<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17224
DORAL FINANCIAL CORPORATION
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico 66-0312162
----------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1159 F.D. Roosevelt Avenue,
San Juan, Puerto Rico 00920-2998
- --------------------- ----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code (787) 749-7000
--------------
Former name, former address
and Not Applicable
Former fiscal year, if changed --------------
since last report
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
-
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MAY 10, 1999 - 40,428,920
<PAGE> 2
DORAL FINANCIAL CORPORATION
INDEX PAGE
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of March 31, 1999 (Unaudited) and 4
December 31, 1998................................................................................
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters ended
March 31, 1999 and March 31, 1998................................................................ 5
Consolidated Statements of Cash Flows (Unaudited) - Quarters ended March 31, 1999 and
March 31, 1998................................................................................... 6
Consolidated Statements of Comprehensive Income (Unaudited)- Quarters ended March 31,
1999 and March 31, 1998.......................................................................... 7
Notes to Consolidated Financial Statements....................................................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk....................................... 39
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................ 39
Item 2 - Changes in Securities............................................................................ 39
Item 3 - Defaults Upon Senior Securities.................................................................. 40
Item 4 - Submission of Matters to a Vote of Security Holders.............................................. 40
Item 5 - Other Information................................................................................ 41
Item 6 - Exhibits and Reports on Form 8-K................................................................. 41
SIGNATURES..................................................................................................... 43
</TABLE>
2
<PAGE> 3
FORWARD LOOKING STATEMENTS
When used in this form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, competitive and regulatory
factors and legislative changes, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
3
<PAGE> 4
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- ------------
Assets
<S> <C> <C>
Cash and due from banks $ 33,522 $ 31,945
---------- ----------
Money market investments:
Securities purchased under agreements to resell 82,033 120,733
Time deposits with other banks 141,531 51,549
Other short term investments, at cost 74,540 140,469
---------- ----------
Total money market investments 298,104 312,751
---------- ----------
Loans:
Mortgage loans held for sale, at lower of cost or market 886,329 883,048
Loans receivable, net 175,073 166,987
---------- ----------
Total loans 1,061,402 1,050,035
---------- ----------
Investment securities and other instruments:
Trading securities, at fair value 646,901 606,918
Securities available-for-sale, at fair value 617,233 408,888
Securities held-to-maturity, at amortized cost 185,426 190,778
Federal Home Loan Bank of NY (FHLB) stock, at cost 8,895 6,914
---------- ----------
Total investment securities and other instruments 1,458,455 1,213,498
---------- ----------
Receivables and mortgage servicing advances 33,249 32,568
Broker dealers' operations receivable 111,676 144,486
Accrued interest receivable 24,088 23,570
Servicing assets, net 79,175 72,568
Property, leasehold improvements and equipment, net 22,225 19,273
Cost in excess of fair value of net assets acquired, net 5,386 5,475
Real estate held for sale, net 2,801 2,987
Prepaid and other assets 8,039 8,957
---------- ----------
Total assets $3,138,122 $2,918,113
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $1,253,051 $1,197,328
Loans payable 392,949 426,704
Deposits 649,378 533,113
Notes payable 199,462 199,733
Advances from FHLB 55,500 32,000
Broker dealers' operations payable 110,419 142,002
Accrued expenses and other liabilities 129,673 117,674
---------- ----------
Total liabilities 2,790,432 2,648,554
Commitments and contingencies
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares authorized; 8%
Convertible Cumulative Preferred Stock, $1 par value (liquidation
preference $1,000 per Share), 20,000 designated, and 8,460 shares issued
and outstanding; 7% Noncumulative Monthly Income Preferred Stock,
$1 par value (liquidation preference $50 per share) 1,495,000 shares
issued and outstanding 1,503 8
Common stock, $1 par value, 50,000,000 shares authorized; 40,484,920 shares
issued (1997 - 36,850,920); 40,428,920 shares outstanding (1997 - 36,794,920) 40,485 40,485
Paid-in capital 140,822 70,252
Legal surplus 2,499 2,499
Retained earnings 168,853 156,315
Accumulated other comprehensive income, net of taxes (6,416) 56
Treasury stock at par value, 56,000 shares held (56) (56)
---------- ----------
Total stockholders' equity 347,690 269,559
---------- ----------
Total liabilities and stockholders' equity $3,138,122 $2,918,113
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS OF DOLLARS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest income:
Loans $ 18,201 $ 10,586
Mortgage-backed securities 12,496 12,155
Investment securities 7,540 7,219
Other interest-earning assets 3,501 1,084
--------- ---------
Total interest income 41,738 31,044
--------- ---------
Interest expense:
Loans payable 5,793 5,426
Securities sold under agreements to repurchase 15,010 11,273
Deposits 6,652 3,597
Other borrowed funds 4,421 2,906
--------- ---------
Total interest expense 31,876 23,202
--------- ---------
Net interest income 9,862 7,842
Provision for loan losses 295 218
--------- ---------
Net interest income after provision for loan losses 9,567 7,624
--------- ---------
Non-interest income:
Net gain on mortgage loan sales 16,234 5,333
Trading account profit 5,530 2,546
Gain on sale of investment securities -- 1,515
Servicing income 7,213 4,721
Gain on sale of servicing assets -- 1,829
Commissions, fees and other income 815 526
--------- ---------
Total non-interest income 29,792 16,470
--------- ---------
Non-interest expense:
Compensation and benefits, net (See Note f) 10,140 3,883
Taxes, other than payroll and income taxes 483 391
Maintenance 455 227
Advertising 1,398 1,303
Professional services 1,236 878
Telephone 884 604
Rent 1,025 731
Amortization of servicing assets 2,715 1,403
Depreciation and amortization 931 843
Other, (See Note f) 2,288 1,241
--------- ---------
Total non-interest expense 21,555 11,504
--------- ---------
Income before income taxes 17,804 12,590
Income taxes 2,133 1,493
--------- ---------
Net income 15,671 11,097
========= =========
Retained earnings at beginning of period 156,315 114,253
Less cash dividends paid:
8% Convertible Cumulative Preferred Stock 169 169
7% Noncumulative Monthly Income Preferred stock 538 --
Common stock 2,426 2,022
--------- ---------
Retained earnings at the end of period $ 168,853 $ 123,159
========= =========
Earnings per share(1):
Basic $ 0.37 $ 0.285
========= =========
Diluted $ 0.36 $ 0.275
========= =========
</TABLE>
(1) Adjusted to reflect a two-for-one stock split effective May 20, 1998.
The accompanying notes are an integral part of these financial statement.
5
<PAGE> 6
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................................... $ 15,671 $ 11,097
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................................... 931 661
Amortization of interest-only strips held in trading accounts ............................... 1,656 1,048
Amortization of cost in excess of fair value of net assets acquired ......................... 89 182
Amortization of servicing assets ............................................................ 2,715 1,403
Deferred tax benefit ........................................................................ (82) (2,366)
Gain on sale of servicing assets ............................................................ -- (1,829)
Provision for loan losses ................................................................... 295 218
Origination and purchases of mortgage loans held for sale ................................... (690,424) (386,862)
Principal repayment and sales of mortgage loans held for sale ............................... 685,462 144,164
Purchases of securities held for trading .................................................... (697,778) (361,367)
Principal repayments and sales of securities held for trading ............................... 658,780 377,560
Increase in interest only strips, net ....................................................... (1,095) (448)
Increase in servicing assets ................................................................ (9,322) (6,052)
Increase in accounts receivable and mortgage servicing advances ............................. (681) (502)
Decrease in broker dealers' operations receivable ........................................... 32,810 153,441
Increase in accrued interest receivable ..................................................... (518) (5,371)
(Decrease) increase in interest payable ..................................................... (1,140) 1,407
(Decrease) increase in broker dealers' operations payable ................................... (31,583) 54,713
Increase in accounts payable and other liabilities .......................................... 17,359 3,764
Decrease in prepaid and other assets ........................................................ 918 2,918
--------- ---------
Total adjustments ........................................................................ (31,608) (229,196)
--------- ---------
Net cash used in operating activities ....................................................... (15,937) (218,099)
--------- ---------
Cash flows from investing activities:
Principal repayments of securities held to maturity ............................................ 5,352 6,534
Origination of loans receivable ................................................................ (11,836) --
Principal repayments of loans receivable ....................................................... 3,590 903
Purchases of securities available for sale ..................................................... (489,580) (247,706)
Principal repayments and sales of securities available for sale ............................... 270,625 112,641
Purchase of FHLB stock ......................................................................... (1,981) --
Purchase of property, leasehold improvements and equipment ..................................... (3,883) (1,201)
Decrease in real estate held for sale .......................................................... 186 526
Proceeds from the sale of servicing assets ..................................................... -- 1,829
--------- ---------
Net cash used in investing activities ....................................................... (227,527) (126,474)
--------- ---------
Cash flows from financing activities:
Increase in deposits ........................................................................... 116,265 27,925
Increase in securities sold under agreements to repurchase ..................................... 55,723 198,009
(Decrease) increase in loans payable ........................................................... (33,755) 64,090
Issuance of common stock ....................................................................... -- 40,592
Issuance of preferred stock .................................................................... 72,065 --
Proceeds from FHLB advances .................................................................... 23,500 --
Decrease in notes payable ...................................................................... (271) (392)
Dividends declared and paid .................................................................... (3,133) (2,191)
--------- ---------
Net cash provided by financing activities ................................................... 230,394 328,033
--------- ---------
Net decrease in cash and cash equivalents ...................................................... (13,070) (16,540)
Cash and cash equivalents at beginning of period ............................................... 344,696 174,794
--------- ---------
Cash and cash equivalents at the end of period ................................................. $ 331,626 $ 158,254
========= =========
Cash and cash equivalent includes:
Cash and due from banks ..................................................................... $ 33,522 $ 12,906
Money market investments .................................................................... 298,104 145,348
--------- ---------
$ 331,626 $ 158,254
Supplemental schedule of non-cash activities
Loan securitizations ........................................................................ $ 336,143 $ 132,827
========= =========
Supplemental cash flows information:
Cash used to pay interest ................................................................... $ 33,016 $ 21,795
========= =========
Cash used to pay income taxes ............................................................... $ 4,603 $ 1,581
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income: $ 15,671 $ 11,097
--------- ---------
Other comprehensive income, net of tax
Unrealized net gains (losses) on securities arising during the period
(net of taxes of $4.1 million - 1999 and $300 - 1998)
Less: reclassification adjustment for (gains) losses (6,458) 469
included in net income (net of taxes of $9 - 1999 and
$338 - 1998) 14 528
--------- ---------
Other comprehensive income (loss) (6,472) (59)
--------- ---------
Comprehensive income, net of taxes $ 9,199 $ 11,038
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated Financial Statements (unaudited) include the accounts
of Doral Financial Corporation ("Doral Financial" or "the Company"),
Doral Mortgage Corporation ("Doral Mortgage"), Centro Hipotecario de
Puerto Rico, Inc., Doral Securities, Inc. ("Doral Securities"), Doral
Bank and Doral Money, Inc. References herein to "Doral Financial" or
"the Company" shall be deemed to refer to the Company and its
consolidated subsidiaries, unless otherwise provided. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The Consolidated Financial Statements (unaudited) have
been prepared in conformity with the accounting policies stated in the
Company's Annual Audited Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and
should be read in conjunction with the Notes to the Consolidated
Financial Statements appearing in that report. All adjustments
(consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of results for
the interim periods have been reflected.
b. The results of operations for the quarter ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
c. Cash dividends per share paid for the quarter ended March 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
------------------------
1999 1998
------- -------
<S> <C> <C>
8% Convertible Cumulative Preferred Stock $20.00 $20.00
7% Noncumulative Monthly Income Preferred Stock $ 0.36 $ --
Common Stock $ 0.06 $ 0.05
</TABLE>
d. At March 31, 1999, escrow funds include approximately $85.7 million
deposited with Doral Bank. These funds are included in the Company's
financial statements. Escrow funds also include approximately $7.2
million deposited with other banks which are excluded from the
Company's assets and liabilities.
e. The number of average shares of common stock used for computing the
basic and diluted net income per share was as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Basic 40,428,920 38,450,408
Diluted 42,447,389 40,384,124
</TABLE>
f. Employee costs and other expenses are shown in the Consolidated
Statements of Income and Retained Earnings net of direct loan
origination costs which, pursuant to SFAS No. 91, are capitalized as
part of the carrying cost of mortgage loans and are offset against net
gains on mortgage loan sales when the loans are sold.
8
<PAGE> 9
Set forth below is a reconciliation of the application of SFAS No. 91
to employee costs and other expenses:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
--------------------
(IN THOUSANDS)
--------------------
<S> <C> <C>
1999 1998
------- -------
Employee costs, gross $17,008 $11,430
Deferred costs pursuant to SFAS No. 91 6,868 7,547
------- -------
Employee cost, net $10,140 $ 3,883
======= =======
Other expenses, gross $ 4,464 $ 2,959
Deferred costs pursuant to SFAS No. 91 2,176 1,718
------- -------
Other expenses, net $ 2,288 $ 1,241
======= =======
</TABLE>
g. On February 22, 1999, Doral Financial closed the sale of 1,495,000
shares of its 7% Noncumulative Monthly Income Preferred Stock, Series A
(including 195,000 shares sold pursuant to an over-allotment option to
the underwriters) in a public underwritten offering at a price to the
public of $50.00 per share. The Company received proceeds of
approximately $72.1 million from the offering, after deducting the
related expenses.
h. Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130 - "Reporting Comprehensive
Income". This Statement establishes standards of reporting and
displaying comprehensive income and its components in general-purpose
financial statements. Comprehensive income is intended to report all
changes in the equity of a business enterprise during a period from
transactions and other events or circumstances, except those resulting
from investments by or distribution to owners. The only item of
comprehensive income reported by the Company is the unrealized gains or
losses on securities available for sale which, at March 31, 1999,
amounted to a loss of $6.4 million net of taxes.
i. Segment information
In 1998, the Company implemented the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
which established standards for reporting information about a company's
operating segments.
The Company has three reportable segments identified by line of
business: mortgage banking, commercial banking and broker dealer
operations. The segments are managed separately since each one targets
different customers and requires different strategies. The majority of
the Company's operations are conducted in Puerto Rico.
The Company monitors the performance of its reportable segments based
on pre-established goals for different financial parameters such as net
income, interest rate spread, loan production and increase in market
share.
The information that follows presents net interest income after
provision for loan losses, non interest income, net income and
identifiable assets for the Company's reportable segments.
9
<PAGE> 10
<TABLE>
<CAPTION>
(in thousands)
Mortgage Commercial Broker
Banking Banking Dealer Eliminations Totals
---------- ---------- ------- ------------ ----------
QUARTER ENDED MARCH 31, 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 3,723 4,988 655 201 $ 9,567
Non-interest income $ 26,431 2,362 1,241 (242) $ 29,792
Net income $ 12,760 2,744 210 (43) $ 15,671
Identifiable assets $1,965,939 1,019,324 788,693 (635,834) $3,138,122
QUARTER ENDED MARCH 31, 1998
---------------------------------------------------------------------
Net interest income after
provision for loan losses $ 4,595 2,724 305 0 $ 7,624
Non-interest income $ 14,117 1,137 1,090 126 $ 16,470
Net income $ 8,819 1,748 357 173 $ 11,097
Identifiable assets $1,634,905 458,555 606,936 (446,018) $2,254,378
</TABLE>
j. Certain amounts reflected in the 1998 Consolidated Financial Statements
have been reclassified to conform to the presentation for 1999.
k. Securities Transactions of Broker Dealer
Securities transactions of the Company's broker dealer operation are
recorded on the trade date basis. At the end of the period, unsettled
purchase transactions are recorded as part of the Company's position
and as a payable while unsettled sales transactions are deducted from
the Company's position and recorded as a receivable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Doral Financial Corporation is a bank holding company that, together
with its wholly-owned subsidiaries, is engaged in mortgage banking, commercial
banking and broker-dealer activities. It 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 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 and land (the "mortgage
banking business").
Doral Financial is currently in its 27th year of operations. The
Company is the leading originator of mortgage loans on single-family residences
in Puerto Rico. The volume of loans originated and purchased during the quarters
ended March 31, 1999 and 1998 was approximately $702.3 million and $386.9
million, respectively.
Doral Financial's mortgage servicing portfolio increased to
approximately $6.6 billion as of March 31, 1999, from $4.8 billion as of the
same date a year ago, an increase of 37%. Doral Financial's traditional strategy
has been to increase the size of its mortgage servicing portfolio by relying
principally on internal loan originations.
For the quarters ended March 31, 1999 and 1998, Doral Bank, the
Company's commercial banking subsidiary, contributed approximately $2.7 million
and $1.7 million, respectively, to the Company's consolidated net income which
includes the operations of Doral Money, a wholly-owned subsidiary of Doral Bank
commencing with the second quarter of 1998. The increase in Doral Bank's net
income reflects a substantial increase in interest earning assets during these
periods.
10
<PAGE> 11
During the second quarter of 1998, Doral Financial expanded into the
mainland United States through the creation of Doral Money, a subsidiary of
Doral Bank, which operates through two divisions, a multi-family and commercial
lending unit in the New York City metropolitan area, and a residential wholesale
mortgage operation in the Chicago metropolitan area. Doral Money contributed
approximately 17% to the Company's total loan production for the first quarter
of 1999.
The Company owns Doral Securities, a broker-dealer subsidiary that
provides retail and institutional brokerage services, financial advisory and
investment banking services in Puerto Rico. For the quarters ended March 31,
1999 and 1998, Doral Securities' net income was $210,000 and $358,000,
respectively. Results for the quarter ended March 31, 1999, reflect increased
personnel and rental expenses related to Doral Securities' continued growth.
Doral Financial is also in the process of organizing a new federal
savings association in the New York City metropolitan area, which it anticipates
will open for business during the third quarter of 1999.
Unlike most bank holding companies, Doral Financial has significant
assets and operations at the holding company level. HF Mortgage Bankers, one of
the Company's principal mortgage units, is organized as an operating division
within the parent company. As of March 31, 1999, Doral Financial had assets of
$1.6 billion at the parent company level.
11
<PAGE> 12
LOAN PRODUCTION
The following table sets forth the number and dollar amount of Doral
Financial's loan production for the periods indicated:
TABLE A
LOAN PRODUCTION
(DOLLARS IN THOUSANDS, EXCEPT FOR AVERAGE INITIAL LOAN BALANCE)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
FHA/VA mortgage loans
Number of loans ............................... 2,240 1,492
Volume of loans ............................... $181,375 $113,961
Percent of total volume ....................... 26% 29%
Conventional conforming mortgage loans(1)
Number of loans ............................... 3,635 986
Volume of loans ............................... $313,859 $ 92,700
Percent of total volume ....................... 45% 24%
Conventional non - conforming mortgage loans(2)(3)(4)
Number of loans ............................... 1,651 2,614
Volume of loans ............................... $139,348 $161,667
Percent of total volume ....................... 20% 42%
Other(5)
Number of loans ............................... 244 142
Volume of loans ............................... $ 67,678 $ 18,534
Percent of total volume ....................... 9% 5%
Total loans
Number of loans ............................... 7,770 5,234
Volume of loans ............................... $702,260 $386,862
Average initial loan balance ........................... $ 90,381 $ 73,913
</TABLE>
- --------------------
(1) Refers to mortgage loans that qualify for the sale or exchange programs
of FNMA or FHLMC.
(2) Refers to mortgage loans that do not qualify for the sale or exchange
programs of FNMA or FHLMC.
(3) Includes $2.7 million and $5.8 million in second mortgages for the
quarters ended March 31, 1999 and 1998, respectively.
(4) Includes $5.7 million and $8.8 million in home equity or personal loans
secured by real estate mortgages of up to $40,000 for the quarters
ended March 31, 1999 and 1998, respectively.
(5) Consists of construction loans on residential projects, mortgage loans
secured by multi-family and commercial properties as well as other
commercial, land, and consumer loans.
A substantial portion of Doral Financial's total mortgage loan
originations has consistently been comprised of refinance loans. For the
quarters ended March 31, 1999 and 1998, refinance loans represented
approximately 64% and 62%, respectively, of the total dollar volume of mortgage
loans originated (excluding loans purchased from third parties). Doral
Financial's future results could be adversely affected by a significant increase
in mortgage interest rates that reduces refinancing activity.
12
<PAGE> 13
LOAN ORIGINATION CHANNELS
In Puerto Rico, Doral Financial relies primarily on its extensive
retail mortgage banking and bank branch network to originate loans. It
supplements these originations by wholesale originations consisting primarily of
purchases of FHA and VA loans from other mortgage bankers and, to a lesser
extent, purchases of conventional conforming and non-conforming loans from other
mortgage bankers and originations through mortgage brokers. The Company, through
Doral Bank and other specialized units, also originates consumer, commercial,
construction and land loans. In 1998, Doral Financial established a new
wholesale residential mortgage operation in Chicago and a multi-family lending
unit in the New York metropolitan area. In Puerto Rico, the Company maintains a
specialized unit that works closely with home builders and originates mortgage
loans to finance the acquisition of homes in new residential projects.
Doral Bank is a party to a Master Loan Production Agreement with the
mortgage banking units of the Company, whereby these are obligated to assist
Doral Bank meet its stated mortgage loan 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 addition, Doral Bank engages in direct loan originations through
its branch network for other loan products such as consumer, land, and
commercial loans.
Doral Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
consumer, construction, land, and commercial loans originated by Doral Bank and
construction and land loans originated by other specialized units of Doral
Financial which are held for investment and classified as Loans Receivable. See
"Loans Receivable".
The following table sets forth the sources of Doral Financial's loan
production as a percentage of total loan originations for the periods indicated:
TABLE B
LOAN ORIGINATION SOURCES
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------------------------------
1999 1998(1)
------------------------------------ -------
PUERTO RICO US TOTAL
----------- -- ---------
<S> <C> <C> <C> <C>
Retail ................................. 49% -- 49% 65%
Wholesale .............................. 23% 11% 34% 21%
New Housing Developments ............... 7% -- 7% 9%
Multi-family ........................... --% 6% 6% --
Other(2) ............................... 4% --% 4% 5%
</TABLE>
- -----------------
(1) For the first quarter of 1998, originations from the mainland United
States represented less than 1% of total loan originations.
(2) Refers to commercial, construction, land, and consumer loans
originated through Doral Bank and other specialized units.
