, the
"AGENT"). Unless otherwise defined herein, terms defined in the Credit Agreement
and used herein shall have the meanings given to them in the Credit Agreement.
The Assignor identified on Schedule 1 hereto (the "ASSIGNOR")
and the Assignee identified on Schedule 1 hereto (the "ASSIGNEE") agree as
follows:
1. The Assignor hereby irrevocably sells and assigns to the
Assignee without recourse to the Assignor, and the Assignee hereby irrevocably
purchases and assumes from the Assignor without recourse to the Assignor, as of
the Effective Date (as defined below), the interest described in Schedule 1
hereto (the "ASSIGNED INTEREST") in and to the Assignor's rights and obligations
under the Credit Agreement in a principal amount for the Assigned Interest as
set forth on Schedule 1 hereto.
2. The Assignor (a) makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with the Credit Agreement or with
respect to the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Credit Agreement, any other Loan Document or any
other instrument or document furnished pursuant thereto, other than that the
Assignor has not created any adverse claim upon the interest being assigned by
it hereunder and that such interest is free and clear of any such adverse claim;
(b) makes no representation or warranty and assumes no responsibility with
respect to the financial condition of either Borrower, any of their Subsidiaries
or any other obligor or the performance or observance by either Borrower, any of
their Subsidiaries or any other obligor of any of their respective obligations
under the Credit Agreement or any other Loan Document or any other instrument or
document furnished pursuant hereto to thereto; and (c) attaches any Notes held
by it evidencing the Assigned Interest and (i) requests that the Agent, upon
request by the Assignee, exchange the attached Notes for a new Note or Notes
payable to the Assignee and (ii) if the Assignor has retained any interest in
the Assigned Interest requests that the Agent exchange the attached Notes for a
new Note or Notes payable to the Assignor, in each case in amounts which reflect
the assignments being made hereby (and after giving effect to any other
assignments which have become effective on the Effective Date).
3. The Assignee (a) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (b) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements delivered pursuant to Section 4.4 thereof and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance; (c) agrees
that it will, independently and without reliance upon the Assignor, the Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in
<PAGE> 91
taking or not taking action under the Credit Agreement, the other Loan Documents
or any other instrument or document furnished pursuant hereto or thereto; (d)
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers and discretion under the Credit Agreement, the other
Loan Documents or any other instrument or document furnished pursuant hereto or
thereto as are delegated to the Agent by the terms thereof, together with such
powers as are incidental thereto; and (e) agrees that it will be bound by the
provisions of the Credit Agreement and will perform in accordance with its terms
all the obligations which by the terms of the Credit Agreement are required to
be performed by it as a Lender.
4. The effective date of this Assignment and Acceptance shall be
the Effective Date of Assignment described in Schedule 1 hereto ( the "Effective
Date "). Following the execution of this Assignment and Acceptance, it will be
delivered to the Agent for acceptance by it and recording by the Agent effective
as of the Effective Date (which shall not, unless otherwise agreed to by the
Agent, be earlier than five Business Days after the date of such acceptance and
recording by the Agent).
5. Upon such acceptance and recording, from and after the
Effective Date, the Agent shall make all payments in respect of the Assigned
Interest (including payments of principal, interest, fees and other amounts) to
the Assignor for amounts which have accrued to the Effective Date and to the
Assignee for amounts which have accrued subsequent to the Effective Date. The
Assignor and the Assignee shall make all appropriate adjustments in payments by
the Agent for periods prior to the Effective Date or with respect to the making
of this assignment directly between themselves.
6. From and after the Effective Date, (a) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder and under the
other Loan Documents and shall be bound by the provisions thereof and (b) the
Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement.
7. This Assignment and Acceptance shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
Assignment and Acceptance to be executed as of the date first above written by
their respective duly authorized officers on Schedule 1 hereto.