MORTGAGE LOAN SERVICING
Doral Financial's principal source of servicing rights has
traditionally been its mortgage loan production. However, during the first three
months of 1999 and 1998, Doral Financial purchased servicing rights to
approximately $72.9 million and $38.9 million, respectively, in principal amount
of mortgage loans. Doral Financial intends to continue growing its mortgage
servicing portfolio by internal loan originations and will continue to seek and
consider attractive opportunities for bulk purchases of servicing rights.
13
<PAGE> 14
The following table sets forth certain information regarding the total
mortgage loan servicing portfolio of Doral Financial for the periods indicated:
TABLE C
MORTGAGE LOAN SERVICING
(DOLLARS IN THOUSANDS, EXCEPT FOR AVERAGE SIZE OF LOANS PREPAID)
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END
GNMA ........................................ $2,373,492 $2,096,169
FHLMC/FNMA .................................. 1,795,626 965,675
Doral Financial grantor trusts .............. 135,875 187,894
Other conventional mortgage loans(1) ........ 2,261,201 1,560,075
---------- ----------
Total servicing portfolio ................... $6,566,194 $4,809,813
SERVICING PORTFOLIO ACTIVITY
Beginning servicing portfolio ............... $6,186,059 $4,655,135
ADD:
Loans funded and purchased(2) ...... 637,329 382,657
Bulk servicing acquired ............ 72,941 38,900
LESS:
Servicing sales transferred ........ -- 103,003
Run-off(3) ......................... 330,135 163,876
---------- ----------
Ending servicing portfolio .................. $6,566,194 $4,809,813
========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED
Number of loans ............................. 105,120 87,366
Weighted average interest rate .............. 7.95% 8.08%
Weighted average remaining maturity (months) 213 203
Weighted average servicing fee rate ......... .3934% .3347%
Average servicing portfolio ................. $6,084,915 $4,747,104
Principal prepayments ....................... $ 205,000 $ 115,500
Prepayments to average portfolio (annualized) 13% 10%
Average size of loans prepaid ............... $ 54,750 $ 45,047
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD END
60-89 days past due ......................... 1.19% 1.67%
90 days or more past due .................... 2.04% 2.30%
---------- ----------
Total delinquencies excluding foreclosures .. 3.23% 3.97%
========== ==========
Foreclosures pending ........................ 1.18% 1.25%
</TABLE>
- --------------------
(1) Includes $877 million and $503 million of loans owned by the Company at
March 31, 1999 and 1998, respectively, which represented 13% and 10% of
the total servicing portfolio as of such dates.
(2) Excludes approximately $64.9 million and $4.2 million of commercial,
construction and loans sold with servicing released not included in the
Company's mortgage servicing portfolio, as of March 31, 1999 and March
31, 1998, respectively..
(3) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
Substantially all of the mortgage loans in Doral Financial's servicing
portfolio are secured by single (one-to-four) family residences. Substantially
all of Doral Financial's mortgage servicing portfolio is composed of mortgages
secured by real estate located in Puerto Rico. At March 31, 1999 and 1998, less
than 6% and 1%,
14
<PAGE> 15
respectively, of Doral Financial's mortgage servicing portfolio was related to
mortgages secured by real property located outside Puerto Rico.
LOANS RECEIVABLE
Doral Financial, principally through Doral Bank, and, to a lesser
extent, through other specialized units, originates mortgage loans secured by
income producing residential and commercial properties, construction loans, land
loans and other commercial and consumer loans that are held for investment and
classified as loans receivable. Substantially all of Doral Financial's loans
receivable represent loans made to entities or individuals located in Puerto
Rico. The loans originated by the Company's multi-family lending operation in
the New York City metropolitan area are classified as loans held for sale.
The maximum aggregate amount of unsecured loans that Doral Bank could
make to a single borrower under Puerto Rico banking regulations as of March 31,
1999 was $6.4 million. As of such date the largest loan held for investment by
the Company was $4.6 million, which was held by Doral Bank.
The following table sets forth certain information regarding Doral
Financial's loans receivable as of the dates indicated:
TABLE D
LOANS RECEIVABLE, NET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998
-------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Construction loans $ 96,047 40% $ 72,081 33%
Residential mortgage loans 75,977 32% 80,902 37%
Commercial real estate 15,389 6% 16,443 8%
Consumer -- secured by mortgage 4,610 2% 5,005 2%
Consumer -- other 7,286 3% 6,290 3%
Commercial (non-real estate) 9,884 4% 11,051 5%
Loans on saving deposits 5,072 2% 3,676 2%
Land secured 24,596 10% 21,418 10%
-------- --- -------- ---
Gross loans receivable(1)(2) 238,861 100% 216,866 100%
-------- ---
Less:
Undisbursed portion of loans
in process (60,937) (47,575)
Unearned interest and deferred
loan fees (1,051) (648)
Allowance for loan losses(3) (1,800) (1,656)
-------- --------
(63,788) (49,879)
-------- --------
Loans receivable, net $175,073 $166,987
======== ========
</TABLE>
- -------------------
(1) Sum of the columns may not add up to the totals due to rounding.
(2) Does not include mortgage loans held for sale by Doral Financial of
$886.3 million as of March 31, 1999 and $883.0 million as of December
31, 1998.
(3) Does not include $3.6 million and $3.5 million of allowance for loan
losses allocated to mortgage loans held for sale as of March 31, 1999
and December 31, 1998, respectively.
15
<PAGE> 16
The following table sets forth certain information as of March 31,
1999, regarding the dollar amount of Doral Financial's loans receivable
portfolio based on the remaining contractual maturity. Expected maturities may
differ 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 E
LOANS RECEIVABLE BY
CONTRACTUAL MATURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE 5 OR MORE
DUE 1 YEAR DUE 1-5 YEARS AFTER YEARS AFTER
OR LESS MARCH 31, 1999 MARCH 31, 1999 TOTAL
---------- ------------------- -------------- --------
<S> <C> <C> <C> <C>
Construction loans ...................... $44,042 $52,005 $ -- $ 96,047
Residential mortgage loans .............. 8,081 2,518 65,378 75,977
Commercial real estate .................. 63 603 14,723 15,389
Consumer - secured by mortgage .......... -- 289 4,321 4,610
Consumer - other ........................ 2,072 5,214 -- 7,286
Commercial (non-real estate) ............ 3,924 5,144 816 9,884
Loans on saving deposits ................ 3,760 1,312 -- 5,072
Land secured ............................ 18,051 4,439 2,106 24,596
------- ------- ------- --------
Gross loans receivable ......... $79,993 $71,524 $87,344 $238,861
======= ======= ======= ========
</TABLE>
Scheduled contractual amortization of loans receivable does not reflect
the expected term of Doral Financial's loans receivable portfolio. The average
life of these loans is substantially less than their contractual terms because
of prepayments and, with respect to conventional mortgage loans, due-on-sale
clauses, which give Doral Financial the right to declare a conventional mortgage
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 current mortgage loan rates are lower than rates on
existing mortgage loans (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.
The following table sets forth the dollar amount of total loans
receivable at March 31, 1999, as shown in the preceding table, which have fixed
interest rates or which have floating or adjustable interest rates.
TABLE F
BREAKDOWN OF LOANS
RECEIVABLE BY FIXED AND
FLOATING RATES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE-RATE TOTAL
---------- --------------- --------
<S> <C> <C> <C>
Construction loans.................... $ 5,144 $ 90,903 $ 96,047
Residential mortgage loans............ 68,795 7,182 75,977
Commercial real estate................ 15,389 -- 15,389
Consumer - secured by mortgage........ 4,610 -- 4,610
Consumer - other...................... 6,768 518 7,286
Commercial (non-real estate).......... 1,263 8,621 9,884
Loans on saving deposits.............. 5,072 -- 5,072
Land secured.......................... 2,382 22,214 24,596
-------- -------- --------
Gross loans receivable....... $109,423 $129,438 $238,861
======== ======== ========
</TABLE>
16
<PAGE> 17
The Company originates adjustable and fixed interest rate loans.
However, given traditional consumer preferences in Puerto Rico for fixed rate
mortgage loans, the Company's principal product, Doral Financial does not
anticipate a significant growth in adjustable rate loans, except in the case of
construction and land loans, mortgage loans secured by commercial properties and
other commercial loans. At March 31, 1999 and December 31, 1998, approximately
54% and 48%, respectively, of the Company's gross loans receivable were
adjustable rate loans. Most of the adjustable rate loans held by the Company are
comprised of land loans and loans for construction development projects. 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 the Company pays on
the different funding sources used to finance these loans. Substantially all
construction, commercial and land loans held by the Company are adjustable rate
loans maturing within 36 months.
CREDIT RISKS RELATED TO LOAN ACTIVITIES
With respect to mortgage loans originated for sale as part of Doral
Financial's mortgage banking business, the Company is generally at risk for any
mortgage loan default from the time the Company originates the mortgage loan
until the time it sells the loan or packages it into a mortgage-backed security.
With respect to FHA loans, the Company is fully insured as to principal by the
FHA against foreclosure loss. VA loans are guaranteed up to 25% to 50% of the
principal amount of the loan subject to a maximum, ranging from $22,500 to
$50,750. Loan-to-value ratios for residential mortgage loans generally do not
exceed 80% (85% for qualifying home purchase transactions through Doral Bank)
unless private mortgage insurance is obtained.
Loans that do not qualify for the insurance or guarantee programs of
FHA and VA, or the sale or exchange programs of FNMA or FHLMC ("non-conforming
loans"), including loans secured by multi-family projects, are often sold to
investors on a partial or full recourse basis or with put back options. In such
cases, the Company retains part or all of the credit risk associated with such
loan after sale. As of March 31, 1999, the maximum amount of loans that the
Company would have been required to repurchase if all loans subject to recourse
defaulted or if investors exercised their put back options was $541.3 million.
As of March 31, 1999, the Company maintained a reserve of $1.4 million for
potential losses from such arrangements which is included in "Accrued expenses
and other liabilities" in the Company's Consolidated Financial Statements.
Loans secured by income producing residential and commercial properties
involve greater credit risk because they are larger in size and more risk is
concentrated in a single borrower. The properties securing these loans are also
more difficult to dispose of in foreclosure.
Doral Financial is also subject to credit risk with respect to its
portfolio of loans receivable. Loans receivable represent loans that the Company
holds for investment and, therefore, the Company is at risk for the term of the
loan. As of March 31, 1999, approximately 32% of Doral Financial's loans
receivable portfolio consisted of residential mortgage loans.
Doral Financial manages credit risk by maintaining sound underwriting
standards, monitoring the quality of the loan portfolio, assessing reserves and
loan concentrations, recruiting qualified credit officers, implementing and
monitoring lending policies and collateral requirements, and instituting
procedures to ensure appropriate actions to comply with laws and regulations.
The Company's collateral requirements for loans depend on the financial strength
of the borrower and the type of loan involved. Acceptable collateral principally
includes cash, deposit and investment accounts and real estate, and, to a lesser
extent, liens on accounts receivable, lease receivables, inventory and personal
property. In the case of non-conforming loans sold subject to recourse, the
Company also generally requires lower loan-to-value ratios to protect itself
from possible losses on foreclosure.
Because most of Doral Financial's loans are made to borrowers located
in Puerto Rico and secured by properties located in Puerto Rico, the Company is
subject to greater credit risks tied to adverse economic, political or business
developments and natural hazards, such as hurricanes, that may affect the
Island. For example, if Puerto Rico's
17
<PAGE> 18
real estate market were to experience an overall decline in property values, the
Company's rates of loss on foreclosure would probably increase.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets ("NPAs") consist of loans held for sale past due
90 days and still accruing, loans on a non-accrual basis and other real estate
owned. Doral Bank's policy (other than FHA/VA loans) 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 quarters ended March 31, 1999 and 1998, Doral Bank would have
recognized $379,000 and $241,000, respectively, in additional interest income
had all delinquent loans owned by Doral Bank been accounted for on an accrual
basis. Mortgage loans held for sale by Doral Financial's mortgage banking units
are not normally placed on a non-accrual basis following default. Doral
Financial believes that this policy is reasonable because these loans are
generally adequately secured by real estate and the amounts due on the loans are
generally recovered in foreclosure.
The following table sets forth information with respect to Doral
Financial's non-accrual loans, other real estate owned ("OREO") and other
non-performing assets as of the dates indicated. Doral Financial did not have
any troubled debt restructurings as of the end of either of the periods
presented.
18
<PAGE> 19
TABLE G
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
--------------- ------------------
1999 1998
--------------- ------------------
<S> <C> <C>
Mortgage Banking Business(1):
Loans held for sale past due 90 days
and still accruing(2) ...................................................... $44,613 $49,201
Other real estate owned ("OREO") .............................................. 2,801 2,987
Other non-performing assets(3) ................................................ 973 1,011
------- -------
Total NPAs of Mortgage Banking Business ....................................... 48,387 53,199
------- -------
Other Lending Activities through Doral Bank(4):
Non-accrual loans
Construction .............................................................. 183 183
Residential mortgage loans ................................................ 2,101 2,382
Commercial real estate .................................................... 677 770
Consumer .................................................................. 177 241
Commercial non-real estate ................................................ 95 95
Other ..................................................................... -- --
------- -------
Total non-accrual loans ....................................................... 3,233 3,671
OREO .......................................................................... -- --
------- -------
Total NPAs of Doral Bank ............................................. 3,233 3,671
------- -------
Total NPAs of Doral Financial (consolidated) .................................. $51,620 $56,870
======= =======
Total NPAs of Doral Bank as a percentage of
Doral Bank's loans receivable, net and OREO ................................ 2.60% 2.88%
Total NPAs of Doral Financial (consolidated) as a
percentage of consolidated total assets ................................... 1.64% 1.95%
Ratio of allowance for loan losses to
non-performing assets (consolidated) ....................................... 10.53% 9.08%
</TABLE>
- ---------------------
(1) Includes mortgage loans held for sale and OREO related to Doral
Financial's mortgage banking business.
(2) Does not include approximately $15,876,000 and $6,495,000 of 90 days
past due FHA/VA loans for the quarter and year ended March 31, 1999 and
December 31, 1998, respectively, which are not considered
non-performing assets by the Company because the principal balance of
these loans is insured or guaranteed under applicable FHA and VA
programs and interest is, in most cases, fully recovered in foreclosure
procedures.
(3) This amount refers to a mortgage loan to a real estate partnership to
which Doral Financial previously sold OREO. This loan is included in
"Receivables and mortgage servicing advances" in Doral Financial's
Consolidated Financial Statements.
(4) Includes mortgage loans and OREO of Doral Bank.
OREO arises primarily through foreclosure on mortgage loans repurchased
from investors, either because of breach of representations or warranties, or
pursuant to recourse arrangements. Doral Financial believes that the value of
the OREO reflected on its financial statements represents a reasonable estimate
of the properties' fair value, net of cost of disposition. During the past five
years, the impact of losses on loans repurchased as the result of breach of
representations or warranties or pursuant to recourse arrangements has not been
material.
19
<PAGE> 20
The following table summarizes certain information regarding Doral
Financial's allowance for loan losses and losses on OREO, for both the Company's
commercial banking and mortgage banking business for the periods indicated.
TABLE H
ALLOWANCE FOR LOAN
LOSSES AND OREO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
------ ------
<S> <C> <C>
OREO:
Balance at beginning of period $1,011 $ 676
Provision for losses 215 313
Losses charged to the allowance (430) (210)
------ ------
Balance at end of period $ 796 $ 779
====== ======
Allowance for Loan Losses(1):
Balance at beginning of period $5,166 $2,866
Provision for loan losses 295 218
------ ------
Charge - offs:
Mortgage loans held for sale (84) --
Construction -- --
Residential mortgage loans -- --
Commercial real estate -- --
Consumer (11) --
Commercial non-real estate -- --
Other (80) --
------ ------
Total Charge-offs (175) --
------ ------
Recoveries:
Mortgage loans held for sale 139 --
Construction -- --
Residential mortgage loans 6 --
Commercial real estate -- --
Consumer 4 23
Commercial non-real estate -- --
Other -- --
------ ------
Total recoveries 149 23
------ ------
Net charge offs (26) 23
------ ------
Other -- 1,468
------ ------
Balance at end of period $5,435 $4,575
====== ======
Allowance for loan losses as a percentage
of total loans outstanding 0.51% 0.71%
</TABLE>
- ---------------
(1) Relates to both mortgage loans held for sale and to loans receivable held
for investment.
20
<PAGE> 21
The following table sets forth information concerning the allocation
of Doral Financial's allowance for loan losses by loan category as of the dates
indicated:
TABLE I
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------------------------------
1999 1998
---- ----
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage loans held for sale $3,635 66.9% $3,142 68.7%
Loans receivable, net
Construction 724 13.3% 108 2.4%
Residential mortgage 573 10.5% 920 20.1%
Commercial real estate 116 2.1% 196 4.3%
Consumer - secured by
mortgage 35 0.7% 78 1.7%
Consumer - other 55 1.0% 34 0.7%
Commercial non-real estate 74 1.4% 41 0.9%
Loans on saving deposits 38 0.7% 38 0.8%
Land secured 185 3.4% 18 0.4%
------ ----- ------ -----
Total $5,435 100.0% $4,575 100.0%
====== ======
</TABLE>
The allowance for loan losses relating to loans held by Doral
Financial was $5.4 million at March 31, 1999, compared to $4.6 million as of
March 31, 1998. The increase in the allowance was primarily the result of the
increase in the size of the loan portfolio.
The percentage of the allowance for loan losses to non-performing
loans will not remain constant due to the nature of the Company's portfolio of
loans, which are primarily collateralized by real estate. The collateral for
each non-performing mortgage loan is analyzed to determine potential loss
exposure, and, in conjunction with other factors, this loss exposure contributes
to the overall assessment of the adequacy of the allowance for loan losses. On
an on-going basis, management monitors the loan portfolio and evaluates the
adequacy of the allowance for loan losses. In determining the adequacy of the
allowance for loan losses, management considers such factors as historical loan
loss experience, known problem loans, evaluations made by bank regulatory
authorities, assessment of economic conditions, and other appropriate data to
identify the risks in the loan portfolio. Loans deemed by management to be
uncollectible are charged to the allowance for loan losses. Recoveries on loans
previously charged off are credited to the allowance. Provisions for loan losses
are charged to expense and credited to the allowance in amounts deemed
appropriate by 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 Doral Financial in determining the allowance for loan losses.
INVESTMENT ACTIVITIES
As a result of Doral Financial's mortgage securitization activities,
the Company maintains a substantial portfolio of mortgage-backed securities held
for trading. At March 31, 1999, Doral Financial held securities for trading with
a fair market value of $646.9 million, approximately $495.5 million of which
consisted of Puerto Rico tax-exempt
21
<PAGE> 22
GNMA securities and other securities, the interest on which is tax-exempt to the
Company. These tax-exempt securities are generally held by Doral Financial 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 Doral Financial's Consolidated Financial Statements at their fair
market value with resulting gains or losses included as part of trading account
profit.
As part of its strategy to maximize net interest income, Doral
Financial also invests in securities that are classified as available for sale
or held to maturity. As of March 31, 1999, Doral Financial held $617.2 million
of investment securities that were classified as available for sale and reported
at fair value, with unrealized gains or losses included in stockholders' equity
and reported as "Accumulated other comprehensive income, net of taxes," in Doral
Financial's Consolidated Financial Statements. As of March 31, 1999, Doral
Financial also held approximately $185.4 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.
The following tables summarizes Doral Financial's holdings of
securities held for trading as of March 31, 1999.
TABLE J-1
SECURITIES HELD FOR TRADING
(IN THOUSANDS)
<TABLE>
<CAPTION>
HELD
FOR
TRADING
-------
<S> <C>
Mortgage-backed securities................................................. $601,248
Interest only strips....................................................... 41,642
U.S. Treasury and agencies................................................. 202
Puerto Rico government obligations......................................... -
Other...................................................................... 3,809
--------
Total.......................................................... $646,901
========
</TABLE>
The following table summarizes amortized costs, unrealized holding
gains and losses, approximate market values, weighted average yields and
contractual maturities of available for sale securities as of March 31, 1999.
Expected maturities of certain debt securities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
TABLE J-2 WEIGHTED
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
(IN THOUSANDS) COST GAINS LOSSES VALUE YIELD
---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Debt securities
Fed Farm Credit Notes (Maturing from 1 month to 10 Years) $ 14,928 $0 $ 54 $ 14,874 5.73%
FHLB Notes (maturing from 1 month to 15 years) 488,576 0 9,081 479,495 6.65%
US Treasury Notes and Bonds (Maturing from 1 month
to 30 years) 124,247 0 1,383 122,864 5.34%
-------- -- ------- -------- ----
$627,751 $0 $10,518 $617,233 6.37%
======== == ======= ======== ====
</TABLE>
22
<PAGE> 23
The following table summarizes amortized costs, unrealized holding
gains and losses, approximate market values, weighted average yields and
contractual maturities of held to maturity securities as of March 31, 1999.
Expected maturities of certain mortgage-backed and debt securities
might differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayments penalties.
<TABLE>
<CAPTION>
TABLE J-3 WEIGHTED
SECURITIES HELD TO MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
(IN THOUSANDS) COST GAINS LOSSES VALUE YIELD
---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities
Tax exempt GNMA
(maturing from 10 years
to 29 years) $ 30,350 $1,037 $0 $ 31,387 6.84%
Tax exempt CMO (maturing
from 6 years to 28 years) 150,076 965 2 151,039 5.98%
Debt securities
Tax exempt PRHB Notes (maturing
within 25 years) 5,000 0 0 5,000 6.20%
-------- ------ -- -------- ----
$185,426 $2,002 $2 $187,426 6.15%
======== ====== == ======== ====
</TABLE>
BROKER-DEALER ACTIVITIES
Doral Financial is involved in the securities business through Doral
Securities, a broker-dealer firm that provides retail and institutional
brokerage, investment banking, and financial advisory services in Puerto Rico.
The table below shows certain financial information for Doral Securities for
the quarters ended March 31, 1999 and 1998.
TABLE K
FINANCIAL INFORMATION OF DORAL SECURITIES
BROKER DEALER SUBSIDIARY
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
------ ------
<S> <C> <C>
Selected Income Statement Data:
Trading account profit $ 927 $ 756
Net interest income 655 305
Investment banking and other fees 93 133
Commissions 220 201
------ ------
Total revenues, net of interest expense $1,895 $1,395
====== ======
</TABLE>
23
<PAGE> 24
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998.
GENERAL
Doral Financial's results of operations are primarily influenced by:
(i) the direction of interest rates; (ii) the level of demand for mortgage
credit; (iii) the strength of the economy in Puerto Rico; and (iv) the
relationship between interest rates and the cost of funds.
The principal components of Doral Financial's revenues are: (i) net
interest income; (ii) net gains on mortgage loan sales; (iii) servicing income;
(iv) trading account profit; (v) gain on sale of investment securities; (vi)
gain on sale of servicing assets; and (vii) commissions, fees and other income.
TABLE L
REVENUE SOURCES OF DORAL FINANCIAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income................................. $41,738 $31,044
Interest expense................................ 31,876 23,202
------- -------
Net interest income............................. 9,862 7,842
Net gain on mortgage loan sales................. 16,234 5,333
Servicing income................................ 7,213 4,721
Trading account profit.......................... 5,530 2,546
Gain on sale of investment securities........... - 1,515
Gain on sale of servicing assets................ - 1,829
Commissions, fees and other income.............. 815 526
</TABLE>
NET INCOME
Doral Financial's net income for the quarter ended March 31, 1999
increased to $15.7 million, compared to $11.1 million for the same period of
1998. Consolidated results include the operations of Doral Bank, the Company's
commercial banking unit, which contributed approximately $2.7 million to Doral
Financial's consolidated net income during the first quarter of 1999, compared
to $1.7 million for the corresponding 1998 period, and Doral Securities, the
Company's broker dealer unit, which contributed $210,000 and $358,000 to
consolidated net income for the quarters ended March 31, 1999 and 1998,
respectively.
NET INTEREST INCOME
Net interest income is the excess of interest earned by the Company on
its interest earning assets over the interest incurred on its interest bearing
liabilities.
The increase in net interest income for the first three months of 1999,
as compared to the respective 1998 period, was principally due to an increase in
Doral Financial's average interest earning assets. Doral Bank contributed
approximately $5.1 million or 52% of the consolidated net interest income of
Doral Financial for the quarter ended March 31, 1999, compared to $2.9 million
or 37% of consolidated net interest income for the quarter ended March 31, 1998.
Average interest earning assets grew by 48% from March 31, 1998 to
March 31, 1999, while net interest income grew by 26% during the same period.
The smaller growth in net interest income relative to the growth in average
earning assets reflects a decrease in net interest earning assets, which was due
in part to the incurrence of
24
<PAGE> 25
borrowings to finance the Company's servicing assets whose income is not
reflected as interest received on interest earning assets.
The following table presents, for the periods indicated, the Company's
average balance sheet, the total dollar amount of interest from average
interest-earning assets and the related 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 Doral
Financial and its non-banking subsidiaries, and average daily balances for Doral
Bank, in each case during the periods presented.
TABLE M
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Total Loans(1) $ 997,604 $18,201 7.30% $ 497,413 $10,586 8.51%
Mortgage-Backed Securities 784,484 12,496 6.37% 742,152 12,155 6.55%
Investment Securities 477,029 7,540 6.32% 393,917 7,219 7.33%
Other Interest-Earning Assets(2) 282,170 3,501 4.96% 80,649 1,084 5.38%
---------- ------- ------ ---------- ------- ------
Total Interest Earning Assets/Interest
Income 2,541,287 $41,738 6.57% 1,714,131 $31,044 7.24%
========== ======= ====== ========== ======= ======
Total Non-Interest Earning Assets 399,262 308,460
---------- ----------
Total Assets $2,940,549 $2,022,591
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Liabilities:
Loans Payable $ 393,867 $ 5,793 5.88% $ 307,734 $ 5,426 7.05%
Repurchase Agreements 1,169,487 15,010 5.13% 775,576 11,273 5.81%
Deposits 595,990 6,652 4.46% 317,552 3,597 4.53%
Other Borrowed Funds(3) 246,833 4,421 7.16% 160,554 2,906 7.24%
---------- ------- ------ ---------- ------- ------
Total Interest Bearing Liabilities/Interest
Expense 2,406,176 $31,876 5.30% 1,561,416 $23,202 5.94%
======= ====== ========== ======= ======
Total Non-Interest Bearing Liabilities 218,634 249,455
---------- ----------
Total Liabilities 2,624,810 1,810,871
Stockholders' Equity 315,739 211,720
---------- ----------
Total Liabilities and Stockholders' Equity $2,940,549 $2,022,591
========== ==========
Net Interest Earning Assets $ 135,111 $ 152,715
Net Interest Income on a Non-Taxable Equivalent Basis $ 9,862 $ 7,842
Interest Rate Spread(4) 1.27% 1.30%
Interest Rate Margin(4) 1.55% 1.83%
Net Interest-Earning Assets Ratio 105.62% 109.78%
</TABLE>
- ----------
(1) Average loan balances include the average balance of non-accruing
loans, on which no interest income is recognized.
(2) Consist of money market instruments, reverse repurchase agreements and
deposits in other banks.
(3) Consist of FHLB-NY advances, notes payable and convertible subordinated
debentures.
(4) Interest rate spread represents the difference between Doral
Financial's weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities. Interest rate
margin represents net interest income as a percentage of average
interest earning assets.
The following table describes the extent to which changes in interest
rates and changes in volume of interest rates on interest earning assets and
interest bearing liabilities have affected Doral Financial'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 current year volume), and (iii) total change in rate and volume.
25
<PAGE> 26
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 N
NET INTEREST INCOME ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
--------------------------------------
1999 COMPARED TO 1998
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
------ ---- -----
<S> <C> <C> <C>
INTEREST EARNING ASSETS
TOTAL LOANS $42,580 ($12,121) $30,459
MORTGAGE-BACKED SECURITIES 2,773 (1,409) 1,364
INVESTMENT SECURITIES 6,093 (4,809) 1,284
OTHER INTEREST EARNING ASSETS 10,835 (1,165) 9,670
------- -------- -------
TOTAL INTEREST EARNING ASSETS 62,281 (19,504) 42,777
------- -------- -------
INTEREST BEARING LIABILITIES
LOANS PAYABLE 6,075 (4,608) 1,467
REPURCHASE AGREEMENTS 22,902 (7,956) 14,946
DEPOSITS 12,616 (397) 12,219
OTHER BORROWED FUNDS 6,246 (187) 6,059
------- -------- -------
TOTAL INTEREST BEARING LIABILITIES 47,839 (13,148) 34,691
------- -------- -------
NET INTEREST EARNING ASSETS $14,442 ($ 6,356) $ 8,066
======= ======== =======
</TABLE>
INTEREST INCOME
Total interest income increased from approximately $31.0 million during
the first quarter of 1998, to $41.7 million during the first quarter of 1999.
The increase in interest income is primarily related to the increase in Doral
Financial's total average interest earning assets, which increased by
approximately $827.2 million compared to the first quarter of 1998.
Interest income on loans increased by $7.6 million or 72% during the
first three months of 1999, as compared to the respective 1998 period. The
increase during 1999 reflected an increase in the level of loans held by Doral
Financial as compared to 1998, due to the increased volume of loan originations.
Interest income on mortgage-backed securities increased by $341,000 or
3% for the quarter ended March 31, 1999, as compared to the quarter ended March
31, 1998. The increase during this period reflected an increase in the average
balance of mortgage-backed securities, which increased from $742.2 million
during 1998 to $784.5 million during 1999. The increase in mortgage-backed
securities reflected the strategy of Doral Financial to hold tax exempt
securities for longer periods prior to sale in order to maximize tax exempt
interest income on such securities.
Interest income on investment securities increased by $321,000. The
increase reflects the increase in the average balance of investment securities
held during the period. The average balance of investment securities was $477.0
million for the quarter ended March 31, 1999, as compared to $393.9 million for
the respective 1998 period.
Interest income on other interest earning assets increased by $2.4
million or 223% from March 31, 1998 to March 31, 1999. Other interest-earning
assets consist primarily of money market instruments, overnight deposits, term
deposits, and reverse repurchase agreements. The increase from 1998 to 1999 was
due primarily to higher liquidity 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 Financial's strategy to
diversify its sources of interest income by entering into new business segments,
such as commercial banking and broker-dealer services.
26
<PAGE> 27
INTEREST EXPENSE
Total interest expense increased to $31.9 million during the first
quarter of 1999, compared to $23.2 million for the respective 1998 period, an
increase of 37%. The increase in interest expense for the 1999 period was due
primarily to the increase in the average amount of interest-bearing liabilities
used to fund the increase in interest earning assets. Average interest bearing
liabilities increased to $2.4 billion at an average cost of 5.30% for the
quarter ended March 31, 1999, compared to $1.6 billion at an average cost of
5.94% for the corresponding period of 1998.
Interest expense related to loans payable increased by $367,000 or 7%
during the first three months of 1999 as compared to the same period of 1998.
The increase during such period was due to the increase in borrowings used to
fund the increase in loan production. The weighted-average interest rate cost
for borrowings under Doral Financial's warehouse lines of credit was 5.88% and
7.05% for the quarters ended March 31, 1999 and 1998, respectively.
Interest expense related to securities sold under agreements to
repurchase increased by $3.7 million or 33% during the first quarter of 1999 as
compared to the same period of 1998. The increase during the 1999 period
reflected increased borrowings to finance mortgage-backed securities and other
investment securities. The weighted average interest rate of borrowings under
repurchase agreements was 5.13% and 5.81% for the quarters ended March 31, 1999
and 1998, respectively.
Interest expense on deposits increased by $3.1 million or 85%. The
increase in interest expense on deposits reflects the increase in deposits held
at Doral Bank to $649.4 million at March 31, 1999, from $328.4 million as of
March 31, 1998. The growth in deposits reflects the opening of additional
branches by Doral Bank, which currently operates twelve branches, and the
offering of competitive rates. Doral Bank intends to continue its branch
expansion program throughout the rest of 1999. Doral Bank's average interest
cost of deposits was 4.46% and 4.53% for the quarters ended March 31, 1999 and
1998, respectively.
Interest expense on other borrowed funds increased by $1.5 million or
52% for the first three months of 1999 as compared to the respective 1998
period. Interest expense on other borrowed funds includes various term notes
issued by Doral Bank, Doral Financial's $75 million senior notes due October 10,
2006, and Doral Bank's advances from the FHLB-NY, as well as various other
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses relates to loans held by Doral Financial.
The provision is charged to earnings to bring the total allowance for loan
losses to a level considered appropriate by management based on Doral
Financial'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 Doral Financial in determining the
allowance for loan losses.
Doral Financial made provisions to its allowance for loan losses of
$295,000 and $218,000 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in the provision was primarily as a result of the
increase in the size of Doral Financial's loan portfolio and an increase in the
amount of construction loans and commercial mortgage loans for which Doral
Financial provides a higher allowance for loan losses.
NON-INTEREST INCOME
Net Gains on Mortgage Loan Sales. Net gains from mortgage loan sales
increased by 204% during the first quarter of 1999 as compared to the same
period of 1998 . The increase during the first three months of 1999 was the
result of increased volume of loan production and the ability of the Company to
obtain higher profitability on sales of various
27
<PAGE> 28
loan products, including the creation of interest only strips ("IOs") in
connection with bulk sales of mortgage loans to corporate investors. See
"Amortization of IOs and Servicing Assets."
Servicing Income. Servicing income represents revenues earned for
administering mortgage loans. Loan servicing fees depend on the type of mortgage
loan being serviced and for residential mortgage loans range from 0.25% to 0.50%
of the declining outstanding principal amount of the serviced loan. The size of
Doral Financial's loan servicing portfolio and the amount of its servicing fees
have increased substantially since its inception as a result of increases in
loan originations and bulk purchases of servicing rights. During the first three
months of 1999 and 1998, the Company purchased servicing rights to approximately
$72.9 million and $38.9 million, respectively, of mortgages through bulk
purchases. Doral Financial 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 income increased 53% from the first quarter of 1998 to the
same period of 1999. The increase in the amount of loan servicing income for the
1999 first quarter was primarily due to the increase in the principal amount of
loans serviced as compared to the 1998 period. The mortgage servicing portfolio
was approximately $6.6 billion at March 31, 1999, compared to $4.8 billion as of
March 31, 1998. At March 31, 1999, less than 6% of Doral Financial's servicing
portfolio was related to mortgages originated outside Puerto Rico.
The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $205 million and $115.5 million for the quarters ended March 31,
1999 and 1998, respectively. This represented approximately 13% and 10% on an
annualized basis, respectively, of the average principal amount of mortgage
loans serviced during such periods. The primary means used by Doral Financial 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.
Trading Account Profit. Trading account profit includes any unrealized
gains or losses in the market value of its securities held for trading. Trading
account activities for the quarter ended March 31, 1999, resulted in gains of
$5.5 million, compared to gains of $2.5 million during the respective 1998
period, including $1.0 million, and $1.7 million, respectively, of unrealized
gains on the value of its securities held for trading pursuant to SFAS No. 115.
For the quarters ended March 31,1999 and 1998, trading account profit
included gains on options and futures contracts used for interest rate
management purposes in the amount of $3.6 million and $1.8 million,
respectively, including unrealized gains or losses charged to operations as a
result of mark to market adjustments.
Gain on Sale of Investment Securities. Gain on sale of investment
securities represents the impact on income of transactions involving the sale of
securities available for sale. During the first three months of 1999, the
Company had no transactions involving the sale of securities available for sale,
while during the same 1998 period Doral Financial engaged in sales of such
securities which resulted in gains of $1.5 million.
Gain on Sale of Servicing Assets. During the first quarter of 1998,
Doral Financial sold servicing rights to $103 million of mortgage loans,
realizing pretax gains of approximately $1.8 million during such period. No such
sales were made during the corresponding 1999 period. While Doral Financial's
strategy is to continue to increase the size of its servicing portfolio by
retaining the servicing rights on the mortgage loans it originates, the Company
may sell servicing rights in the future when market conditions are favorable.
Commissions, Fees and Other Income. Other non-interest income,
commissions and fees increased 55% during the first quarter of 1999 as compared
to the same 1998 period. The increase during the 1999 period was due primarily
to increased commissions and fees earned by Doral Bank and Doral Securities.
28
<PAGE> 29
AMORTIZATION OF IOS AND SERVICING ASSETS
Doral Financial creates IOs (previously classified as excess servicing
fees receivable) as a result of the sale of loans in bulk or securitization
transactions. IOs are created on the sale of loans with servicing retained, 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 normal 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 IOs 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 "Net Gains on Mortgage Loan Sales" on Doral Financial's
Consolidated Statements of Income. Sales of mortgage loans made during the first
three months of 1999 resulted in the recording of approximately $10.6 million of
IOs, compared to $5.8 million for the corresponding 1998 period. The unamortized
balance of the IOs is reflected in Doral Financial's Consolidated Statement of
Condition as a component of "Securities held for trading."
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 IOs. Amortization of such IOs for each of the
quarters ended March 31, 1999 and 1998, was approximately $1.7 million, and $1.0
million, respectively.
Beginning with the second quarter of 1995, following the implementation
by Doral Financial of SFAS No. 122 (later superseded by SFAS No. 125), whenever
Doral Financial 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 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 the loan and is
recorded as a component of "Net Gains on Mortgage Loan Sales" on Doral
Financial's Consolidated Statement of Income. During the quarters ended March
31, 1999 and 1998, Doral Financial capitalized $9.3 million and $6.1 million,
respectively, in servicing assets. The increase in the creation of servicing
assets reflects increased mortgage loan production during such periods and bulk
purchases of servicing rights. The unamortized balance of the servicing asset is
reflected on the Consolidated Statements of Condition of Doral Financial.
Doral Financial'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 "Non-interest expense-Amortization of Servicing
Assets" in Doral Financial's Consolidated Statements of Income and Retained
Earnings. During the first quarter of 1999, total amortization of servicing
assets amounted to $2.7 million versus $1.4 million for the respective 1998
period.
The following table shows the increase in the Company's mortgage
servicing assets for each of the periods shown:
TABLE O
CAPITALIZATION OF MORTGAGE SERVICING ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period.................................................. $72,568 $46,416
Capitalization of rights........................................................ 7,238 3,606
Rights sold - (54)
Rights purchased................................................................ 2,084 2,500
Amortization:
Scheduled................................................................... (2,715) (1,403)
Unscheduled................................................................. - -
------- -------
Balance at end of period $79,175 $51,065
======= =======
</TABLE>
29
<PAGE> 30
Increases in prepayment rates or credit loss rates over anticipated
levels used in calculating the value of IOs and servicing assets can adversely
affect Doral Financial's revenues and liquidity by increasing the amortization
rates for servicing assets and IOs, as well as requiring Doral Financial to
recognize an impairment against income over and above scheduled amortization.
See "Interest Rate Management." The portion of Doral Financial's mortgage
servicing portfolio consisting of the servicing asset that was originated by
Doral Financial prior to the adoption of SFAS No. 122 is not reflected as an
asset on Doral Financial's Consolidated Financial Statements, and is not subject
to amortization or impairment.
NON-INTEREST EXPENSE
Total non-interest expense increased by 87% during the three months
ended March 31, 1999, as compared to the respective 1998 period, reflecting the
expansion of the Company's loan origination capacity and banking and
broker-dealer operations, the resulting increase in employees and management,
investment in technology, and the increased costs associated with the
substantial growth of the servicing portfolio. During the first three months of
1999, the Company opened two mortgage offices in Puerto Rico, one commercial
bank branch and one broker-dealer office. The increase in expenses also
reflected the Company's recent expansion into the mainland United States through
the opening of a wholesale residential mortgage and a multifamily lending
operation.
PUERTO RICO INCOME TAXES
The Puerto Rico maximum statutory corporate income tax rate is 39%. For
the first quarters of 1999 and 1998, the effective income tax rate of Doral
Financial was 12.0% and 11.9%, respectively.
The lower effective tax rates (as compared to the maximum statutory
rate) experienced by the Company reflect the fact that the portion of the net
interest income derived from certain FHA and VA mortgage loans secured by
properties located in Puerto Rico and on GNMA securities backed by such mortgage
loans is exempt from income tax under Puerto Rico law. The Company also invests
in U.S. Treasury and agency securities that are exempt from Puerto Rico income
taxation.
Effective August 1, 1997, the Puerto Rico Internal Revenue Code was
amended to limit tax exemption to those FHA and VA loans and GNMA securities
backed by such loans that are used to finance the original acquisition of newly
constructed homes.
LIQUIDITY AND CAPITAL RESOURCES
Doral Financial has an ongoing need for capital to finance its lending
and investing activities. This need is expected to increase as the volume of the
loan originations increases. Doral Financial'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.
Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA, and agreements with certain other investors, require Doral
Financial to advance funds to make scheduled payments of principal, interest,
taxes and insurance, if such payments have not been received from the borrowers.
The Company generally recovers funds advanced pursuant to these arrangements
within 30 days. During the quarter ended March 31, 1999, the monthly average
amount of funds advanced by Doral Financial under such servicing agreements was
approximately $7.6 million.
Doral Financial's primary sources of liquidity are sales in the
secondary mortgage market of the loans it originates and purchases, short term
borrowings under warehouse, gestation and repurchase agreement lines of credit
secured by pledges of its loans and mortgage-backed securities (in most cases
until such loans are sold and the lenders repaid) and revenues from operations.
In the past, Doral Financial has also relied on privately-placed and publicly
offered debt financing and public offerings of preferred and common stock. Doral
Financial's bank subsidiary also relies on deposits, borrowings from the FHLB-NY
as well as term notes backed by letters of credit of the FHLB-NY.
30
<PAGE> 31
The following table shows Doral Financial's sources of borrowings and
the related average interest rate as of March 31, 1999 and December 31, 1998:
TABLE P
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1998
-------------------- -----------------------
AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Repurchase Agreements.......................... $1,253,051 4.88% $1,197,328 5.26%
Loans Payable.................................. 392,949 6.00% 426,704 6.69%
Deposits....................................... 649,378 4.86% 533,113 4.30%
Notes Payable.................................. 199,462 7.11% 199,733 7.03%
Advances from FHLB............................. 55,500 5.76% 32,000 6.34%
</TABLE>
Doral Financial 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 mortgage market. It borrows money under
warehousing lines of credit to fund its mortgage loan originations and repays
the borrowing as the mortgages are sold or securitized. The warehousing lines of
credit then become available for additional borrowings. Included among Doral
Financial'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. Some of Doral Financial's warehousing lines of
credit are subject to termination at the discretion of the lender.
Doral Financial is also dependent on the use of repurchase agreements
lines of credit. Under these agreements, the Company sells GNMA, FNMA or
FHLMC-guaranteed mortgage-backed securities, collateralized mortgage obligations
or other investment securities and simultaneously agrees to repurchase them at a
future date at a fixed price. Doral Financial 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 cost of funds under repurchase agreements is typically lower than the
cost of funds borrowed under Doral Financial's warehousing lines of credit. The
Company'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.
As of March 31, 1999, Doral Financial had warehousing, gestation and
repurchase lines of credit with an aggregate amount of available credit of $3.3
billion, of which $392.9 million was outstanding under warehousing lines of
credit and $1.3 billion was outstanding under repurchase lines of credit.
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 March 31, 1999, Doral Bank held
approximately $649.4 million in deposits (excluding $4.6 million in deposits
from affiliates that are eliminated in the preparation of Doral Financial's
Consolidated Financial Statements) at a weighted-average interest rate of 4.86%.
31
<PAGE> 32
The following table presents the average balance and the average rate
paid on each deposit type of Doral Bank for the period indicated.
TABLE Q
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
Certificates of deposit........................ $346,295 6.03% $232,702 5.77%
Regular passbook savings....................... 49,325 4.69% 29,054 4.74%
Now accounts................................... 72,555 4.71% 36,075 5.06%
Non-interest bearing........................... 127,815 - 95,726 -
-------- ---- -------- ----
Total deposits............................. $595,990 4.46% $393,557 4.40%
======== ==== ======== ====
</TABLE>
The following table sets forth the maturities of Doral Bank's certificates
of deposit having principal amounts of $100,000 or more at March 31, 1999.
TABLE R
DEPOSIT MATURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Certificate of deposit maturing
Three months or less................................................ $ 46,174
Over three through six months....................................... 22,655
Over six through twelve months...................................... 45,565
Over twelve months.................................................. 115,425
--------
Total............................................................... $229,819
========
</TABLE>
As of March 31, 1999 and December 31, 1998, Doral Bank had
approximately $111.6 million and $96.8 million, respectively, in brokered
deposits obtained through broker-dealers. Doral Bank uses such deposits as a
source of long-term funds.