<PAGE> 92
Schedule 1
----------
to Assignment and Acceptance
----------------------------
Name of Assignor: ____________________________
Name of Assignee: ____________________________
Effective Date of Assignment: ___________________
Principal
Amount Assigned Commitment Percentage Assigned
--------------- ------------------------------
$ _________ ____%
[Name of Assignee] [Name of Assignor]
By:_______________________ By:_______________________
Name:_____________________ Name:_____________________
Title:____________________ Title:____________________
Accepted: Consented To:
BANKERS TRUST COMPANY, as DORAL FINANCIAL CORPORATION [1]
Agent
By:_______________________ By:_______________________
Name:_____________________ Name:_____________________
Title:____________________ Title:____________________
DORAL MORTGAGE CORPORATION
By:_______________________
Name:_____________________
Title:____________________
<PAGE> 1
EXHIBIT 10.74
SECOND AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(the "Amendment"), dated as of March 28, 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"), 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 ABorrower" and collectively, the ABorrowers"),
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
by the First Amendment to First Amended and Restated Credit Agreement and
Certain Other Loan Documents dated as of January 8, 1997, and as further
amended, supplemented or otherwise modified from time to time, the ACredit
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 Credit Agreement.
(a) The definitions of "MINIMUM ATNW" and "PRIOR YEAR MINIMUM ATNW"
shall be deleted from Section 1.1 of the Credit Agreement.
(b) Section 5.3(b) of the Credit Agreement shall be amended to read as
follows:
"(b) Adjusted Tangible Net Worth. Permit Adjusted Tangible Net
Worth at any time to be less than $90,000,000."
Section 2. 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.
<PAGE> 2
Section 3. Effectiveness. This Amendment shall become effective as of
the date hereof upon delivery to the Agent of counterparts of this Amendment ,
duly executed and delivered by the parties hereto.
Section 4. 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 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6. 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: Executive V.P. & Treasurer
-----------------------------------
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /S/ Mario S. Levis
-----------------------------------
Name: Mario S. Levis
-----------------------------------
Title: Executive Vice President
-----------------------------------
BANKERS TRUST COMPANY,
as Agent and as a Lender
By: /S/ Kevin McCann
-----------------------------------
Name: Kevin McCann
-----------------------------------
Title:
-----------------------------------
<PAGE> 3
-2-
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as a Lender
By: /S/ R. Steven Hall
-------------------------------------
Name: R. Steven Hall
-------------------------------------
Title: Vice President
-------------------------------------
THE BANK OF BOSTON,
as a Lender
By: /S/ Paul Chmielinski
-------------------------------------
Name: Paul Chmielinski
-------------------------------------
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: /S/ Robert J. Ogburn
-------------------------------------
Name: Robert J. Ogburn
-------------------------------------
Title: Vice President
-------------------------------------
<PAGE> 1
EXHIBIT 10.75
THIRD AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(the "Amendment"), dated as of June 27, 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"), 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 ABorrower" and collectively, the ABorrowers"),
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
by the First Amendment to First Amended and Restated Credit Agreement and
Certain Other Loan Documents dated as of January 8, 1997, the Second Amendment
to First Amended and Restated Credit Agreement dated as of March 28, 1997, and
as further amended, supplemented or otherwise modified from time to time, the
ACredit 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 Credit Agreement.
(a) The definition of "ADJUSTED TANGIBLE NET WORTH" in Section 1.1 of
the Credit Agreement shall be amended to read as follows:
"ADJUSTED TANGIBLE NET WORTH" shall mean, as of any date, (a)
the sum of: (i) Book Net Worth as of such date, (ii) one
percent (1.0%) 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)(i) fifty percent (50%)
of all excess servicing fees receivable (or if excess
servicing fees receivable are recharacterized as "interest
only securities" on the consolidated and consolidating balance
sheet of FFCC and its consolidated Subsidiaries, then fifty
percent (50%) of the amount of such securities reflected on
FFCC=s consolidated balance sheet), (ii) all purchased loan
administration contracts and (iii) 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
<PAGE> 2
- 2 -
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."
(b) The percentage "0.95%" in clause (ii) of the definition of
"COLLATERAL VALUE OF THE PLEDGED SERVICING PORTFOLIO" in Section 1.1 of the
Credit Agreement shall be changed to "1.0%".
(c) Clause (n) of the definition of "ELIGIBLE MORTGAGE LOAN" in Section
1.1 of the Credit Agreement shall be amended to read 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
three hundred and sixty-five (365) 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 three hundred and sixty-five
(365) days from the date such Mortgage Loan was first included
in the Facility 1 Tranche B Borrowing Base; provided that if
such Mortgage Loan has been included in the Facility 1 Tranche
B 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, or if such Mortgage Loan has
been included in the Facility 1 Tranche A Borrowing Base (as
an unpooled Mortgage Loan) and has 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, then if the original
principal amount of such Mortgage Loan, when added to the
original principal amount of any other such Mortgage Loans
included in the Facility 1 Borrowing Base for a period in
excess of one hundred and eighty (180) days, exceeds
$50,000,000, 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."