Doral Bank, as a member of FHLB-NY, has access to collateralized
borrowings from the FHLB-NY up to a maximum of 30% of its total assets. Advances
and reimbursement obligations with respect to letters of credit must be secured
by qualifying assets with a market value of 110% of the advances or
reimbursement obligations. At March 31, 1999, Doral Bank had $55.5 million in
outstanding advances from the FHLB-NY at a weighted average interest rate cost
of 5.76%. In addition, as of March 31, 1999, Doral Bank had $53.1 million
outstanding in term notes secured by FHLB-NY letters of credit at an average
interest rate cost of 6.50%. 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.
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<PAGE> 33
REGULATORY CAPITAL RATIOS
As of March 31, 1999, Doral Financial 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 4%). Set forth
below are Doral Financial's and Doral Bank's regulatory capital ratios as of
March 31, 1999, based on existing Federal Reserve and FDIC guidelines.
TABLE S
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
DORAL DORAL
FINANCIAL BANK
--------- ----
<S> <C> <C>
Tier 1 Capital Ratio (Tier 1 capital to
risk weighted assets).................................... 21.9% 15.2%
Total Capital (total capital to risk
weighted assets)......................................... 22.2% 15.6%
Leverage Ratio (Tier 1 capital to
average assets).......................................... 11.9% 8.6%
</TABLE>
As of March 31, 1999, 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%, a 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 February 22, 1999, Doral Financial completed the sale of 1,495,000
shares of its 7% Noncumulative Monthly Income Preferred Stock at a price to the
public of $50.00 per share, resulting in net proceeds to the Company of
approximately $72.1 million, after deducting related expenses of the offering.
On April 14, 1999, the Company filed a registration statement which
was declared effective by the Securities and Exchange Commission on May 7,
1999, pursuant to which the Company may sell from time to time up to $250
million in unsecured debt securities and preferred stock of the Company.
Doral Financial expects that it will continue to have adequate
liquidity, financing arrangements and capital resources to finance its
operations. Doral Financial 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 Doral Financial will
be successful in consummating any such transactions.
ASSETS AND LIABILITIES
At March 31, 1999, Doral Financial's total assets were $3.1 billion
compared to $2.9 billion at December 31, 1998. The increase in assets was due
primarily to a net increase in the securities portfolio of $245.0 million. Total
liabilities were $2.8 billion at March 31, 1999, compared to $2.6 billion at
December 31, 1998. The increase in liabilities was largely the result of an
increase in securities sold under agreements to repurchase, deposit accounts at
Doral Bank, and FHLB-NY advances. At March 31, 1999, deposit accounts totaled
$649.4 million, compared to $533.1 million at December 31, 1998. As of March 31,
1999, Doral Bank had $1.0 billion in assets, compared to $805 million at
December 31, 1998.
INTEREST RATE MANAGEMENT
General. Changes in interest rates can affect the volume of mortgage
loan originations, the net interest income earned on the Company's portfolio of
loans and mortgage-backed securities, the amount of gain on sale of loans, and
the value of Doral Financial's loan servicing portfolio and securities holdings.
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<PAGE> 34
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 Doral Financial's total mortgage loan
originations has consistently been comprised of refinance loans. For the
quarters ended March 31, 1999 and 1998, refinance loans represented
approximately 64% and 62%, respectively, of Doral Financial's total dollar
volume of mortgage loans originated (excluding purchases from third parties). As
a result, higher interest rates may adversely affect the volume of loan
originations and income related to mortgage loan sales. Although Doral Financial
has increased home purchase originations, a significant future increase in
mortgage interest rates in Puerto Rico would adversely affect Doral Financial's
business if it results in a significant decrease in refinancing of mortgage
loans.
If long-term interest rates increase between the time Doral Financial
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,
Doral Financial may realize a reduced gain or loss on such sale. The Company
does not generally hedge conventional loans in the pipeline or in the process of
origination because Doral Financial does not generally permit customers to
lock-in an interest rate prior to closing. Instead, the interest rates on these
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, Doral Financial seeks to sell or to obtain commitments for the sale
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 Doral Financial does engage in
offerings of mortgage products which lock-in the interest rate until the closing
date, it attempts to enter into forward commitments to sell such loans at the
time it fixes the rates for the loans.
Non-conforming conventional loans are normally sold in bulk to local
financial institutions. The sale of non-conforming conventional loans normally
takes longer than the sale of conforming mortgage loans. Accordingly, Doral
Financial attempts to manage this market risk through the purchase of listed
options on U.S. Treasury futures contracts, 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.
Options are contracts that grant the purchaser the right to buy or sell the
underlying asset by a certain date for a specified price. 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.
In the case of Puerto Rico tax exempt GNMA securities, which Doral
Financial normally holds for longer periods, prices tend to be more stable than
for U.S. taxable GNMA securities because their tax exempt status under Puerto
Rico law makes them more attractive to retail investors. This relative stability
of prices for Puerto Rico GNMA securities allows Doral Financial to carry out a
less aggressive hedging strategy to attempt to protect the value of these assets
than what might otherwise be required. Doral Financial seeks to protect itself
from the market 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.
With respect to GNMA securities that are originated by Doral Financial
and no longer qualify for Puerto Rico tax exemption, Doral Financial implements
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.
Declines in interest rates can adversely affect Doral Financial'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 Doral Financial's servicing income by decreasing the size of Doral
Financial's servicing portfolio. To date, Doral Financial has not used synthetic
hedge devices to protect its servicing income or the value of its servicing
assets or IOs from the risks presented by interest rate fluctuations. The
primary means used by Doral Financial to reduce the sensitivity of the Company's
servicing income and the value of its servicing asset due to a possible
reduction of its servicing portfolio has been the development of a strong retail
34
<PAGE> 35
origination network that has allowed Doral Financial to increase or maintain the
size of its servicing portfolio even during periods of high prepayments, such as
those experienced during 1993, 1998 and, during the first quarter of 1999.
The net interest income of Doral Financial is also subject to interest
rate risk because its interest earning assets and interest bearing liabilities
reprice at different times and at varying amounts. Most of Doral Financial's
interest earning assets, including its mortgage loans and mortgage-backed
securities, are fixed rate interest earning assets that are not subject to
repricing (except for the replacement of assets through repayments, sales and
new originations) while the short-term borrowings used to finance these
positions normally reprice on a periodic basis (e.g., daily, monthly or
quarterly). Doral Financial manages the risk to its net interest income through
a combination of the internal management of the composition of its assets and
liabilities and through the use of hedging instruments. Internal asset/liability
management policies include the attraction of longer term funds through the use
of long-term repurchase agreements and other borrowings such as senior notes,
term notes, and FHLB-NY advances. The Company also attempts to obtain long-term
deposits, including brokered certificates of deposit.
In addition to the use of the internal asset-liability management
policies discussed above, Doral Financial 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-earning assets with longer
maturities. An interest rate swap is an agreement where one party (in this case,
Doral Financial) 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 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 March 31, 1999, Doral
Financial, through Doral Bank, had in place various interest rate swap
agreements with an aggregate notional amount of $105 million. The Company also
purchases put options on futures contracts for Euro-dollar instruments in an
attempt to manage the risk to its net interest income.
Doral Financial 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
rates rise, and conversely, increase when interest rates fall. At March 31,
1999, Doral Financial held $646.9 million of mortgage-backed and other
investment securities (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 March 31, 1999, Doral Financial
held $617.2 million of investment securities (all of which carried fixed
interest rates) which were classified as available for sale and reported at fair
value, with unrealized gains or losses reported as a segregated component of
stockholders' equity. Accordingly, declines in the value of Doral Financial's
securities held for trading and available for sale could have a negative impact
on Doral Financial's earnings or financial condition. In order to hedge the
interest rate risk associated with Doral Financial's portfolio of securities
held for trading and available for sale, Doral Financial 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,
Doral Financial will consider, among other things, the volatility of prices of
its securities. As noted above, the prices for Puerto Rico tax exempt GNMA
securities tend to be more stable than their U.S. counterparts.
In the future, Doral Financial 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 that any of the above hedging techniques will be successful. To
the extent they are not successful, Doral Financial's profitability may be
adversely affected. For additional information on the use of derivatives to
manage interest rate risk, see "Derivatives" below.
Interest Rate Sensitivity Analysis. The following table summarizes the
expected maturities or repricing of Doral Financial's interest-earning assets
and interest-bearing liabilities as of March 31, 1999. Condensed information as
of December 31, 1998 is also shown. For purposes of this presentation, the
interest-earning components of mortgage loans held for sale and securities held
for trading are assumed to mature within one year. Off balance sheet instruments
represent the notional amounts of interest rate swap agreements. Notional
amounts are used to calculate the contractual amounts to be exchanged under the
swap agreements.
35
<PAGE> 36
TABLE T
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------------------------------------
1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF MARCH 31, 1999 OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
- ---------------------------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Money Market Instruments $ 298,104 $ -- $ -- $ -- $ -- $ 298,104
Total Loans 937,456 25,879 10,723 87,344 -- 1,061,402
Securities Held for Trading 646,901 -- -- -- -- 646,901
Securities Available for Sale 80,123 -- 29,994 507,116 -- 617,233
Securities Held to Maturity -- -- 3,030 182,396 -- 185,426
FHLB Stock -- -- -- 8,895 -- 8,895
Other assets -- -- -- -- 320,161 320,161
---------- -------- --------- -------- --------- ----------
TOTAL ASSETS $1,962,584 $ 25,879 $ 43,747 $785,751 $ 320,161 $3,138,122
========== ======== ========= ======== ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Loans Payable $ 392,949 $ -- $ -- $ -- $ -- $ 392,949
Repurchase Agreements 1,107,685 -- 10,000 135,366 -- 1,253,051
Deposits 415,127 14,195 6,314 101 213,641 649,378
Other Borrowed Funds 74,739 59,498 5,225 115,500 -- 254,962
Other Liabilities -- -- -- -- 240,092 240,092
Stockholders' equity -- -- -- -- 347,690 347,690
---------- -------- --------- -------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' $1,990,500 $ 73,693 $ 21,539 $250,967 $ 801,423 $3,138,122
========== ======== ========= ======== ========= ==========
EQUITY
Off Balance Sheet Instruments - Interest
Rate Swaps $ 105,000 $ (5,000) $(100,000) $ -- $ -- $ --
Interest Rate Sensitivity Gap 77,084 (52,814) (77,792) 534,784 (481,262) --
Cumulative Interest Rate Sensitivity 77,084 24,270 (53,522) 481,262 -- --
Cumulative Gap to Interest Earning Assets 2.99% 0.94% (2.08%) 18.68% -- --
</TABLE>
<TABLE>
<CAPTION>
CONDENSED INTEREST RATE
SENSITIVITY ANALYSIS 1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF DECEMBER 31, 1998 OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
- -------------------------------------------- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Off-Balance Sheet Instruments - Interest
Rate Swaps $105,000 $ (5,000) $(100,000) $ -- $ -- $--
Interest Rate Sensitivity Gap 166,034 (113,722) (115,875) 368,371 (304,898) --
Cumulative Interest Rate Sensitivity 166,034 52,312 (63,473) 304,898 -- --
Cumulative Gap to Interest Earning Assets 6.44% 2.03% -2.46% 11.83% -- --
</TABLE>
Gap analysis measures the volume of assets and liabilities at a point
in time and their repricing during future periods. The volume of assets
repricing is adjusted to take into consideration the expected prepayment of
certain assets such as mortgage loans and mortgage-backed securities, which can
be prepaid before their contractual maturity. The net balance of assets and
liabilities (the "gap") repricing during future periods is an indicator of the
degree of interest rate risk being assumed by the Company. A positive gap
generally denotes asset sensitivity and that increases in interest rates would
have a positive effect on net interest income while a decrease in interest rates
would have a negative effect on net interest
36
<PAGE> 37
income. A negative gap denotes liability sensitivity and means that an increase
in interest rates would have a negative effect on net interest income while a
decrease in rates would have a positive effect on net interest income interest.
As of March 31, 1999, the Company had a one year positive gap of approximately
$77.1 million compared to a positive gap position of $166.0 million as of
December 31, 1998. The Company's positive gap within one year is due primarily
to its large portfolio of mortgage loans held for sale and trading assets which
the Company could attempt to sell within a short-time in a rising interest rate
environment and replace them with higher yielding assets. While static gap
analysis is a useful measure for determining short-term risk to future net
interest income, it does not measure the sensitivity of the market value of
assets and liabilities to changes in interest rates. For example, the value of
the Company's mortgage loans held for sale and trading assets would probably
fall in a rising interest rate environment thereby adversely affecting the
Company's revenues from mortgage loan originations and trading account profit.
Derivatives. As described above, the Company uses derivatives to manage
its interest rate risk. Derivatives include interest rate swaps, futures,
forwards and options. Derivatives are generally either privately-negotiated
over-the-counter ("OTC") or standard contracts transacted through regulated
exchanges. OTC contracts generally consist of swaps, forwards and options.
Exchange traded derivatives include futures and options.
Although the Company uses derivatives to manage market risk, for
financial reporting purposes its general policy is to account for such
instruments on a marked to market basis with gains or losses charged to
operations as they occur, except for interest rate swaps entered into by Doral
Bank which are not reflected on the Company's Consolidated Financial Statements.
Contracts with positive fair values are recorded as assets and contracts with
negative fair values as liabilities after the application of netting
arrangements. For the quarter ended March 31, 1999, average assets and
liabilities related to derivatives were $3.9 million and $4.3 million,
respectively. The notional amounts of assets and liabilities related to
derivatives which are not recorded on the Company's statement of condition
totaled $3.4 billion and $2.7 billion, respectively, as of March 31, 1999.
Notional amounts indicate the volume of derivatives activity but do not
represent the Company's exposure to market or credit risk. Amounts do not
include interest rate swaps with an aggregate notional amount of $105 million
held at Doral Bank.
The use of derivatives involves market and credit risk. The market risk
of derivatives arises principally from the potential for changes in the value of
derivative contracts based on changes in interest rates. The Company generally
manages its risks by taking risk offsetting positions.
The credit risk of derivatives arises from the potential of a
counterparty to default on its contractual obligations. Credit risk related to
derivatives depend on the following: the current fair value of outstanding
contracts with an entity; the potential credit exposure on the derivative over
time; the extent to which legally enforceable netting arrangements allow the
offsetting of contracts with the same entity to be netted against each other;
the extent to which collateral held against the contract reduces credit risk;
and the likelihood of defaults by the counterparty.
To manage this 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 contracts with the same
counterparty in the event of default. The credit risk associated with futures
contracts is also limited due to daily cash settlement of the net change in the
value of open contracts with the exchange on which the contract is traded.
INFLATION
Doral Financial is affected by inflation mainly 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 Doral Financial'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 Doral Financial's operations.
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<PAGE> 38
CHANGES IN ACCOUNTING STANDARDS
Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative and Similar Financial
Instruments and for Hedging Activities" ("SFAS No. 133"). This new standard,
which becomes effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999, but with earlier application permitted as of the beginning
of any fiscal quarter subsequent to June 15, 1998, establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities, and requires all derivatives to be measured at fair value and to be
recognized as either assets or liabilities in the statement of financial
position. Under this Standard, derivatives used in hedging activities are to be
designated into one of the following categories: (a) fair value hedge; (b) cash
flow hedge; and (c) foreign currency exposure hedge. The changes in fair value
(that is, gains and losses) will be either recognized as part of earnings in the
period when the change occurs, or as a component of other comprehensive income
(outside earnings) depending on their intended use and resulting designation.
Management has determined to adopt this Statement during the first quarter of
2000 and believes that such adoption will not have a material effect on the
Company's financial position or results of operations.
Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise.
At December 31, 1998, Doral Financial adopted the provision of the Statement of
Financial Accounting Standards (SFAS) No. 134," Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held-for-sale by
a Mortgage Banking Enterprise," an amendment of FASB Statement No. 65. On the
date this Statement is initially adopted, an enterprise may reclassify
mortgage-backed securities and other beneficial interests retained after the
securitization of mortgage loans held-for-sale from the trading category, except
for those with sales commitments in place. Those securities and other interests
shall be classified based on the entity's ability and intent, on the date this
Statement is initially adopted, to hold those investments. Transfers from the
trading category that result from implementing this Statement shall be accounted
for in accordance with FASB 115. In connection with the adoption of this
Statement, in 1998, Doral Financial reclassified approximately $115.7 million of
securities classified as trading securities to the held-to-maturity portfolio.
YEAR 2000 ISSUES
The Year 2000 problem is caused by the situation whereby existing
computer software programs use only the last two digits to identify the year.
Those programs could read "00" as the year 1900, and thus, may not recognize
dates after December 31, 1999. This misinterpretation of data could cause
significant problems with banking and mortgage banking entities, such as the
Company, as the use of date calculations is extensive in daily operations for
matters such as interest accruals, maturity dates, delinquency status, and
customer statements. Year 2000 problems go beyond computer systems and affect
anything that uses an internal microchip such as telephone, fax machines,
security and alarm systems, vaults, elevators, heating and air conditioning.
Doral Financial does not own any proprietary software systems or
applications and relies on those provided by third party vendors. The Company
has completed the assessment of its computer hardware, software programs and
data processing applications, including those provided by third party vendors.
The Company has received revised programs from its third party vendors that have
been modified to address the Year 2000 problem for the principal applications
used in its mortgage banking, commercial banking and securities businesses. The
Company began testing these revised programs and applications during the first
week of October 1998. The testing for most of Company's software systems and
applications including those applicable to mortgage servicing and commercial
banking operations were substantially completed by December 31, 1998. Testing on
certain applications used in mortgage originations that interface with FNMA,
FHLMC and GNMA are expected to be completed by June 30, 1999. The Company is
using outside consultants to assist it in verifying all test results. The
Company's mainframe computer, used principally in its commercial banking
operations, is Year 2000 compliant, meaning that it can properly process and
calculate date-related information after January 1, 2000. The Company is
replacing other equipment, primarily desk top computers that are not Year 2000
compliant.
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<PAGE> 39
Doral Financial does not anticipate that the Year 2000 problem will
have a material adverse effect on its financial condition or results of
operations. However, Year 2000 problems suffered by third parties, including
providers of basic services, such as telephone, water, sewer and electricity,
could have an adverse impact on the daily operations of the Company. The Company
has completed contingency plans for its commercial banking operations and is in
the process of modifying its existing business interruption contingency plans
for its other operations to address disruptions that could be caused by the Year
2000 problem. These plans will include, among other things, performing certain
processes manually, contracting third parties to perform certain operations and
reducing or suspending impaired services. The Company intends to continue to
review and modify its contingency plans as it acquires additional information
through its ongoing Year 2000 program.
The Company estimates that the costs of addressing Year 2000 issues
will be approximately $1.2 million, of which $900,000 has already been spent.
Most of such costs are directly related to the costs of replacing existing
equipment, primarily desktop computers, which have been fully depreciated on the
Company's financial statements. The Company has and intends to continue to fund
such costs through operating cash flow.
As a bank holding company, Doral Financial could be subject to
enforcement action by federal banking authorities if it fails to adequately
address the Year 2000 problem.
RECENT DEVELOPMENTS
Expansion into Mainland United States. During the second quarter of
1998, Doral Financial, through Doral Bank, organized a new mortgage banking
subsidiary, Doral Money, Inc., which commenced a wholesale residential mortgage
operation in Chicago and a multi-family and commercial real estate lending unit
in the New York metropolitan area. Doral Money accounted for approximately 17%
of the Company's total loan originations for the quarter ended March 31, 1999.
The Company is also in the process of opening a new federal savings association
in the New York metropolitan area, which it expects will commence operations
during the third quarter of 1999. Doral Financial intends to continue to search
for new business opportunities in Puerto Rico as well as to explore additional
expansion in the mainland United States.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Company is exposed,
see the information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Management."
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
On April 9, 1999, the Company entered into a Credit Agreement with
FirstBank Puerto Rico pursuant to which the Company obtained an unsecured term
facility for $15 million which is payable on April 30, 2000, unless otherwise
extended by the parties. Under the Agreement, the Company is restricted from
paying dividends on its capital stock during any year in an amount in excess of
its consolidated retained earnings as of the end of the immediately preceding
year. The Company is also prohibited from paying dividends if it is in default
under the Agreement. The Company had consolidated retained earnings of $156
million as of December 31, 1998.
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<PAGE> 40
On April 29, 1999, the Company entered into a Mortgage Warehousing Loan
Agreement with Citibank, N.A. Under the Agreement, Citibank, N.A. has agreed to
make revolving credit advances to the Company of up to $50 million to finance
mortgage loans and mortgage-backed securities. The advances are payable on April
28, 2000, unless the facility is extended by mutual agreement of the parties.
The Agreement restricts the Company from paying dividends during any year in an
amount in excess of 50% of the Company's consolidated net income for the
immediately preceding year or if the Company is in default under the Agreement.
The Company had a consolidated net income of $52.8 million for the year ended
December 31, 1998.
Copies of the above-referenced credit agreements are filed as exhibits
to this Quarterly Report on Form 10-Q.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Stockholders Meeting of the Company was held on April 22,
1999. A quorum was obtained with 36,166,426 votes represented in person or by
proxy, which represented approximately 89.5% of all votes eligible to be cast at
the meeting. Eight directors of the Company, Salomon Levis, Zoila Levis, Richard
F. Bonini, Edgar M. Cullman, Jr., Efraim Kier, John L. Ernst, A. Brean Murray
and Victor M. Pons, Jr., were reelected for additional one-year terms. A
proposal to amend the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 50,000,000 to
200,000,000 shares was approved. The appointment of PricewaterhouseCoopers LLP
as the Company's independent accountants for 1999 was also approved. After
approving these three proposals, a motion was passed to adjourn the meeting
until May 13, 1999, at which time shareholders would vote upon the proposal to
amend the Restated Certificate of Incorporation to increase the number of
authorized shares of serial preferred stock from 2,000,000 to 10,000,000 shares.
The adjourned meeting was reconvened on May 13, 1999, and the proposal to
increase the number of authorized shares of serial preferred stock to 10,000,000
shares was approved. The results of the voting for each of the proposals is set
forth below:
Election of Directors
<TABLE>
<CAPTION>
NOMINEES FOR ONE-YEAR TERM VOTES FOR VOTES WITHHELD
- -------------------------- --------- --------------
<S> <C> <C>
Salomon Levis 35,916,392 250,034
Richard F. Bonini 35,902,520 263,906
Edgar M. Cullman, Jr. 36,025,810 140,616
John L. Ernst 33,619,433 2,546,933
Efraim Kier 36,021,706 144,720
Zoila Levis 35,905,932 260,494
A. Brean Murray 35,871,146 295,280
Victor M. Pons, Jr. 36,032,706 133,720
</TABLE>
40
<PAGE> 41
Proposal to Increase Number of Authorized Shares of Common Stock
For: 28,414,983
Against: 7,708,641
Abstain: 40,342
Broker Non-Votes: 2,460
Proposal to Increase the Number of Authorized Shares of Serial Preferred Stock.
For: 21,808,356
Against: 6,638,040
Abstain: 60,704
Broker Non-Votes: 8,874,100
Ratification of the Appointment of PricewaterhouseCoopers LLP as the Company's
Independent Accountants for 1999.
For: 36,137,411
Against: 8,691
Abstain: 20,324
Broker Non-Votes: 0
ITEM 5 - OTHER INFORMATION
Dividend declaration
On April 22, 1999, the Board of Directors authorized a quarterly $0.08
per share cash dividend to be paid on June 4, 1999 to holders of record as of
May 10, 1999 of the Company's Common Stock. The Common Stock dividend reflected
a $0.02 per share increase over the prior quarterly dividend.
Amendment to Company's Restated Certificate of Incorporation
Effective May 14, 1999, the Company amended its Restated Certificate of
Incorporation to: (i) increase the number of authorized shares of Common Stock
from 50,000,000 to 200,000,000 shares and (ii) increase the number of authorized
shares of serial preferred stock from 2,000,000 to 10,000,000 shares. A copy of
the Certificate of Amendment is filed as an exhibit to this Quarterly Report on
Form 10-Q.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1(f) - Certificate of Amendment, dated May 13, 1999,
to Restated Certificate of Incorporation.
Exhibit 10.84 - Seventh Amendment dated as of May 5, 1999, to
First Amended and Restated Credit Agreement, dated as of
September 26, 1996, among the Company, Doral Mortgage
Corporation, Bankers Trust Company, as agent and lender and the
other lenders party thereto.
Exhibit 10.85(a) - Credit Agreement, dated as of April 9, 1999,
between FirstBank Puerto Rico and the Company.
Exhibit 10.85(b) - First Amendment, dated as of May 13, 1999, to
Credit Agreement, dated as of April 9, 1999, between FirstBank
Puerto Rico and the Company.
41
<PAGE> 42
Exhibit 10.86 - Warehousing Loan Agreement, dated as of April
29, 1999, among the Company, Doral Mortgage Corporation and
Citibank, N.A.
Exhibit 12(a) - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 12(b) - Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends
Exhibit 27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
(i) Form 8-K dated January 12, 1999, reporting under Item 5
- "Other Items" the Company unaudited results for the
quarter and year ended December 31, 1998.
(ii) Form 8-K dated February 22, 1999, reporting under Item 5
- "Other Items" the closing of the issuance and sale of
1,495,000 shares of the Company's 7% Noncumulative
Monthly Income Preferred Stock, Series A.
(iii) Form 8-K, dated April 13, 1999, reporting under Item 5
- "Other Items" the Company's unaudited results for the
quarter ended March 31, 1999.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DORAL FINANCIAL CORPORATION
(Registrant)
Date: May 14, 1999 /s/ Salomon Levis
-----------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: May 14, 1999 /s/ Richard F. Bonini
-----------------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: May 14, 1999 /s/ Ricardo Melendez
-----------------------------------
Ricardo Melendez
Vice President
Principal Accounting Officer
43
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
3.1(f) - Certificate of Amendment, dated May 13, 1999, to Restated
Certificate of Incorporation.
10.84 - Seventh Amendment dated as of May 5, 1999, to First Amended
and Restated Credit Agreement, dated as of September 26, 1996,
among the Company, Doral Mortgage Corporation, Bankers Trust
Company, as agent and lender and the other lenders party
thereto.
10.85(a) - Credit Agreement, dated as of April 9, 1999, between
FirstBank Puerto Rico and the Company.
10.85(b) - First Amendment, dated as of May 13, 1999, to Credit
Agreement, dated as of April 9, 1999, between FirstBank Puerto
Rico and the Company.
10.86 - Warehousing Loan Agreement, dated as of April 29, 1999,
among the Company, Doral Mortgage Corporation and Citibank,
N.A.
Exhibit 12(a) - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 12(b) - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends.
27 - Financial Data Schedule (for SEC use only).
</TABLE>
44
<PAGE> 1
EXHIBIT 3.1(F)
CERTIFICATE OF AMENDMENT TO
SECOND RESTATED CERTIFICATE OF INCORPORATION OF
DORAL FINANCIAL CORPORATION
(REGISTRATION NUMBER 29,324)
Doral Financial Corporation (the "Corporation"), a corporation
organized and existing under the laws of the Commonwealth of Puerto Rico, does
hereby certify:
FIRST: That at a meeting of the Board of Directors of the Corporation,
duly held and convened on January 25, 1999, resolutions were duly adopted
approving proposed amendments (the "Amendments") to the Corporation's Second
Restated Certificate of Incorporation and declaring said Amendments advisable
to (i) increase the number of authorized shares of Common Stock from 50,000,000
to 200,000,000 shares and (ii) increase the number of authorized shares of
serial preferred stock from 2,000,000 to 10,000,000 shares.
SECOND: That at a Meeting of Shareholders of the Corporation held on
April 22, 1999, adjourned and reconvened on May 13, 1999, the inspectors of
election appointed for the purpose of conducting and tabulating the votes of
the shareholders for and against the adoption of the Amendments, executed and
delivered a certificate to the effect that more than a majority of the issued
and outstanding stock of the Corporation entitled to vote on the Amendments
voted in favor of each of said Amendments.
THIRD: That the Amendments have been adopted in accordance with the
provisions of Article 8.02 of the Puerto Rico General Corporation Law of 1995.
FOURTH: That the first paragraph of Article FOURTH of the Second
Restated Certificate of Incorporation is hereby amended to read in its entirety
as follows:
"FOURTH: The total number of shares of all classes of stock
which the Corporation is authorized to issue is 210,000,000 shares,
consisting of 200,000,000 shares of Common Stock, $1.00 par value, and
10,000,000 shares of Serial Preferred Stock, $1.00 par value."
<PAGE> 2
IN WITNESS WHEREOF, Doral Financial Corporation has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by
Zoila Levis, its President and Richard F. Bonini, its Secretary, this 13th day
of May, 1999.
/s/ Zoila Levis
-------------------------
Zoila Levis
President
[Corporate Seal]
/s/ Richard F. Bonini
-------------------------
Richard F. Bonini
Secretary
2
<PAGE> 1
EXHIBIT 10.84
SEVENTH AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(the "Amendment"), dated as of May 5, 1999, 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
Borrowers, the Agent and the lenders party thereto (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, the
Fourth Amendment to First Amended and Restated Credit Agreement dated as of
November 5, 1997, the Fifth Amendment to First Amended and Restated Credit
Agreement dated as of June 26, 1998, and the Sixth Amendment to First Amended
and Restated Credit Agreement dated as of November 23, 1998, 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. Addition of New Lenders and Amendment of Commitments.
As of the effective date of this Amendment as determined in accordance with
Section 5 below, each of Credit Lyonnais, New York Branch and Hibernia National
Bank shall (i) become a party to the Credit Agreement and a Facility 1 Lender
thereunder, (ii) be entitled to all rights, benefits and privileges accorded a
Facility 1 Lender under the Credit Agreement and under the other Loan
Documents, (iii) be subject to all obligations of a Facility 1 Lender under the
Credit Agreement and under the other Loan Documents, and (iv) have the
respective Facility 1 Commitments set forth opposite its name on the signature
pages hereto, as such Commitments may be reduced from time to time pursuant to
Section 8.6(c) of the Credit Agreement. The respective addresses for notices
for Credit Lyonnais, New York Branch and Hibernia National Bank are set forth
on Schedule X hereto. The Commitments of each of the existing Lenders shall be
as set forth opposite such Lender's name on the signature pages hereto, as such
Commitments may be reduced from time to time pursuant to Section 8.6(c) of the
Credit Agreement.
<PAGE> 2
Section 2. Amendment to Section 2.1 of the Credit Agreement.
Section 2.1(a)(i) of the Credit Agreement shall be amended by replacing the
phrase "fifty percent (50%) of the aggregate Facility 1 Commitments then in
effect" with "$62,500,000".
Section 3. Other Amendments to Credit Agreement. Section 8.6 of
the Credit Agreement shall be amended by adding thereto the following new
subsections (g) and (h) immediately following subsection (f) thereof:
"(g) So long as no Potential Default or Event of Default has
occurred and is continuing, the Borrowers may at any time propose that one or
more commercial banks (each, an "Applicant Lender") become an additional Lender
hereunder. At such time, the Borrowers shall notify each of the Lenders of (i)
the identity of such Applicant Lender, (ii) the proposed increase in the
aggregate Commitments resulting from the addition of such Applicant Lender as a
Lender hereunder, and (iii) such Applicant Lender's proposed Commitments (which
must be not less than $15,000,000 in the case of a Facility 1 Commitment and
not less than $1,000,000 in the case of a Facility 2 Commitment). Upon the
Applicant Lender's addition as a Lender hereunder, such Applicant Lender shall
become a party to this Agreement and a Lender hereunder, shall be entitled to
all rights, benefits and privileges accorded a Lender under this Agreement and
under the other Loan Documents, and shall be subject to all obligations of a
Lender under this Agreement and under the other Loan Documents. Notwithstanding
the foregoing or anything else contained herein, the aggregate amount of the
Facility 1 Commitments of all Lenders shall not exceed $250,000,000 at any time
and the aggregate amount of the Facility 2 Commitments of all Lenders shall not
exceed $15,000,000 at any time.
(h) The addition of any Applicant Lender as a Lender hereunder
shall become effective upon the occurrence of each of the following events:
(i) the Borrowers and the Agent shall have given their prior
written consent to such Applicant Lender, which consent shall
not be unreasonably withheld, delayed or conditioned;
(ii) such Applicant Lender, the Borrowers and the Agent shall have
mutually agreed on the date (the "Adjustment Date") on which
such Applicant Lender shall become a Lender hereunder and
under the other Loan Documents; and
(iii) on such Adjustment Date:
(A) such Applicant Lender, the Borrowers and the Agent
shall execute and deliver to each of the other
signatories thereto an Additional Lender Agreement
in substantially the form of Exhibit W hereto and
the Agent shall deliver a copy of such executed
Additional Lender Agreement and a copy of the
Commitment Notice attached as Schedule I thereto to
each of the Lenders;
-2-
<PAGE> 3
(B) the Borrowers shall execute and deliver to such
Applicant Lender (x) a duly executed Facility 1 Note
and/or a duly executed Facility 2 Note, as the case
may be, (y) a reliance letter from Puerto Rico
counsel to the Borrowers addressed to such Applicant
Lender and in form and substance satisfactory to
such Applicant Lender, providing that such Applicant
Lender may rely on the opinion letters of such
counsel addressed to the existing Lenders and dated
October 10, 1996 and May 7, 1997, as if such opinion
letters were addressed directly to such Applicant
Lender, and (z) certified copies of the resolutions
of the Board of Directors of each of the Borrowers
evidencing the authorization of such Borrower to
enter into such Additional Lender Agreement and
consummate the transactions and matters contemplated
thereby; and
(C) no Potential Default or Event of Default shall have
occurred and be continuing as of such date."
Section 4. Addition of New Exhibit W. Exhibit W in the form of
Exhibit W hereto shall be added to the Credit Agreement immediately following
Exhibit V thereto.
Section 5. 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 6. 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, (ii) a duly
executed Facility 1 Note for each of Credit Lyonnais, New York Branch and
Hibernia National Bank, (iii) a reliance letter from Puerto Rico counsel to the
Borrowers addressed to Credit Lyonnais, New York Branch and Hibernia National
Bank and in form and substance satisfactory to Credit Lyonnais, New York Branch
and Hibernia National Bank providing that Credit Lyonnais, New York Branch and
Hibernia National Bank may rely on the opinion letters of such counsel
addressed to the existing Lenders and dated October 10, 1996 and May 7, 1997,
as if such opinion letters were addressed directly to Credit Lyonnais, New York
Branch and Hibernia National Bank, respectively, and (iv) certified copies of
the resolutions of the Board of Directors of each of the Borrowers evidencing
the authorization of such Borrower to enter into this Amendment and consummate
the transactions and matters contemplated hereby.
Section 7. 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.
-3-
<PAGE> 4
Section 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 9. 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.
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: Executive Vice President and Treasurer
Facility 1 Commitment: BANKERS TRUST COMPANY,
$39,000,000 as Agent and as a Lender
Facility 2 Commitment:
$2,000,000
By: /s/ Kevin M. McCann
--------------------------------------
Name: Kevin M. McCann
Title: Managing Director
-4-
<PAGE> 5
Facility 1 Commitment: FIRST UNION NATIONAL BANK,
$39,000,000 as a Lender
Facility 2 Commitment:
$2,000,000
By: /s/ R. STEVEN HALL
--------------------------------------
Name: R. Steven Hall
--------------------------------------
Title: Vice President
--------------------------------------
Facility 1 Commitment: BANKBOSTON, N.A. (formerly known as
$29,000,000 The Bank of Boston), as a Lender
Facility 2 Commitment:
$2,000,000
By: /s/ PAUL A. CHMIELINSKI
--------------------------------------
Name: Paul A. Chmielinski
--------------------------------------
Title: Vice President
--------------------------------------
Facility 1 Commitment: THE BANK OF NEW YORK,
$25,000,000 as a Lender
Facility 2 Commitment:
$2,000,000
By: /s/ ROBERT A. TWEED
--------------------------------------
Name: Robert A. Tweed
--------------------------------------
Title: Vice President
--------------------------------------
Facility 1 Commitment: NATIONAL CITY BANK OF KENTUCKY,
$25,000,000 as a Lender
Facility 2 Commitment:
$2,000,000
By: /s/ ROBERT J. OGBURN
--------------------------------------
Name: Robert J. Ogburn
--------------------------------------
Title: Vice President
--------------------------------------
Facility 1 Commitment: CREDIT LYONNAIS, NEW YORK BRANCH
$23,437,500 as a Lender
By: /s/ SEBASTIAN ROCCO
--------------------------------------
Name: Sebastian Rocco
--------------------------------------
Title: Senior Vice President
--------------------------------------
-5-
<PAGE> 6
Facility 1 Commitment: HIBERNIA NATIONAL BANK,
$19,500,000 as a Lender
By: /s/ EDWARD K. SANTOS
--------------------------------------
Name: Edward K. Santos
--------------------------------------
Title: Vice President
--------------------------------------
-6-
<PAGE> 7
SCHEDULE X
ADDRESS FOR NOTICES
Credit Lyonnais, New York Branch
1301 Avenue of the Americas
New York, NY 10019
Attn: Paul Connolly
Telephone: (212) 261-3885
Fax: (212) 261-3438
Hibernia National Bank
P.O. Box 61540
New Orleans, LA 70161
Attn: Stephanie F. Tyner
Telephone: (504) 533-3345
Fax: (504) 533-6242
<PAGE> 8
EXHIBIT W
ADDITIONAL LENDER AGREEMENT
THIS ADDITIONAL LENDER AGREEMENT (the "Agreement") is dated
as of _________________, ____, between _____________________ (the "Applicant
Lender"), 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, with reference to the First Amended and
Restated Credit Agreement, dated as of September 25, 1996, between the
Borrowers, the Agent and the lenders party thereto (as 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.
A. The Applicant Lender desires to become a "Lender"
under the Credit Agreement.
B. Pursuant to Section 8.6 of the Credit Agreement, the
Applicant Lender has been approved by the Borrowers and the Agent for inclusion
as a Lender under the Credit Agreement and the other Loan Documents.
ACCORDINGLY, the parties hereto agree as follows:
1. As of the Adjustment Date, the Applicant Lender shall
become a party to the Credit Agreement and shall be a "Lender" thereunder and
under the other Loan Documents, shall be entitled to all rights, benefits and
privileges accorded a Lender under the Credit Agreement and under the other
Loan Documents, and shall be subject to all obligations of a Lender under the
Credit Agreement and under the other Loan Documents. The Commitment Notice
attached as Schedule I hereto sets forth the Commitments of each of the Lenders
after giving effect to the inclusion of the Applicant Lender as a Lender under
the Credit Agreement and the other Loan Documents.
2. The address for notices of the Applicant Lender shall
initially be as set forth beneath its signature below.
3. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and construed in accordance with the
laws of the State of New York.
4. This Agreement may be executed in any number of
counterparts, each of
<PAGE> 9
which when so executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument.
5. This Agreement, when executed by each of the parties
hereto, shall constitute an amendment of the Credit Agreement and the other
Loan Documents consistent with the Commitment Notice referred to in Section 1
above.
EXECUTED as of the day and year first above written.
DORAL FINANCIAL CORPORATION,
as a Borrower
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
DORAL MORTGAGE CORPORATION,
as a Borrower
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
BANKERS TRUST COMPANY,
as Agent and as a Lender
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
[----------------------------------],
as Applicant Lender
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address:
<PAGE> 10
Schedule I to
Additional Lender Agreement
COMMITMENT NOTICE
This Commitment Notice, dated ____________, _____, is
delivered in connection with that certain First Amended and Restated Credit
Agreement, dated as of September 25, 1996, between 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, and the Lenders party thereto from time to time (as amended,
supplemented or extended from time to time, the "Credit Agreement").
Capitalized terms not otherwise defined herein shall have the meanings given to
such terms in the Credit Agreement.
The Agent hereby notifies each Lender as follows:
1. __________________ has been added as a Lender under the
Credit Agreement effective as of _____________, ____ (the
"Adjustment Date").
2. As of the Adjustment Date, the respective Commitments of each
Lender, after giving effect to the addition of _______________
as a Lender, are as follows:
[INSERT COMMITMENTS OF EACH LENDER]
BANKERS TRUST COMPANY,
as Agent
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
<PAGE> 1
EXHIBIT 10.85(A)
$15,000,000
CREDIT AGREEMENT
Dated as of April 9, 1999
Among
DORAL FINANCIAL CORPORATION
as the Borrower
and
FIRSTBANK PUERTO RICO
as the Lender
<PAGE> 2
CREDIT AGREEMENT
Dated as of April 9, 1999
DORAL FINANCIAL CORPORATION, a Puerto Rico corporation (the
"Borrower"), and FIRSTBANK PUERTO RICO, a banking corporation validly organized
and existing under the laws of the Commonwealth of Puerto Rico (the "Lender")
agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. CERTAIN DEFINED TERMS. Unless otherwise defined in this
Agreement, the following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined):
"Advance" means an advance by the Lender to the Borrower
pursuant to Article 2.
"Affiliate" means with respect to any Person, any other Person
(i) which directly or indirectly through one or more intermediaries controls, or
is controlled by, or is under common control with, such Person, (ii) which
directly or indirectly, of record or beneficially, owns or holds ten percent
(10%) or more of the shares of any class of the capital stock of such Person
having voting powers, or (iii) ten percent (10%) or more of the shares of such
stock of which are owned or held, directly or indirectly, of record or
beneficially, for such Person. For the purposes of this Agreement, the term
"control" means the posses sion, directly or indirectly, of the power to direct
or cause the direction of management and policies of a Person, whether through
ownership of common stock, by contract or otherwise; all of the Borrower's
officers, shareholders owning ten percent (10%) or more of the common stock of
the Borrower, directors, subsidiary corporations, joint venturers and partners
shall be deemed to be the Borrower's Affiliates.
<PAGE> 3
"Agreement" or "this Agreement" shall include all amendments,
modifications and supplements hereto and shall refer to this Agreement as the
same may be in effect at the time such reference becomes operative.
"Base Rate" means, for any period, a fluctuating interest rate
per annum as shall be in effect from time to time, which rate per annum shall at
all times be equal to the rate of interest announced publicly by The Chase
Manhattan Bank ("Chase") in New York, New York, from time to time, as Chase's
base rate. The Base Rate is a reference rate and does not necessarily represent
the lowest or best rate actually charged to any customer of Chase and Chase may
make commercial and other loans at rates of interest at, above or below the Base
Rate.
"Borrower" has the meaning assigned to that term in the
Preamble.
"Borrower's Computer Systems" has the meaning assigned to that
term in Section 4.1(w).
"Borrowing" has the meaning assigned to that term in Section
2.1.
"Business Day" means a day of the year on which banks are not
required or authorized to close in San Juan, Puerto Rico.
"Capitalized Lease" has the meaning assigned to that term in
the definition of Debt.
"Closing Date" means the date of this Agreement and when used
in respect to an Advance, the date of such Advance.
"Code" means the United States Internal Revenue Code of 1986,
as amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"Collateral" means and includes all real and personal property
(tangible and intangible, corporeal and incorporeal) and all rights, title and
interest in which a security interest is granted, or purported to be granted, in
accordance with the terms of this Agreement.
"Commitment" has the meaning assigned to that term in Section
2.1.
-2-
<PAGE> 4
"Commonwealth" means the Commonwealth of Puerto Rico and its
political subdivisions, municipalities, agencies and instrumentalities.
"Debt" of any Person means, without duplication, (a) all
indebtedness of such Person for borrowed money, (b) all Obligations of such
Person for the deferred purchase price of property or services (other than trade
payables and accrued expenses incurred in the ordinary course of such Person's
business), (c) all Obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all Obligations of such Person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even through the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) the principal
component of all Obligations of such Person as lessee under leases that have
been or should be, in accordance with Generally Accepted Accounting Principles,
recorded as capital leases ("Capitalized Leases") which principal component has
been or should, at the time of determination, be capitalized on a balance sheet
in accordance with Generally Accepted Accounting Principles, (f) all
Obligations, contingent or otherwise, of such Person under acceptance, letter of
credit or similar facilities, (g) all Obligations of such Person to purchase,
redeem, retire, defease or otherwise make any payment in respect of any capital
stock of or other ownership or profit interest in such Person or any other
Person or any warrants, rights or options to acquire such capital stock, (h) all
Debt of others referred to in clauses (a) through (g) above guaranteed directly
or indirectly in any manner by such Person, or in effect guaranteed directly or
indirectly by such Person through an agreement (i) to pay or purchase such Debt
or to advance or supply funds for the payment or purchase of such Debt, (ii) to
purchase, sell or lease (as lessee or lessor) property, or to purchase or sell
services, primarily for the purpose of enabling the debtor to make payment of
such Debt or to assure the holder of such Debt against loss, (iii) to supply
funds to or in any other manner invest in the debtor (including any agreement to
pay for property or services
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irrespective of whether such property is received or such services are rendered)
to assure a creditor against loss or (iv) otherwise to assure a creditor against
loss, and (v) all Debt referred to in clauses (a) through (g) above secured by
(or for which the holder of such Debt has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Debt in an
amount equal to the lesser of the amount of the Debt secured by the Lien or the
fair market value of such property.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"Environmental Action" means any administrative, regulatory
or judicial action, suit, demand, demand letter, claim, notice of non-compliance
or violation, investigation, proceeding, consent order or consent agreement
relating in any way to any Environmental Law or any Environmental Permit
including, without limitation, (a) any claim by any Governmental Authority for
enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any Environmental Law and (b) any claim by any third party seeking
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from hazardous or toxic materials or arising from
alleged injury to health, safety or the environment.