In addition, Exhibit H-1 to the Credit Agreement (Facility 1 Tranche A and B
Borrowing Base Certificate) shall be modified to conform to the amendment to the
Credit Agreement set forth in this Section 1(c).
<PAGE> 3
- 3 -
(d) The definition of "MATURITY DATE" in Section 1.1 of the Credit
Agreement shall be amended to read as follows:
""MATURITY DATE" shall mean June 27, 1998; 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."
(e) Section 5.2(b) of the Credit Agreement shall be amended to read as
follows:
"(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 any related financial service
business 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 banks, savings
associations, or savings and loan or bank holding companies)."
(f) The parenthetical at the end of Section 5.2(c) of the Credit
Agreement shall be amended to read as follows:
"(including, without limitation, any activity permitted for
banks, savings associations, or savings and loan or bank
holding companies)."
(g) Section 5.2(d) of the Credit Agreement shall be amended to read as
follows:
"(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 Purchase,
Servicing and Collections Agreement dated as of September 15,
1993 with Doral Federal Savings Bank ("Doral Federal"), the
Amended and Restated Master Production Agreement among FFCC,
DMC and Doral Federal dated as of October 1, 1995, as amended
by the First Amendment to Master Production Agreement, dated
as of March 1, 1996 and the Master Servicing and Collection
Agreement between FFCC and Doral Federal, dated as of October
1, 1995, as amended by the First Amendment to Master Servicing
and Collection Agreement, dated as of March 1, 1996, each as
in effect on such respective date."
(h) Section 5.3(a) of the Credit Agreement shall be amended to read as
follows:
<PAGE> 4
- 4 -
"(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
ACash" or Acash equivalents"; (ii) ninety-five percent (95%)
of the sum of (A) AMortgage Loans held for sale" and (B)
AMortgage-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) AAccounts 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) AProperty, leasehold
improvements and equipment" and (B) AReal estate held for
sale"; (vii) fifty percent (50%) of "Excess servicing fees
receivable" (or if excess servicing fees receivable are
recharacterized as "interest only securities" on the
consolidated and consolidating balance sheet of FFCC and its
consolidated Subsidiaries, then fifty percent (50%) of the
amount of such securities reflected on FFCC=s consolidated
balance sheet); and (viii) 1.0% 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)."
(i) Section 5.3(b) of the Credit Agreement shall be amended to read as
follows:
"(b) Adjusted Tangible Net Worth. Permit
Adjusted Tangible Net Worth at any time to be less than
$100,000,000."
(j) Section 5.3(c) of the Credit Agreement shall be amended to read as
follows:
"(c) Book Net Worth. Permit Book Net Worth at
any time to be less than $106,000,000."
Section 2. 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 3. Effectiveness. This Amendment shall become effective as of
the date hereof upon delivery to the Agent of counterparts of this Amendment ,
duly executed and delivered by the parties
<PAGE> 5
- 5 -
hereto, together with a certified copy of resolutions of the Board of Directors
of each of the Borrowers approving the execution, delivery and performance of
this Amendment and the transactions contemplated herein.