"Environmental Law" means any federal, state or local
(including, without limitation, the Commonwealth of Puerto Rico) law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
relating to the environment, health, safety or hazardous or toxic materials,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conservation and Recovery Act, the
Hazardous Materials Transportation Act, the Clean Water Act, the Toxic
Substances Control Act, the Clean Air Act, the Safe Drinking Water Act, the
Atomic Energy Act, the Federal Insecticide, Fungicide and
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Rodenticide Act and the Occupational Safety and Health Act, each as amended from
time to time.
"Environmental Permit" means any permit, approval,
identification number, license or other authorization required under any
Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"Event of Default" has the meaning assigned to that term in
Section 6.1.
"Existing Debt" has the meaning assigned to that term in
Section 4.1(q).
"Fiscal Year" means the twelve-month period commencing on
January 1 and ending on December 31 of every year.
"Generally Accepted Accounting Principles" means generally
accepted accounting principles consistently applied and maintained throughout
the period indicated and consistent with the prior financial practice of the
Borrower, except for changes mandated by the Financial Accounting Standards
Board or any similar accounting authority of comparable standing.
"Governmental Approval" means any applicable consent, permit,
license or other approval issued by any agency, department, bureau, division or
other instrumentality of any Governmental Authority.
"Governmental Authority" means any municipal, Commonwealth,
state or federal governmental authority (domestic or foreign) having
jurisdiction over the Borrower or the transactions contemplated in this
Agreement.
"Lender" has the meaning assigned to that term in the
Preamble.
"LIBOR" means, as of a particular date of determination, the
three (3) months offered rate for funds in United States dollars in the London
interbank market, as published by Telerate Systems, Inc. (currently on page 3750
of its financial information reporting services) as of 11:00 a.m. London Time,
on the date which is two Business Days prior to such date of determination, or
if such quotations are no longer published or otherwise cease to be
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available, then the offer quotation for the rate of interest on such deposits as
published in The Wall Street Journal on the date of publication of such journal
immediately preceding the date of determination.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Loan Documents" means this Agreement, the Note and, on and
after the date of delivery thereof, each other agreement, document or instrument
delivered under the terms of this Agreement or any other Loan Document, in each
case as amended or otherwise modified from time to time.
"Material Adverse Change" means any material adverse change
in the business, financial condition, operations, performance or properties of
(i) the Borrower or (ii) the Borrower and its Subsidiaries taken as a whole.
"Material Adverse Effect" means a material adverse effect on
(a) the business, financial condition, operations, performance or properties of
(i) the Borrower, or (ii) the Borrower and its Subsidiaries taken as a whole,
(b) the rights and remedies of the Lender under any Loan Document or (c) the
ability of the Borrower to perform its Obligations under any Loan Document to
which it is or is to be a party.
"Note" means the promissory note of the Borrower payable to
the order of the Lender, in substantially the form of Exhibit B, evidencing the
aggregate indebtedness of the Borrower to the Lender resulting from the Advances
made to the Borrower by the Lender.
"Notice of Borrowing" has the meaning assigned to that term in
Section 2.2(a).
"Obligations" means, with respect to any Person, any
obligation of such Person of any kind (including, without limitation,
overdrafts), including, without limitation, any liability of such Person on any
claim, whether or not the right of any creditor to payment in respect of such
claim is reduced to
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judgment, liquidated, unliquidated, fixed, contingent, matured, disputed,
undisputed, legal, equitable, secured or unsecured, and whether or not such
claim is discharged, stayed or otherwise affected by any proceeding referred to
in Section 6.1(f). With out limiting the generality of the foregoing, the
Obligations of the Loan Parties under the Loan Documents include (a) the
obligation to pay principal, interest, charges, expenses, fees, attorneys' fees
and disbursements, indemnities and other amounts payable by any Loan Party under
any Loan Document, and (b) the obligation to reimburse any amount in respect of
any of the foregoing that the Lender, in its sole discretion, may elect to pay
or advance on behalf of such Loan Party.
"Permitted Liens" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced: (a) Liens for taxes, assessments and governmental charges or
levies to the extent not required to be paid under Section 5.1(i) ; (b) Liens
imposed by law, such as materialmen's, mechanics', carriers', workmen's and
repairmen's Liens and other similar Liens arising in the ordinary course of
business securing obligations that are not overdue for a period of more than
thirty (30) days; (c) pledges or deposits to secure obligations under workers'
compensation laws or similar legislation or to secure public or statutory
obligations; (d) easements, rights of way and other encumbrances on title to
real property that do not render title to the property encumbered thereby
unmarketable or materially adversely affect the use of such property for its
present purposes; (e) Liens securing surety, indemnity and performance bonds
entered into in the ordinary course of business as to which full reserves are
maintained; and (f) Liens in existence on the Closing Date, without giving
effect to any extensions or renewals thereof.
"Person" means and includes any individual, sole
proprietorship, partnership, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party or government (whether
national, federal, state, county, city, municipal, or otherwise, including,
without limitation, any
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instrumentality, division, agency, body or department thereof), and including
the Borrower.
"Plan" means each employee plan or other plan maintained for
the employees of the Borrower or any Subsidiary of the Borrower and covered by
Title IV or ERISA.
"Solvent" means, as to any Person, that (a) the fair value and
present fair saleable value of such Person's assets is in excess of the total
amount of such Person's stated liabilities; (b) the present fair saleable value
of such Person's assets is in excess of the amount that will be required to pay
such Person's probable liability on such Person's Debt as such Debt becomes
absolute and mature; (c) such Person does not have unreasonably small capital to
carry on the business in which such Person is engaged and all businesses in
which such Person is about to engage; and (d) such Person has not incurred Debt
beyond such Person's ability to pay such Debt as it matures.
"Subsidiary" means any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation is at the time
directly or indirectly owned or controlled by the Borrower or by one or more
Subsidiaries.
"Termination Date" means the earlier of (i) April 30, 2000 and
(ii) the date of termination of this Agreement pursuant to Section 6.1.
"Termination Event" means (i) a Reportable Event described in
Section 4043 of ERISA and the regulations issued thereunder (other than a
Reportable Event not subject to the provision for 30-day notice to the PBGC
under such regulations), or (ii) the withdrawal of the Borrower or any Affiliate
of the Borrower from a Plan during a Plan year in which it was a "substantial
employer" as defined in Section 4001(a) (2) of ERISA, or (iii) the filing of a
notice of intent to terminate a Plan or the treatment of a Plan amendment as a
termination under Section 4041 of ERISA, or (iv) the institution of proceedings
to terminate a Plan by the PBGC under Section 4042 of ERISA, or (v) any other
event or condition which might constitute grounds
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under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan.
"Year 2000 Plan" has the meaning assigned to that term in
Section 5.1(l).
Year 2000 Problem" has the meaning assigned to that term in
Section 4.1(w).
SECTION 1.2. COMPUTATION OF TIME PERIODS. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding".
SECTION 1.3. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with Generally Accepted
Accounting Principles consistent with those applied in the preparation of the
financial statements referred to in Section 4.1(e).
ARTICLE 2
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.1. THE ADVANCE. The Lender agrees, on the terms and
conditions hereinafter set forth, to make revolving credit advances (each an
"Advance" and collectively, the "Advance") to the Borrower from time to time on
any Business Day during the period from the Closing Date up to and including the
Termination Date in an aggregate principal amount not to exceed FIFTEEN MILLION
DOLLARS ($15,000,000) (the "Commitment"). The proceeds of the Advances shall be
used by the Borrower to pay reasonable closing and legal costs and expenses
incurred in connection with this Agreement and the other Loan Documents and for
working capital requirements of the Borrower in respect to the business in which
the Borrower is presently engaged. Each borrowing under this Section 2.1 (a
"Borrowing") shall be in an aggregate principal amount of not less than $50,000
or an integral multiple of $25,000 in excess thereof. Within the such limits,
the Borrower may borrow, repay and reborrow under this Section 2.1.
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<PAGE> 11
SECTION 2.2. MAKING THE ADVANCES.
(a) (i) Each Borrowing shall be made on notice, given not
later than 1:00 P.M. (Puerto Rico time) on the Business Day prior to the date of
the proposed Borrowing, by the Borrower to the Lender. Each such notice from the
Borrower of such Borrowing (a "Notice of Borrowing") shall be by telephone,
telecopier, telex or cable (in each such case confirmed immediately in writing)
or by personal delivery, in substantially the form of Exhibit A hereto,
specifying therein the (i) requested date of such Borrowing and (ii) aggregate
amount of such Borrowing. Upon fulfillment of the applicable conditions set
forth in Article 3 and compliance with the terms of this Agreement, the Lender
will make such funds available to the Borrower at the Lender's address set forth
in this Agreement.
(ii) The Lender shall be entitled to rely on any
telephonic notice given by the Borrower pursuant to subsection (a)(i) above
(regardless of whether or not such telephonic notice is subsequently confirmed
in writing, but with out prejudice to the Borrower's obligation to deliver such
writ ten confirmation) which the Lender in good faith believes to be from a
responsible officer of the Borrower, and the Borrower hereby waives any right
that it may have to dispute the accuracy of the Lender's transcription or record
of such telephonic notice.
(b) Each Notice of Borrowing shall be irrevocable and binding
on the Borrower.
SECTION 2.3. FEES. (a) The Borrower shall pay to the Lender such
structuring fees, commitment fees and/or other fees as the Borrower and the
Lender may have agreed to from time to time.
(b) All fees provided for herein shall be fully earned when
due and shall not be subject to proration or rebate upon the early termination
of this Agreement or any Commitment hereunder for any reason.
SECTION 2.4. REPAYMENT. The Borrower shall repay to the Lender the
aggregate outstanding principal amount of the Advances made to the Borrower by
no later than the Termination Date.
SECTION 2.5. INTEREST. (a) The Borrower shall pay interest on the
unpaid principal amount of the Advances made by the Lender
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from the date of the Advance until such principal amount is paid in full, at a
rate per annum equal at all times to the sum of the LIBOR plus 150 basis points
payable monthly in arrears on the first Business Day of each month and on the
date such Advance is paid in full. The interest rate on the Advances shall be
determined by the Lender on a quarterly basis and fixed for such quarter. The
Lender shall give prompt notice to the Borrower of the applicable interest rate
as determined by the Lender for purposes of this Section 2.5 (a).
(b) Upon the occurrence and during the continuance of a
payment or monetary Event of Default and/or an Event of Default having a
Material Adverse Effect, the Borrower shall pay interest on the unpaid principal
amount of the Advances owing to the Lender or any other amount payable hereunder
which is not paid when due, from the date such amount shall be due until such
amount shall be paid in full, payable in arrears on the date such amount shall
be paid in full and on demand, at a rate per annum equal at all times to three
percent (3%) per annum above the Base Rate.
SECTION 2.6. INCREASED COSTS. (a) If, due to either the introduction of
or any change (including any change by way of imposition or increase of reserve
requirements) in, or in the interpretation of, any law or regulation occurring
after the Closing Date there shall (i) impose, modify or deem applicable any
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, or any other acquisition of
funds for contributions by the Lender; or (ii) impose on the Lender any other
condition regarding this Agreement; or (iii) subject the Lender to any tax
(including, without limitation, United States interest equalization tax), levy,
impost, duty, charge, fee, deduction or withholding on or from payments due from
the Borrower hereunder; or (iv) change the basis of taxation of payments due
hereunder from the Borrower to the Lender (other than by a change in taxation of
the overall net income of the Lender); or (v) the compliance with any guideline
or request from any central bank or other Governmental Authority (whether or not
having the force of law) issued after the Closing Date, and as a result of any
of the above there shall be any increase in the cost
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to the Lender of agreeing to make or making, funding or maintaining the unpaid
balance of the Advance, then the Borrower shall from time to time, upon notice
and demand by the Lender, pay to the Lender additional amounts sufficient to
compensate the Lender for such increased cost. A certificate as to the amount of
such increased cost, submitted to the Borrower by the Lender, shall be
conclusive and binding for all purposes, absent manifest error. The Lender will
determine the amount of the increased cost payable under this sub-section (a)
acting reasonably and in good faith and using averaging and attribution methods
among its customers which are fair and reasonable.
(b) If the Lender determines that compliance with any law or
regulation or any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law) affects or would
affect the amount of capital required or expected to be maintained by the Lender
or any corporation controlling the Lender and that the amount of such capital
is increased by or based upon the existence of the Lender's commitment to lend
hereunder and other commitments of this type (considering the Lender's policy
regarding capital adequacy), then, upon notice and demand by the Lender, the
Borrower shall pay to the Lender, from time to time as specified by the Lender,
additional amounts sufficient to compensate the Lender or such corporation in
the light of such circumstances, to the extent that the Lender reasonably and in
good faith determines such increase in capital to be allocable to the existence
of the Lender's commitment to lend hereunder (using averaging and attribution
methods among its customers which are fair and reasonable). A certificate as to
such amounts submitted to the Borrower by the Lender shall be conclusive and
binding for all purposes, absent manifest error.
SECTION 2.7. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall make
each payment hereunder and under the Note not later than 2:00 P.M. (Puerto Rico
time) on the day when due in United States dollars to the Lender.
(b) The Borrower hereby authorizes the Lender, if and to the
extent payment owed to the Lender is not made when due hereunder or under the
Note held by the Lender, to charge from time
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to time against any or all of the Borrower's accounts with the Lender any amount
so due.
(c) All computations of interest shall be made by the Lender
on the basis of a year of 360 days, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest are payable. Each determination by the Lender of an interest
rate hereunder shall be conclusive and binding for all purposes, absent manifest
error.
(d) Whenever any payment hereunder or under the Note shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest, provided, however,
that if such extension would cause the next succeeding Business Day to occur in
the next following calendar month, then the day of such payment shall occur on
the next preceding Business Day.
ARTICLE 3
CONDITIONS OF LENDING
SECTION 3.1. CONDITIONS PRECEDENT TO INITIAL BORROWING. The obligation
of the Lender to make an Advance on the occasion of the initial Borrowing is
subject to the following conditions precedent:
(a) There shall have occurred no Material Adverse Change since
December 31,1998.
(b) There shall exist no action, suit, investigation,
litigation or proceeding affecting the Borrower and/or any of its Subsidiaries
or, to the knowledge of the Borrower, threatened before any court, governmental
agency or arbitrator that (i) is reasonably likely to have a Material Adverse
Effect or (ii) purports to affect the legality, validity or enforceability of
this Agreement, the Note, any other Loan Document or the consummation of the
transactions contemplated hereby or thereby.
(c) The Lender shall have received on the Closing Date, each
dated such day (unless otherwise specified), in form and
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substance satisfactory to the Lender (unless otherwise specified) and (except
for the Note) in sufficient copies for the Lender:
(i) The Note of the Borrower to the order of the
Lender; and
(ii) This Agreement.
(d) The Lender shall have received certified copies of all
corporate action taken by the Borrower approving each Loan Document to which it
is a party, and of all documents evidencing all other necessary corporate action
and Governmental Approvals, if any, with respect to each such Loan Document.
(e) The Lender shall have received a certificate of the
Secretary or Assistant Secretary of the Borrower certifying the names and true
signatures of the officers of the Borrower authorized to sign each Loan Document
to which it is a party and the other documents to be delivered by it hereunder.
(f) A favorable opinion of Fernando Rivera-Munich, Esq., Vice
President and General Counsel of the Borrower in the form previously agreed to
by the Lender and the Borrower, and as to such other matters as the Lender may
reasonably request.
(g) The Lender shall have received certificates of good
standing acceptable to the Lender showing that the Borrower is in good standing
in the Commonwealth of Puerto Rico, a copy certified by the Secretary or the
Assistant Secretary of the Borrower dated not more than thirty (30) days prior
to the date of execution of this Agreement of the Articles of Incorporation and
By-Laws of the Borrower.
(h) A certificate of the Borrower, signed on behalf of the
Borrower by an authorized officer of the Borrower, dated the Closing Date,
certifying as to (A) the truth of the representations and warranties contained
in the Loan Documents as though made on and as of the date of the Closing Date,
and (B) the absence of any event occurring and continuing, or resulting from the
initial Borrowing, that constitutes a Default.
(i) Such financial, business and other information regarding
the Borrower revolving as the Lender shall have requested, including, without
limitation, information as to possible contingent liabilities, tax matters,
environmental
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matters, obligations under ERISA and welfare plans, collective bargaining
agreements and other arrangements with employees, annual financial statements
for the Borrower dated as of December 31, 1998, and interim financial statements
for the Borrower dated the end of the most recent fiscal quarter for which
financial statements are available.
(j) Payment by the Borrower to the Lender of all reasonable
costs and expenses of the Lender (including, without limitation, attorney's
fees) incurred in connection with the preparation, negotiation, execution and
delivery of this Agreement and the other Loan Documents and the consummation of
the transactions contemplated hereby and thereby.
(k) The representations and warranties contained in each Loan
Document are true and correct in all material respects on and as of the date of
the initial Borrowing before and after giving effect to such Borrowing and to
the application of the proceeds therefrom.
(l) No event has occurred and is continuing, or would result
from the Advance, or from the application of the proceeds therefrom, which
constitutes a Default.
(m) The Lender shall have received such other approvals,
consents, waivers, opinions or documents as the Lender may reasonably request.
SECTION 3.2. CONDITIONS PRECEDENT TO EACH BORROWING. The obligation of
the Lender to make an Advance on the occasion of each Borrowing (including the
initial Borrowing) shall be subject to the further conditions precedent that on
the date of such Borrowing:
(a) The following statements shall be true and each of the
giving of the applicable Notice of Borrowing and the acceptance by the Borrower
of the proceeds of such Borrowing shall constitute a representation and warranty
by the Borrower (as to each Loan Document to which it is a party) that on the
date of such Borrowing such statements are true:
(i) The representations and warranties contained
in each Loan Document are true and correct in all material respects on and as of
the date of such Borrowing before and after giving effect to such Borrowing and
to the application of the proceeds therefrom,
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as though made on and as of such date (except to the extent any representation
or warranty is made as of a specific date, in which case such representation or
warranty shall be true and correct in all material respects as of such date),
and
(ii) No event has occurred and is continuing, or would
result from such Borrowing, or from the application of the proceeds therefrom,
which constitutes a Default.
(b) The Lender shall have received such other approvals,
opinions or documents as the Lender may reasonably request.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order
to induce the Lender to make the Advances, the Borrower makes the following
representations and warranties to the Lender, each and all of which shall
survive the execution and delivery of this Agreement:
(a) The Borrower is a corporation duly organized, validly
existing in the Commonwealth of Puerto Rico and is in good standing under the
laws of the Commonwealth of Puerto Rico, is qualified and conducts business in
the States of Florida, Illinois and New York and the Borrower does not conduct
business in any other jurisdiction where the nature of its business or assets
requires it to be so qualified to do business, except where the failure to so
qualify would not have a Material Adverse Effect on the business or the assets
of the Borrower. The Borrower has all requisite corporate power and authority to
conduct its business, to own its property and to execute, deliver and perform
all of its obligations under this Agreement, the Note and each of the other Loan
Documents to which it is or will be a party.
(b) The execution, delivery and performance by the Borrower of
the Loan Documents to which it is or will be a party, have been duly authorized
by all necessary corporate action of the Borrower and do not and will not (A)
contravene the organization documents and/or by-laws of the Borrower, (B)
violate in any material respect any provision of any applicable law, rule,
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regulation, order, writ, judgment, injunction, decree, determination or award,
(C) constitute or result in a material breach of or constitute a material
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Borrower and/or any its Subsidiaries is a party
or by which its properties may be bound or affected, or (D) result in, or
require, the creation or imposition of any mortgage, deed of trust, pledge,
Lien, security interest or other charge or encumbrance of any nature (other than
as required hereunder) upon or with respect to any of the properties now owned
or hereafter acquired by the Borrower and/or its Subsidiaries. Neither the
Borrower nor its Subsidiaries is in default under any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award,
or in breach of any such indenture, agreement, lease or instrument, the
violation or breach of which is reasonably likely to have a Material Adverse
Effect.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or regulatory body is
required for the due execution, delivery and performance by the Borrower of the
Loan Document to which it is or will be a party, or for the consummation of the
transactions contemplated hereby or thereby. The Borrower has all material
licenses, permits, rights, variances and other Governmental Approvals that are
necessary to perform its various obligations under the Loan Documents, to own
and operate its properties and assets and to conduct its business as currently
conducted.
(d) This Agreement is, and each other Loan Document to which
the Borrower is or will be a party when delivered hereunder will be, legal,
valid and binding obligations of the Borrower enforceable against the Borrower
in accordance with their respective terms, except to the extent enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditor's rights generally and by
equitable principles (regardless of whether enforcement is sought in equity or
at law).
(e) The balance sheet of the Borrower as of December 31, 1998
and the related statements of income and retained earnings of
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the Borrower for the period ended on December 31, 1998, copies of which have
been furnished to the Lender, fairly present the financial condition of the
Borrower as of such date and the results of the operations of the Borrower for
the period ended on such date, all in accordance with Generally Accepted
Accounting Principles consistently applied, and since such date, there has been
no Material Adverse Change in such condition or operations.
(f) There is no pending or, to the best of the Borrower's
knowledge, threatened action or proceeding affecting the Borrower and/or its
Subsidiaries before any court, governmental agency or arbitrator which, (i) if
adversely deter mined, is reasonably likely to have a Material Adverse Effect or
(ii) purports to affect the legality, validity or enforceability of this
Agreement, the Note or any other Loan Document or the consummation of the
transactions contemplated hereby or thereby.
(g) Except for Doral Securities, Inc., the Borrower and its
other Subsidiaries are not engaged in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
U issued by the Board of Governors of the Federal Reserve System), and no
proceeds of the Advances will be used by the Borrower to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.
(h) The Borrower and its Subsidiaries are Solvent.
(i) The Borrower and its Subsidiaries have filed all federal,
state, Commonwealth and local tax returns required to be filed and have paid all
taxes shown thereon to be due, including interest and penalties, or have
provided adequate reserves therefor; no unpaid or uncontested assessments have
been made against the Borrower and its Subsidiaries by any taxing authority, nor
has any penalty or deficiency been assessed by any such authority, which in the
aggregate for all such assessments, penalties and deficiencies may have a
Material Adverse Effect. All contested assessments which may have a Material
Adverse Effect have been disclosed to the Lender and adequate reserves have been
made therefor. Such tax returns properly reflect the income and taxes of the
Borrower and its Subsidiaries for the periods covered thereby,
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subject only to reasonable adjustments required by the corresponding taxing
authorities upon audit and having no Material Adverse Effect on the financial
condition, business or results of operations of the Borrower.
(j) No Reportable Event has occurred with respect to any Plan
of the Borrower and its Subsidiaries, and neither the Borrower nor its
Subsidiaries has any current or past service liability under any Plan.
(k) No Termination Event has occurred or is reasonably
expected to occur with respect to any Plan of the Borrower and/or its
Subsidiaries and neither the Borrower nor its Subsidiaries has any current or
past service liability under any Plan.
(l) Neither the Borrower nor its Subsidiaries has incurred any
actual withdrawal liability under ERISA with respect to any Plan.
(m) Neither the business nor the properties of the Borrower
and its Subsidiaries are affected by any labor dispute which could have a
Material Adverse Effect.
(n) No written information, exhibit or report furnished by
the Borrower to the Lender in connection with the negotiation of this Agreement,
taken together, contained any material misstatement of fact or omitted to state
a material fact or any fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were given.
(o) (i) The operations and properties of the Borrower and its
Subsidiaries comply in all material respects with all applicable Environmental
Laws; (ii) all necessary Environmental Permits have been obtained and are in
effect for the operations and properties of the Borrower and its Subsidiaries
and the Borrower and its Subsidiaries are in compliance in all material
respects with all such Environmental Permits; (iii) none of the operations or
properties of the Borrower and/or its Subsidiaries is subject to any
Environmental Action alleging the violation of any Environmental Law; (iv) no
circumstances known to the Borrower exist that could form the basis of an
Environmental Action against the Borrower and/or its Subsidiaries or any of
their properties that could have a Material Adverse Effect or cause any such
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property to be subject to any restrictions which could have a Material Adverse
Effect on ownership, occupancy, use or transferability under any Environmental
Law; (v) none of the operations of the Borrower and/or its Subsidiaries are the
subject of a federal, state, Commonwealth or local investigation evaluating
whether any remedial action is needed to respond to a release of any hazardous
or toxic waste, substance or constituent, or any other substance into the
environment, which remedial action may have a Material Adverse Effect on the
Borrower's and/or its Subsidiaries' business operations, financial condition or
the value of any Collateral; and (vi) the Borrower and its Subsidiaries do not
have any contingent liability in connection with any release of any hazardous or
toxic waste, substance or constituent, or any other substance into the
environment which contingent liability, if liquidated, would not be adequately
covered (in the reasonable determination of the Lender) by insurance or other
indemnification rights and which, in the reasonable determination of the Lender,
would not have a Material Adverse Effect on the Borrower's and/or its
Subsidiaries' business operations or financial condition. The Borrower and its
Subsidiaries have not filed any notice under any Environmental Law indicating
past or present treatment, storage or disposal of a hazardous waste or reporting
a spill or release of a hazardous or toxic waste, substance or constituent, or
any other hazardous substance into the environment.
(p) Except for Doral Securities, Inc., neither the Borrower
nor its other Subsidiaries, is an "investment company", or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company", as such terms are defined in the Investment Company Act of 1940, as
amended. Neither the making of an Advance, nor the application of the proceeds
or repayment thereof by the Borrower, nor the consummation of the other
transactions contemplated hereby, will violate any provision of the Investment
Company Act of 1940, as amended, or any rule, regulation or order of the
Securities and Exchange Commission thereunder.
(q) Set forth in the Financial Statements most recently
submitted to the Lender is a complete and accurate list of all Debt
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showing as of the date set forth thereon the principal amount outstanding
thereunder (the "Existing Debt").
(r) Neither the Borrower nor its Subsidiaries is a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.
(s) The Borrower has good and marketable title to all assets
and properties shown or reported in the Financial Statements most recently
submitted to the Lender and all such assets and properties are free and clear of
any encumbrances, mortgages, pledges, charges, leases, security interest and any
other type of lien, encumbrance and/or title restriction, except those reflected
in the Financial Statements.
(t) The Borrower and its Subsidiaries hold all franchises and
licenses required for their operations and said licenses and franchises are in
full force and effect and no other approval, application, filing, registration,
consent or other action of any local, state or federal authority is, or will be
required to enable the Borrower and its Subsidiaries to exploit any such
franchise and licenses. The Borrower nor its Subsidiaries have received any
notice from the granting body or any other Governmental Authority with respect
to any breach of any covenant under, or any default with respect to, any such
franchises or licenses. Before and upon giving effect to this Agreement and the
Loan Documents no default shall have occurred and be continuing under any such
franchises and licenses. All material consents and approvals of, filings and
registration with and all other actions in respect of, all Governmental
Authorities or instrumentalities required to maintain any franchises and
licenses in full force and effect prior to the scheduled date of expiration
thereof have been, or, prior to the time when required, will have been,
obtained, given, filed or taken and are or will be in full force and effect.
(u) All policies of insurance of any kind or nature owned by
or issued to the Borrower, including, without limitation, policies of life,
fire, theft, product liability, public liability, property damage, other
casualty, employee fidelity, worker's
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compensation, employee health and welfare, title, property and liability
insurance, are in full force and effect and are of a nature and provide such
coverage as is sufficient and as is customarily carried by companies of the size
and character of the Borrower. The Borrower has not been refused insurance for
which it applied or had any policy of insurance terminated (other than at its
request).
(v) The proceeds of the Advance shall be used and applied only
for the purposes set forth in Section 2.1 hereof.
(w) The Borrower represents and warrants to the Lender that:
(i) in the normal course of the operation of its business it uses computer
hardware and software for the storage and processing of data (collectively the
"Borrower's Computer Systems") including financial information, inventory,
client lists and other data which is of critical importance to the operation of
its business; (ii) as of the date hereof the Borrower's Computer Systems are in
adequate condition for the purposes for which they are used and intended; (iii)
it is distinctly aware of the existence of the so called year 2000 problem in
the computer field (the "Year 2000 Problem"), which consists generally of the
fact that present programming of the vast majority of computer software and
hardware does not provide for the recognition of dates after December 31, 1999,
and that accordingly, upon the advent of the Year 2000 it is expected that
hardware and software which has not been reprogrammed or replaced, as conditions
may require, will cease to operate or will otherwise operate erratically, all of
which would cause a significant loss of data and other efficiencies to the
Borrower's business, including potentially material financial losses; (iv) the
Borrower believes that it is taking, or has taken, any and all necessary steps
to assure that its significant clients, material suppliers, and any other Person
which individually or in the aggregate has or could have a Material Adverse
Effect on the operations, financial or otherwise of the Borrower's business
including, without limitation, technology, telecommunications, software and
hardware providers, are able to meet the requirements of the Year 2000 Problem,
(v) as of the date hereof, the Borrower reasonably believes that it has
substantially completed or will be in a position to substantially
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complete on or before October 31, 1999 all required modifications, conversions,
changes or replacements to the Borrower's Computer Systems so that the Year 2000
Problem shall not materially adversely affect the Borrower's business; (vi) in
this connection, the Borrower will deliver when requested by the Lender, a
certificate from its independent certified public accountants certifying that
the Borrower has successfully met and/or complied with all necessary
modifications to the Borrower's Computer systems so that the Borrower's business
shall not be adversely affected by the Year 2000 Problem.
ARTICLE 5
COVENANTS OF THE BORROWER
SECTION 5.1. AFFIRMATIVE COVENANTS. So long as an Advance shall remain
unpaid or the Lender shall have any Commitment hereunder and until satisfaction
of all other obligations of the Borrower hereunder, the Borrower will:
(a) Comply and cause its Subsidiaries to comply, in all
material respects, with all applicable laws, rules, regulations and orders
except where such non-compliance is not reasonably likely to have a Material
Adverse Effect.
(b) (i) Maintain and cause its Subsidiaries to maintain all of
its properties (real and personal) insured at all times by responsible,
reputable and financially sound insurance companies or associations in such
amounts and covering loss or damage by fire, earthquake and windstorm and such
other risks as are usually carried by companies engaged in similar businesses
and owning similar properties as the Borrower, and maintain adequate product
liability insurance and other insurance against liability to persons for such
risks and hazards and in such amounts as are usually carried by companies
engaged in similar businesses; and (iii) from time to time at the request of the
Lender, the Borrower shall deliver to the Lender a detailed schedule indicating
all insurance policies then in force.
(c) Furnish to the Lender:
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(i) as soon as available and in any event within
45 days after the close of each of the first three quarters of the Borrower's
Fiscal Year and within 90 days after the end of the last fiscal quarter of each
Fiscal Year of the Borrower, quarterly unaudited financial statements of the
Borrower and its Subsidiaries on a separate and combined basis, including
balance sheets, income statements and cash flow statements, prepared according
to Generally Accepted Accounting Principles. The financial statements referred
to above shall be accompanied by a certificate signed by the Chief Financial
Officer or Treasurer of the Borrower identifying any Event of Default hereunder
and/or any existing fact or circumstance which, with the lapse of time or the
giving of notice or both, would result in an Event of Default hereunder, and
certifying that no other default has occurred under this Agreement, and that no
other fact or circumstance exists which, with the lapse of time or the giving of
notice or both, would result in an Event of Default hereunder;
(ii) as soon as available and in any event within
120 days after the close of each Fiscal Year of the Borrower, audited financial
statements of the Borrower and its Subsidiaries on a separate and combined
basis, including balance sheets, income statements and cash flow statements,
prepared according to Generally Accepted Accounting Principles, as of the end of
such year, certified, without exception or qualification, by independent
certified public accountants of recognized national standing satisfactory to the
Lender. The financial statement referred to above shall be accompanied by a
special report of such independent certified public accountant stating that in
the course of their regular audit of the business of the Borrower, which audit
was conducted by such accounting firm in accordance with generally accepted
auditing standards, nothing came to their attention which would lead them to
conclude that an Event of Default has occurred and is continuing, or if, such
Event of Default has come to their attention, a statement as to the nature
thereof;
(iii) promptly, but in any event within ten (10)
Business Days after the Borrower knows or has reason to know of the existence of
a Default, a statement of the Chief Financial Officer or Treasurer of the
Borrower setting forth details of such Default
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and the action which the Borrower has taken or will take with respect thereto;
(iv) promptly, but in any event within ten (10)
Business Days after receipt by the Borrower of service of process or other
notice of commencement thereof, notice of all actions, suits, investigations,
litigation and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, which
requests a monetary judgment not covered by insurance against, or other type of
monetary relief not covered by insurance from, the Borrower which could result
in a Material Adverse Effect, and promptly after the occurrence thereof notice
of any material adverse change in the status or the financial effect on the
Borrower of such actions, suits, investigations, litigation and proceedings;
(v) promptly, but in any event within ten (10)
Business Days after receipt thereof, copies of the following: (i) any notice of
tax deficiency received from the Puerto Rico Treasury Department or any other
taxing authority of the Commonwealth, (ii) any notice of municipal license tax
deficiency received from the Finance Director of any of the municipalities of
the Commonwealth and (iii) any notice of property tax deficiency received from
the Municipal Revenue Collections Center of Puerto Rico; provided that this
subsection (v) shall only apply to deficiencies which could result in a Material
Adverse Effect;
(vi) promptly, but in any event within ten (10)
Business Days after the Borrower knows or has reason to know of the existence
thereof, notice of any condition or occurrence on any property of the Borrower
and/or its Subsidiaries that results in noncompliance with, or liability under,
any Environmental Law or Environmental Permit with respect to the Borrower
and/or its Subsidiaries and which noncompliance or liability could result in a
Material Adverse Effect;
(vii) promptly, but in any event within ten (10)
Business Days after the Borrower knows or has reason to know of the existence
thereof, notice of any material labor dispute to which the Borrower and/or its
Subsidiaries may become a party, any strikes or walkouts relating to any of its
or their facilities;
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(viii) promptly, but in any event within ten (10)
Business Days after the occurrence thereof, notice of the default by the
Borrower and/or its Subsidiaries under any note, indenture, loan agreement,
mortgage, lease, deed or other similar agreement which could result in a
Material Adverse Effect.
(d) Obtain, preserve and maintain and cause its Subsidiaries
to obtain, preserve and maintain, (i) its corporate existence and going concern
status, and (ii) all rights (charter and statutory) and all approvals,
authorizations, licenses, permits and franchises of all Governmental Authorities
necessary to enable the Borrower to operate and maintain its property, business
and operations as currently conducted other than such rights, approvals,
authorizations, licenses, permits and franchises which failure to obtain,
preserve or maintain could not reasonably be expected to have a Material Adverse
Effect.
(e) Keep proper books of record and account and cause its
Subsidiaries to keep proper books of record and account, in which full and
correct entries shall be made of all financial transactions and the assets and
businesses of the Borrower in accordance with Generally Accepted Accounting
Principles consistently applied.
(f) Maintain and preserve all of its properties which are
necessary or reasonably useful for the proper conduct of its businesses in good
working order and condition, ordinary wear and tear excepted, and in material
compliance with all applicable standards and rules imposed by all Governmental
Authorities with jurisdiction, except where the failure to do so is not,
individually or in the aggregate, reasonably likely to result in a Material
Adverse Effect; and at all times do or cause to be done all things necessary to
obtain, preserve, renew and keep in full force and effect all copyrights,
trademarks, service marks and trade names, except where the failure to do so is
not, individually or in the aggregate, reasonably likely to result in a Material
Adverse Effect.
(g) Utilize the proceeds of the Advances for the purposes set
forth in Section 2.1.
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(h) File and cause its Subsidiaries to file all federal,
state, Commonwealth and local tax returns and other reports required by law to
be filed, except if the failure to timely file such returns and reports would
not result in a Material Adverse Effect; maintain and cause its Subsidiaries to
maintain adequate reserves for the payment of all taxes, assessments,
governmental charges and levies imposed upon the Borrower and/or its
Subsidiaries, its income or its profits; pay and discharge all such taxes,
assessments, governmental charges and levies imposed upon the Borrower and its
Subsidiaries or against its properties prior to the date on which penalties
accrue, except to the extent that the same may be contested by the Borrower
and/or its subsidiaries in good faith by appropriate proceedings and adequate
reserves have been made therefor, unless and until a Lien resulting therefrom
attaches to its property and becomes enforceable against its other creditors;
and prior to their becoming overdue, promptly notify the Lender in writing as to
any such taxes, assessments and governmental charges which it intends to
contest.
(i) Continue and cause its Subsidiaries to continue to be
Solvent.
(j) Conduct and cause its Subsidiaries to conduct its business
so as to comply in all material respects with all applicable Environmental Laws
and Environmental Permits; provided, however, that nothing contained in this
subsection shall prohibit the Borrower and/or its Subsidiaries from contesting,
in good faith by appropriate legal proceedings, any such Environmental Law or
Environmental Permit or the interpretation or application thereof, provided,
further, that the Borrower shall and shall cause its Subsidiaries to comply with
the order of any court or other governmental body of applicable jurisdiction
relating to such Environmental Laws and Environmental Permits unless the
Borrower and/or its Subsidiaries shall then be prosecuting an appeal or
proceedings for review and shall have secured a stay of enforcement or execution
or other arrangement postponing enforcement or execution pending such appeal or
proceedings for review. If the Borrower and/or its Subsidiaries shall (iii)
receive notice that any violation of any Environmental Law or Environmental
Permit may have been
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committed or is about to be committed by the Borrower and/or its Subsidiaries,
(iv) receive notice that any Environmental Action has been filed or is about to
be filed against the Borrower and/or its Subsidiaries alleging violations of any
Environmental Law or Environmental Permit or requiring the Borrower and/or its
Subsidiaries to take any action in connection with the release of toxic or
hazardous substances into the environment, (v) receive any notice from a
federal, state, Commonwealth or local governmental agency or private party
alleging that the Borrower and/or its Subsidiaries may be liable or responsible
for costs associated with a response to or cleanup of a release of a toxic or
hazardous substance into the environment or any damages caused thereby, (vi)
receive any notice that the Borrower and/or its Subsidiaries is subject to
federal, state, Commonwealth or local investigation evaluating whether any
remedial action is needed to respond to the release of any hazardous or toxic
waste, substance or constituent, or any other substance into the environment, or
(vii) receive any notice that any properties or assets of the Borrower and/or
its Subsidiaries are subject to a Lien in favor of any governmental entity for
any liability under Environmental Laws or damages arising from or costs incurred
by such governmental entity in response to a release of a hazardous or toxic
waste, substance or constituent, or any other substance into the environment,
then the Borrower shall promptly but in any event within five (5) Business Days
after the Borrower's receipt thereof, provide the Lender with a copy of such
notice.
(k) Conduct all transactions with any of its Affiliates on
terms that are fair and reasonable and no less favorable to the Borrower than it
would obtain in a comparable arm's-length transaction with a Person not an
Affiliate.
(l) Take all necessary and appropriate action and steps to
address and remedy all and any deficiencies in the Borrower's Computer Systems
which relate to the Year 2000 Problem that could be reasonably expected to
adversely affect the operations, financial or otherwise, of the Borrower's
business, including without limitation estimating the cost of making all such
modifications to the Borrower's Computer Systems. In this respect,
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it agrees further to maintain the Lender at all times reasonably informed of its
progress in making all applicable modifications, conversions, changes or
replacements to the Borrower's Computer Systems (the "Year 2000 Plan") so that
the Year 2000 Problem shall not materially adversely affect the operations,
financial or otherwise, of the Borrower's business. The Borrower will further
require its accountants to certify together with their review of the annual
financial statements that they have reviewed the Borrower's compliance with its
representations concerning its Year 2000 Plan and have found them to be true and
correct in all material respects.
SECTION 5.2. NEGATIVE COVENANTS. So long as an Advance shall remain
unpaid or the Lender shall have any Commitment hereunder and until full payment
of the Note and all other obligation of the Borrower hereunder, the Borrower
will not, without the prior written consent of the Lender:
(a) Create, incur, guarantee, endorse, assume or suffer to
exist or permit any of its Subsidiaries to create, incur, guarantee, endorse,
assume or suffer to exist, any Lien upon any of its properties or assets and/or
any Debt, direct, contingent or otherwise, except (i) Debt hereunder and under
the Note; (ii) trade payables and accruals incurred in the ordinary course of
business; (iii) the Existing Debt; (iv) Permitted Liens; and (v) any Debt and/or
Lien which does not result in a Material Adverse Effect.
(b) Declare or pay any dividends, purchase, redeem, retire,
defease or otherwise acquire for value any of its capital stock or any warrants,
rights or options to acquire such capital stock now or hereafter outstanding,
return any capital to its stockholders as such, make any distribution of assets,
capital stock, warrants, rights, options, obligations or securities to its
stockholders as such, or permit any Subsidiary of the Borrower to purchase,
redeem, retire, defease or otherwise acquire for value any capital stock of the
Borrower or of any Subsidiary of the Borrower or any warrants, rights or options
to acquire such capital stock, provided, however, that if no Default has
occurred and is continuing, the Borrower may declare and pay cash dividends in
any Fiscal Year not to exceed its retain earnings for such Fiscal Year.
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(c) Sell, lease, transfer or otherwise dispose of, or permit
any Subsidiary of the Borrower to sell, lease, transfer or otherwise dispose of,
any asset (including, without limitation, receivables, machinery, equipment,
leases, leaseholds, realty, trademarks, trade names, goodwill and other tangible
and intangible assets), except in the ordinary course of business and so long
as such sale, lease, transfer or otherwise does not result in a Material Adverse
Effect.
(d) Wind up, liquidate, dissolve itself.
(e) Make or permit any of its Subsidiaries to make any
material change in the nature of the business carried on by the Borrower and its
Subsidiaries as of the date hereof, or make any material change in the
Borrower's business objectives, purposes or operations, except if any such
change does not result in a Material Adverse Effect.
(f) Assume, guarantee, endorse or otherwise be or become
liable upon or permit any Subsidiary to assume, guarantee, endorse or otherwise
be or become liable upon, the obligations of any Person, except by the
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business or if any such assumption,
guarantee, endorsement or liability does not result in a Material Adverse
Effect.
(g) Create or enter into, or permit any of its Subsidiaries to
create or enter into, any Plan except in compliance in all material respects
with all applicable laws and regulations.
(h) Enter into or be a party to, or permit any of its
Subsidiaries to enter into or be a party to, any transaction with any of its
Affiliates, except in the ordinary course of business and pursuant to the
reasonable requirements of the Borrower's or such Subsidiary's business and upon
fair and reasonable terms which are no less favorable to the Borrower or such
Subsidiary than the Borrower or such Subsidiary would obtain in a comparable
arm's length transaction with a Person which is not the Borrower's Affiliate.
(i) Amend, or permit any Subsidiary to amend, in connection
with any provision relating to capital stock or otherwise in any way adverse in
any material respect to the interest of the
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Lender, the Articles of Incorporation or By-Laws of the Borrower or such
Subsidiary, except to the extent required in order to comply with applicable law
or if any such amendment does not result in a Material Adverse Effect. In any
event, the Borrower shall give the Lender not less than thirty (30) days written
notice after amending the Articles of Incorporation or By-Laws of the Borrower
or any of its Subsidiaries.