Section 4. 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 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6. 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: Executive V.P. & Treasurer
------------------------------------
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /s/ Mario S. Levis
---------------------------------------
Name: Mario S. Levis
------------------------------------
Title: Executive Vice President
------------------------------------
BANKERS TRUST COMPANY,
as Agent and as a Lender
By: /s/ Kevin M. McCann
---------------------------------------
Name: Kevin M. McCann
-------------------------------------
Title: Vice President
------------------------------------
<PAGE> 6
- 6 -
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as a Lender
By: /S/ R. Steven Hall
---------------------------------------
Name: R. Steven Hall
-------------------------------------
Title: Vice President
------------------------------------
BANKBOSTON, N.A. (formerly known as
The Bank of Boston),
as a Lender
By: /S/ Paul A. Chmielinski
--------------------------------------
Name: Paul A. Chmielinski
-------------------------------------
Title: Vice President
------------------------------------
<PAGE> 7
- 7 -
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: /S/ Robert J. Ogburn
-------------------------
Name: Robert J. Ogburn
------------------------
Title: Vice President
-----------------------
<PAGE> 1
EXHIBIT 10.76
FOURTH AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(the "Amendment"), dated as of November 5, 1997, is entered into between the
Lenders party hereto, BANKERS TRUST COMPANY, a New York banking corporation, as
agent for the Lenders (the "Agent"), DORAL FINANCIAL CORPORATION (formerly known
as First Financial Caribbean Corporation), a corporation organized under the
laws of the Commonwealth of Puerto Rico ("DFC"), and DORAL MORTGAGE CORPORATION,
a corporation organized under the laws of the Commonwealth of Puerto Rico and a
wholly-owned subsidiary of DFC ("DMC", and together with DFC, each a "Borrower"
and collectively, the "Borrowers"), 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 by the First Amendment to First Amended
and Restated Credit Agreement and Certain Other Loan Documents dated as of
January 8, 1997, the Second Amendment to First Amended and Restated Credit
Agreement dated as of March 28, 1997, the Third Amendment to First Amended and
Restated Credit Agreement dated as of June 27, 1997, and as further amended,
supplemented or otherwise modified from time to time, the "Credit 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 Credit Agreement.
(a) The following new definitions shall be added to Section 1.1 of the
Credit Agreement in appropriate alphabetical order:
"SERVICING COLLATERAL" shall mean the "Collateral" as such
term is defined in the Servicing Security Agreement.
"SERVICING COLLATERAL AGENT" shall mean Bankers Trust Company,
in its capacity as Collateral Agent under the Servicing
Security Agreement.
"SERVICING CREDIT AGREEMENT" shall mean the Credit Agreement,
dated as of November 5, 1997, between the Borrowers, Bankers
Trust Company, as Agent thereunder, and the lenders party
thereto from time to time, as in effect on the date hereof.
"SERVICING LENDERS" shall mean the "Lenders" as such term is
defined in the Servicing Credit Agreement.
<PAGE> 2
-2-
"SERVICING LOANS" shall mean the "Loans" as such term is
defined in the Servicing Credit Agreement.
"SERVICING SECURITY AGREEMENT" shall mean the Security
Agreement dated as of November 5, 1997, between the Servicing
Collateral Agent and the Borrowers, as in effect on the date
hereof.
(b) Section 2.1 of the Credit Agreement shall be amended by adding the
following new subsection (h) thereto immediately following subsection (g)
thereof:
"(h) Limitation on Aggregate Facility 2 Loans. Notwithstanding
anything contained herein, the aggregate principal amount of
Facility 2 Loans plus the aggregate principal amount of
Servicing Loans outstanding at any time shall not exceed the
then current Collateral Value of the Pledged Servicing
Portfolio."
(c) Section 2.8(d) of the Credit Agreement shall be amended and
restated as follows:
"(d) On any date upon which the aggregate principal amount of
the outstanding Facility 2 Loans plus the aggregate principal
amount of the outstanding Servicing Loans exceeds the
Collateral Value of the Pledged Servicing Portfolio, the
Borrowers shall repay on such date the aggregate principal
amount of the Facility 2 Loans as shall be necessary so that
the aggregate principal amount of outstanding Facility 2 Loans
plus the aggregate principal amount of the outstanding
Servicing Loans does not exceed the Collateral Value of the
Pledged Servicing Portfolio."
(d) Section 5.2(a) of the Credit Agreement shall be amended by adding
the following new clause (vi) thereto immediately following clause (v) thereof:
"and (vi) Liens on the Servicing Collateral in favor of the
Servicing Collateral Agent under the Servicing Security
Agreement."
(e) Section 5.2(o) of the Credit Agreement shall be amended to read as
follows:
"(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 and the Servicing Lenders
pursuant to the Servicing Credit 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)."
<PAGE> 3
-3-
(f) Section 6.1 of the Credit Agreement shall be amended by changing
the word "and" in the second line of each of clauses (b) and (c) of Section 6.1
to "or" and by changing the word "Borrower" in the second line of the last
paragraph of Section 6.1 to "Borrowers".
(g) The following new Section 8.21 shall be added to the Credit
Agreement immediately following Section 8.20 thereof:
"SECTION 8.17 INTEGRATION
This Agreement and the other Loan Documents represent the
entire agreement of the Borrowers, the Agent and the Lenders
with respect to the subject matter hereof and thereof, and
there are no promises, undertakings, representations or
warranties by the Agent or any Lender relative to the subject
matter hereof or thereof not expressly set forth or referred
to herein or in the other Loan Documents."
(h) All references to "Telerate Page 314" in the Credit Agreement shall
be amended to "Telerate Page 3750".
Section 2. 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 3. Effectiveness. This Amendment shall become effective as of
the date hereof upon delivery to the Agent of (i) counterparts of this
Amendment, duly executed and delivered by the parties hereto, and (ii)
counterparts of an Intercreditor Agreement duly executed by the Agent, the
Lenders, the Agent under the Servicing Credit Agreement and the Servicing
Lenders, providing for, among other things, the Agent and the Lenders' agreement
to the granting to the Servicing Secured Parties of a first priority security
interest in the Servicing Collateral, which agreement shall be in form and
substance satisfactory to the Agent and the Lenders in their sole discretion.
Section 4. 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 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6. 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.
<PAGE> 4
-4-
DORAL FINANCIAL CORPORATION,
as a Borrower
By: /S/ Mario S. Levis
----------------------------------------------
Name: Mario S. Levis
Title: Executive Vice President and Treasurer
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
FIRST UNION NATIONAL BANK
as a Lender
By: /S/ R. Steven Hall
----------------------------------------------
Name: R. Steven Hall
----------------------------------------------
Title: Vice President
----------------------------------------------
BANKBOSTON, N.A. (formerly known as
The Bank of Boston),
as a Lender
By: /S/ Paul Chmielinski
----------------------------------------------
Name: Paul Chmielinski
----------------------------------------------
Title: Vice President
----------------------------------------------
<PAGE> 5
-5-
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: /S/ Robert J. Ogburn
----------------------------------------------
Name: Robert J. Ogburn
----------------------------------------------
Title: Vice President
----------------------------------------------
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Name Jurisdiction of Incorporation
Centro Hipotecario de Puerto Rico, Inc. Puerto Rico
Doral Bank Puerto Rico
Doral Mortgage Corporation Puerto Rico
Doral Securities, Inc. Puerto Rico
<PAGE> 1
EXHIBIT 23
PriceWaterhouse
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 No. 333-31283 of Doral Financial
Corporation of our report dated February 23, 1998, appearing on
page F-3 of this Form 10-K.
/S/ PRICE WATERHOUSE
San Juan, Puerto Rico
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORAL FINANCIAL CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1997, AND IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,390
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 157,404
<TRADING-ASSETS> 620,288
<INVESTMENTS-HELD-FOR-SALE> 240,876
<INVESTMENTS-CARRYING> 143,534
<INVESTMENTS-MARKET> 144,784
<LOANS> 539,352
<ALLOWANCE> 1,241
<TOTAL-ASSETS> 1,857,789
<DEPOSITS> 300,494
<SHORT-TERM> 1,038,022
<LIABILITIES-OTHER> 69,958
<LONG-TERM> 262,360
0
8
<COMMON> 18,425
<OTHER-SE> 168,522
<TOTAL-LIABILITIES-AND-EQUITY> 1,857,789
<INTEREST-LOAN> 32,768
<INTEREST-INVEST> 50,918
<INTEREST-OTHER> 6,445
<INTEREST-TOTAL> 90,131
<INTEREST-DEPOSIT> 10,014
<INTEREST-EXPENSE> 61,438
<INTEREST-INCOME-NET> 28,693
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 28,588
<EXPENSE-OTHER> 35,582
<INCOME-PRETAX> 37,797
<INCOME-PRE-EXTRAORDINARY> 32,548
<EXTRAORDINARY> 12,317
<CHANGES> 0
<NET-INCOME> 20,231
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 7.90
<LOANS-NON> 2,462
<LOANS-PAST> 30,656
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,597
<ALLOWANCE-OPEN> 719
<CHARGE-OFFS> 124
<RECOVERIES> 46
<ALLOWANCE-CLOSE> 1,241
<ALLOWANCE-DOMESTIC> 600
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