ARTICLE 6
EVENTS OF DEFAULT
SECTION 6.1. EVENTS OF DEFAULT. If any of the following events ("Events
of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay when due any amount of
principal and/or interest or the Borrower shall fail to pay any other amounts or
fees fifteen (15) days after the same become due; or
(b) The Borrower shall fail to perform or observe any term,
covenant or agreement contained in Sections 5.1 (a), (c), (d), (g), (h), (i) or
(j) or Section 5.2; or
(c) The Borrower shall fail to perform or observe any other
term, covenant or agreement contained in this Agreement and/or in any other Loan
Document on its part to be performed or observed, and in any such case any such
failure shall remain unremedied for a period of thirty (30) days after written
notice thereof shall have been given to the Borrower by the Lender; or
(d) Any representation or warranty made by the Borrower (or
any of its officers) under or in connection with any Loan Document to which it
is a party shall, when taken as a whole, prove to have been incorrect in any
material respect when made; or
(e) The Borrower or any Subsidiary thereof shall fail to pay
any principal of, premium or interest on any Debt that is outstanding in a
principal amount of $1,000,000 or more in the aggregate (excluding Debt
evidenced by the Note) (as the case may be), when due and owing (whether at
scheduled maturity, by required prepayment, acceleration, demand or otherwise)
or any other default under any agreement or instrument relating to any such
Debt, or any other event, shall occur, if the effect of such default or event is
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to accelerate, or to permit the acceleration of, or to permit the acceleration
after the giving of notice or passage of time or both, of, the maturity of such
Debt; or any such Debt shall be declared to be due and payable, or required to
be prepaid (other than by a regularly scheduled required prepayment), prior to
the stated maturity thereof; or
(f) The Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in writing its
inability to pay its debts generally, or shall make a general assignment for the
benefit of all its creditors; or any proceeding shall be instituted by or
against the Borrower or any of its Subsidiaries seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of any order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any substantial part
of its property and, in the case of any such proceeding instituted against it
(but not instituted by it) that is being diligently contested by it in good
faith, either such proceeding shall remain undismissed or unstayed for a period
of sixty (60) days or any of the actions sought in such proceeding (including,
without limitation, the entry of any order for relief against, or the
appointment of a receiver, trustee, custodian or other similar official for, it
or any substantial part of its property) shall occur; or the Borrower or any of
its Subsidiaries shall take any corporate action to authorize any of the actions
set forth above in this subsection (f); or
(g) Any Reportable Event which the Lender believes might
constitute grounds for termination of any Plan maintained by the Borrower or any
of its Subsidiaries shall have occurred or if a United States District Court
appoints a trustee to administer any such Plan, or if the PBGC shall institute
proceedings to terminate any such Plan or to appoint a trustee therefor; or if
any Termination Event with respect to a Plan shall have occurred, and sixty (60)
days thereafter, (i) such Termination Event (if correctable) shall not have been
corrected and (ii) the then
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present value of such Plan's vested benefits exceeds the then current value of
assets accumulated in such Plan; or if the Borrower or any of its Subsidiaries
as employer under a Plan shall have made a complete or partial withdrawal from
such Plan and the Plan sponsor of such Plan shall have notified such withdrawing
employer that such employer has incurred an actual withdrawal liability which
materially adversely affects the financial condition of the Borrower; or
(h) Any final and unappealable judgment or order for the
payment of money in excess of $1,000,000 which is not covered by insurance shall
be rendered against the Borrower or any of its Subsidiaries and either (i)
enforcement proceedings shall have been commenced by any creditor upon such
judgment or order or (ii) there shall be any period of thirty (30) consecutive
days during which a stay of enforcement of such judgment or order, by reason of
a pending appeal or otherwise, shall not be in effect; or
(i) Any material provision of any Loan Document after delivery
thereof pursuant to this Agreement shall for any reason (other than pursuant to
the terms hereof or thereof) cease to be valid and binding on or enforceable
against any party to it (other than the Lender), or any such party shall so
state in writing; or
(j) There shall have occurred a condition or a change of
circumstances which, taken as a whole, has or could reasonably be expected to
have a Material Adverse Effect on the assets, properties, operations,
performance or financial condition of the Borrower and/or its Subsidiaries.
then, and in any such event, the Lender may by notice to the Borrower, declare
the Note, all interest thereon and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon the Note, all such interest
and all such amounts shall become and be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower; provided, however, that in the event of
an actual or deemed entry of an order for relief with respect to the Borrower
under the Federal Bankruptcy Code, the obligation of the Lender to make Advances
shall automatically be terminated and the Note, all such interest and all such
amounts
-33-
<PAGE> 35
shall automatically become and be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are hereby expressly
waived by the Borrower.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1. AMENDMENTS, ETC. No amendment or waiver of any provision
of this Agreement, the Note or any other Loan Documents, nor consent to any
departure by the Borrower there from, shall in any event be effective unless the
same shall be in writing and signed by the Lender (and, in the case of any such
amendment, by the Borrower), and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 7.2. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable communication) and mailed, telecopied, telegraphed, telexed,
cabled or delivered personally or by courier, if to the Borrower, at 1159
Roosevelt Avenue, Puerto Nuevo, San Juan, Puerto Rico, Attention: President
(Facsimile Number: 787-749-7384; and if to the Lender, at P.O. Box 9146,
Santurce, Puerto Rico 00908-0146, Attention: President (Facsimile No.
787-787-1245); or as to each party, at such other address as shall be designated
by such party in a written notice to the other parties. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective three (3) days after being deposited in the mails, on the day when
transmitted by telecopier, on the day when delivered to the telegraph company,
on the day when confirmed by telex answerback or on the day when delivered to
the cable company, respectively, and when delivered personally or by courier, on
the day when delivery is made. Notwithstanding the foregoing, notices and
communications to the Lender pursuant to Article 2 shall not be effective until
received by the Lender.
SECTION 7.3. NO WAIVER; REMEDIES. No failure on the part of the Lender
to exercise, and no delay in exercising, any right hereunder or under the Note
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right preclude any
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<PAGE> 36
other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
SECTION 7.4. COSTS, EXPENSES AND TAXES; INDEMNIFICATION. (a) The
Borrower agrees to pay on demand all reasonable costs and expenses of the Lender
in connection with the preparation, execution, delivery, administration,
modification and amendment of this Agreement, the Note, the Loan Documents and
the other documents to be delivered hereunder and under the other Loan
Documents. The Borrower further agrees to pay on demand all reasonable costs and
expenses, if any (including, without limitation, reasonable counsel fees and
expenses), in connection with the enforcement (whether through negotiations,
legal proceedings or otherwise) after the occurrence of an Event of Default of
this Agreement, the Note, the Loan Documents and the other documents to be
delivered hereunder, including, without limitation, reasonable counsel fees and
expenses in connection with the enforcement of rights under this Section 7.4(a).
(b) The Borrower hereby agrees to indemnify and hold harmless
the Lender and each of its Affiliates and its officers, directors, employees,
agents, advisors and representatives (each, an "Indemnified Party") from and
against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, the reasonable fees and expenses of counsel),
joint or several, that may be incurred by or asserted or awarded against any
Indemnified Party, in each case arising out of or in connection with or by
reason of, or in connection with the preparation for a defense of, any
investigation, litigation or proceeding arising out of, related to or in
connection with (i) the transactions contemplated by this Agreement and the
other Loan Documents or any use made or proposed to be made with the proceeds of
the Advance or (ii) the actual or alleged presence of hazardous materials on any
property of the Borrower or any Environmental Action relating in any way to the
Borrower in each case whether or not such investigation, litigation or
proceeding is brought by the Borrower, its partners, directors, shareholders or
creditors or an Indemnified Party or any Indemnified Party is otherwise a party
thereto and whether or not the transactions contemplated hereby are
-35-
<PAGE> 37
consummated, except to the extent such claim, damage, loss, liability or expense
is found in a final, non-appealable judgment by a court of competent
jurisdiction to have resulted from such Indemnified Party's gross negligence or
willful misconduct. The Borrower further agrees that no Indemnified Party shall
have any liability (whether direct or indirect, in contract or tort or
otherwise) to the Borrower or its creditors for or in connection with the
transactions contemplated by this Agreement and the other Loan Documents, except
to the extent that such liability is found in a final non-appealable judgment by
a court of competent jurisdiction to have resulted from such Indemnified Party's
gross negligence or willful misconduct; provided, however, that the provisions
of this Section shall not in any way alter any contractual obligation or
contractual remedy of any Indemnified Party. The Borrower also agrees not to
assert any claim against the Lender, any of its Affiliates, or any of its
respective directors, officers, employees, attorneys and agents, on any theory
of liability, for special, indirect, consequential or punitive damages arising
out of or otherwise relating to any of the transactions contemplated herein or
in any other Loan Document or the actual or proposed use of the proceeds of the
Advances.
(c) If the Borrower fails to pay when due any reasonable
costs, expenses or other amounts payable by it under any Loan Document,
including, without limitation, fees and expenses of counsel and indemnities,
such amount may be paid on behalf of the Borrower by the Lender in its sole
discretion.
SECTION 7.5. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default the Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Lender
to or for the credit or the account of the Borrower against any and all of the
Obligations of the Borrower now or hereafter existing under this Agreement, the
Note held by the Lender and the other Loan Documents, whether or not the Lender
shall have made any demand under this Agreement, the Note, such other Loan
Documents and although such Obligations may be unmatured. The Lender agrees
-36-
<PAGE> 38
promptly to notify the Borrower after any such set-off and application made by
the Lender, provided that the failure to give such notice shall not affect the
validity of any such set-off and application. The rights of the Lender under
this Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Lender may have.
SECTION 7.6. BINDING EFFECT. This Agreement shall become effective when
it shall have been executed by the Borrower and the Lender and thereafter shall
be binding upon and inure to the benefit of the Borrower, the Lender and their
respective successors and assigns, except that the Borrower shall have no right
to assign its rights hereunder or any interest herein without the prior written
consent of the Lender.
SECTION 7.7. ASSIGNMENTS AND PARTICIPATIONS. (a) The Lender may assign
to one or more banks or other entities all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of the Advance owing to it, the Note held by it and the remaining Loan
Documents). Prompt notice of such assignment shall be given by the Lender to the
Borrower.
(b) The Lender may sell participations to one or more banks or
other entities in or to all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of the Advance
owing to it and the Note held by it).
(c) The Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section,
disclose to the assignee or participant or proposed assignee or participant, any
information relating to the Borrower furnished to such Lender by or on behalf of
the Borrower; provided that, prior to any such disclosure, the assignee or
participant or proposed assignee or participant shall agree to preserve the
confidentiality of any confidential information relating to the Borrower
received by it from the Lender pursuant to the terms of Section 7.12.
SECTION 7.8. SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the
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<PAGE> 39
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 7.9. SURVIVAL OF COVENANTS. All covenants, agreements,
representations and warranties made by the Borrower in this Agreement or in any
other Loan Document or any instrument, document or certificate delivered
pursuant hereto or thereto shall be deemed to have been material and relied on
by the Lender, notwithstanding any investigation made by the Lender, and shall
survive the execution and delivery of this Agreement and of such instrument,
document or certificate until repayment of all amounts due hereunder and under
the Note; provided, however, that the Obligations of the Borrower under Section
7.4 of this Agreement shall survive such repayment.
SECTION 7.10. APPLICATION OF PAYMENTS. The Lender shall have the
continuing and exclusive right to correctly apply or reverse and re-apply any
and all payments to any portion of the Obligations of the Borrower. To the
extent that the Borrower makes a payment or payments to the Lender which payment
or any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, receiver or any
other party under any bankruptcy law or state, Commonwealth or federal law, or
equitable cause, then, to the extent of such payment received, the Obligations
of the Borrower or part thereof intended to be satisfied shall be revived and
continue in full force and effect, as if such payment had not been received by
the Lender.
SECTION 7.11. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts and by different 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.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
SECTION 7.12. CONFIDENTIALITY. The Lender agrees to keep confidential
all non-public information pertaining to the Loan Parties which is provided to
it by any such parties in accordance
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<PAGE> 40
with the Lender's customary procedures for handling confidential information of
this nature, and shall not disclose such information to any Person except (i) to
the extent such information is public when received by the Lender or becomes
public thereafter due to the act or omission of any party other than the Lender,
(ii) to the extent such information is independently obtained from a source
other than the Borrower and such information from such source is not, to the
Lender's knowledge, subject to any obligation of confidentiality or, if such
information is subject to an obligation of confidentiality, that disclosure of
such information is permitted, (iii) to any Affiliate of the Lender, counsel,
auditor, examiner or any regulatory authority having jurisdiction over the
Lender, accountants and other consultants retained by the Lender, (iv) in
connection with any litigation or the enforcement of the rights of the Lender
under this Agreement or any other Loan Document, (v) to the extent required by
any applicable statute, rule or regulation or court order (including, without
limitation, by way of subpoena) or pursuant to the request of any Governmental
Authority having jurisdiction over the Lender, or (vi) to the extent disclosure
to other Persons is appropriate in connection with any proposed or actual
assignment or grant of a participation to such other Person (who will in turn be
required to maintain confidentiality as if it were the Lender party to this
Agreement). In no event shall the Lender be obligated or required to return any
such information or other materials furnished by the Borrower pursuant to this
Agreement or the other Loan Documents.
SECTION 7.13. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO ANY OF THE LOAN DOCUMENTS, THE ADVANCE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 7.14. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Puerto Rico.
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<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
BORROWER:
DORAL FINANCIAL CORPORATION
By: /s/ Mario S. Levis
--------------------------------
Name: Mario Samuel Levis Marquez
Title: Executive Vice President
and Treasurer
LENDER:
FIRSTBANK PUERTO RICO
By: Randolfo Rivera
--------------------------------
Name: Randolfo Rivera Sanfeliz
Title: Executive Vice President
<PAGE> 42
EXHIBIT B
[FORM OF NOTE]
PROMISSORY NOTE
$15,000,000
FOR VALUE RECEIVED, DORAL FINANCIAL CORPORATION, a Puerto Rico
corporation, (the "Borrower"), hereby promises to pay to FIRSTBANK PUERTO RICO
(the "Lender") at the offices of the Lender, 1519 Ponce de Leon Avenue,
Santurce, San Juan, Puerto Rico, the principal sum of FIFTEEN MILLION DOLLARS
($15,000,000) (or such lesser amount as shall equal the aggregate unpaid
principal amount of the Advances made by the Lender to the Borrower under the
Credit Agreement), in lawful money of the United States of America and in
immediately available funds, on the dates and in the principal amounts provided
in the Credit Agreement, and to pay interest on the unpaid principal amount of
the Advance, at such offices, in like money and funds, for the period commencing
on the date of such
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<PAGE> 43
Advance until such Advance shall be paid in full, at the rate per annum and on
the dates provided in the Credit Agreement.
The date, amount and interest rate of the Advance made by the Lender to
the Borrower, and each payment made on account of the principal thereof, shall
be recorded by the Lender on its books and, prior to any transfer of this Note,
endorsed by the Lender on the schedule attached hereto or any continuation
thereof, provided that the failure of the Lender to make any such recordation or
endorsement shall not affect the obligation of the Borrower to make a payment
when due of any amount owing under the Credit Agreement or hereunder in respect
of the Advance made by the Lender.
This Note is the Note referred to in the Credit Agreement dated as of
April ___, 1999 (as modified and supplemented and in effect from time to time,
the "Credit Agreement") between the Borrower and the Lender and evidences the
Advance made by the Lender thereunder. Terms used but not defined in this Note
have the respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events upon the terms and conditions
specified therein.
This Note shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Puerto Rico.
DORAL FINANCIAL CORPORATION
By:
--------------------------------
Name:
Title:
Affidavit No.
--------
Acknowledged and subscribed before me in San Juan, Puerto Rico, on this
___ day of _________, 1999, by the following person who is personally known to
me: ______________________________
- --------------------------------------------------------------------------------
--------------------------
Notary Public
<PAGE> 44
SCHEDULE OF ADVANCES
This Note evidences the Advance made under the within described Credit
Agreement to the Borrower, on the date, in the principal amount and bearing
interest at the rates set forth below, subject to the payments and prepayments
of principal set forth below:
<TABLE>
<CAPTION>
Principal Amount Unpaid
Amount of Interest Paid or Principal Notation
Date Made Advance Rate Prepaid Amount Made By
- --------- ------- ---- ------- ------ -------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 45
EXHIBIT A
NOTICE OF BORROWING
________________, 199___
FirstBank Puerto Rico
PO Box 9146
Santurce, Puerto Rico 00908-0146
Attention:
Gentlemen:
The undersigned Borrower refers to the Credit Agreement, dated as of
April ____, 1999 (the "Credit Agreement", the terms defined therein being used
herein as therein defined), among the undersigned and FirstBank Puerto Rico, and
hereby gives you notice, irrevocably, pursuant to Section 2.2 of the Credit
Agreement that the undersigned hereby requests a Borrowing under the Credit
Agreement, and in that connection sets forth below the information relating to
such Borrowing (the "Proposed Borrowing") as required by Section 2.2(i) of the
Credit Agreement:
(a) The Business Day of the Proposed Borrowing is ________,
199____.
(b) The aggregate amount of the Proposed Borrowing is
$-------.
The undersigned hereby certifies that the following statements are true
on the date hereof, and will be true on the date of the Proposed Borrowing:
(1) the representations and warranties contained in the Credit
Agreement and in each other Loan Document are true and correct in all material
respects on and as of the date of the Proposed Borrowing and to the application
of the proceeds therefrom, as though made on and as of such date (except to the
extent any representation or warranty is made as of a specific date, in which
case such representation and warranty shall be true and correct in all material
respects as of such date); and
<PAGE> 46
(2) no event has occurred and is continuing, or would result from such
Proposed Borrowing or from such Proposed Borrowing or from the application of
the proceeds therefrom, which constitutes a Default.
Very truly yours,
DORAL FINANCIAL CORPORATION
By:
---------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.85(B)
FIRST AMENDMENT TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as
of May 13, 1999, is entered into between FirstBank Puerto Rico, a banking
corporation organized and existing under the laws of the Commonwealth of Puerto
Rico (the "Lender") and DORAL FINANCIAL CORPORATION, a corporation organized
under the laws of the Commonwealth of Puerto Rico (the "Borrower"), with
reference to the Credit Agreement, dated as of April 9, 1999, between the
Borrower and the Lender, (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 Lender and the Borrower wish to amend the Credit Agreement as set
forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Deletion of Sections 5.2(a) and 5.2(f). Subsections (a)
and (f) of Section 5.2 are hereby deleted in their entirety.
Section 2. Amendment of Section 5.2(b). The proviso at the end of
Section 5.2(b) is hereby amended to read as follows:
provided, however, that if no Default has occurred and is
continuing, the Borrower may declare and pay cash dividends
in any Fiscal Year in an amount not to exceed the retained
earnings of the Borrower and its Subsidiaries on a
consolidated basis as of the end of the immediately preceding
year.
<PAGE> 2
Section 3. Representations and Warranties. The Borrower represents
and warrants that, on and as of the date hereof, all of the representations and
warranties made by it in the Credit Agreement and the other Loan Documents are
true and correct as if made on and as of the date hereof.
Section 4. Effectiveness. This Amendment shall become effective as
of the date of its execution by the parties hereto.
Section 5. 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 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PUERTO RICO.
Section 7. 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 Lender 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.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
DORAL FINANCIAL CORPORATION,
as a Borrower
By: /s/ MARIO S. LEVIS
----------------------------
Name: Mario S. Levis
Title: Executive Vice President
and Treasurer
FIRSTBANK PUERTO RICO
By: /s/ RANDOLFO RIVERA SANFELIZ
----------------------------
Name: Randolfo Rivera Sanfeliz
Title: Executive Vice President
3
<PAGE> 1
EXHIBIT 10.86
$50,000,000
WAREHOUSING LOAN AGREEMENT
Dated as of April 29, 1999
Among
DORAL FINANCIAL CORPORATION
and
DORAL MORTGAGE CORPORATION
as Borrowers
and
CITIBANK, N.A.
as Bank
<PAGE> 2
WAREHOUSING LOAN AGREEMENT
WAREHOUSING LOAN AGREEMENT dated as of April 29, 1999 by and among
DORAL FINANCIAL CORPORATION, a corporation organized and existing under the
laws of the Commonwealth of Puerto Rico (hereinafter referred to as "DFC"),
DORAL MORTGAGE CORPORATION, a corporation organized and existing under the laws
of the Commonwealth of Puerto Rico (hereinafter referred to as "DMC" and,
collectively with DFC, the "Borrowers"), and CITIBANK, N.A., a national banking
association (hereinafter referred to as the "Bank").
WITNESSETH
WHEREAS, the Borrowers have that requested the Bank extend a
warehousing loan facility for the purpose of financing single family
residential first mortgage loans;
WHEREAS, the Bank is willing to extend to the Borrowers the above
mentioned warehousing loan facility upon and subject to the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the parties hereto agree as follows:
<PAGE> 3
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and the plural forms of the terms defined):
"ACCOUNT" has the meaning set forth in Section 3.1 hereof.
"ADJUSTED LIABILITY RATIO" has the meaning set forth in Section 8.11
hereof.
"ADVANCES" has the meaning set forth in Section 2.3 hereof.
"BASE RATE" means the rate of interest announced publicly by Citibank,
N.A. in New York, New York from time to time as Citibank's base rate.
"BUSINESS DAY" means any day, other than a Saturday or Sunday, on
which commercial banks are generally open for business in the Commonwealth of
Puerto Rico.
"CLOSING DATE" means the date of this Agreement.
"COLLATERAL" has the meaning set forth in Section 4.2 hereof.
"COMMITTED NON-CONFORMING MORTGAGE" means a first mortgage on a single
family residential property located within the Commonwealth of Puerto Rico that
does not conform to the requirements established by the FHA, VA, FNMA or FHLMC,
which has
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<PAGE> 4
a firm Purchase Commitment from an institutional investor acceptable to the
Bank.
"CONFORMING FHA/VA MORTGAGE" means an FHA Mortgage or a VA Mortgage.
"CONFORMING CONVENTIONAL MORTGAGE" means a first mortgage on a single
family residential property located within the Commonwealth of Puerto Rico
which complies with all applicable requirements for purchase under the FNMA or
the FHLMC standard form of conventional selling contract and any supplement
thereto then in effect.
"CUSTODIAN" shall mean Citibank, N.A. or such other entity as shall
have been approved by the Bank in writing and that shall have entered into a
custodial agreement with the Bank, such agreement to be in form and substance
satisfactory to the Bank.
"DFC" has the meaning set forth in the preamble.
"DMC" has the meaning set forth in the preamble.
"EBITDA" shall mean net income plus interest expense, taxes,
depreciation and amortization.
"EURODOLLAR FLOATING POOL RATE" shall mean the average cost to the
Bank of Eurodollar Funds during the thirty (30) days immediately preceding the
corresponding interest payment date.
"EURODOLLAR FUNDS" means deposits in United States dollars in the
principal office of Citibank, N.A. in London, England.
-3-
<PAGE> 5
"EVENT OF DEFAULT" has the meaning assigned to that term in Section
10.1.
"FHA" means the Federal Housing Administration.
"FHA MORTGAGE" means a first mortgage on property located within the
Commonwealth of Puerto Rico insured by the Federal Housing Commissioner (or
which the Commissioner has made a commitment to insure, provided such
commitment is in full force and effect and such mortgage fully complies with
the terms of the commitment), to the full extent permitted under the applicable
title and section of the NHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"GAAP" shall mean generally accepted accounting principles issued by
the Financial Accounting Standards Board from time to time consistently applied
and maintained throughout the period indicated and consistent with the prior
financial practice of the corresponding Borrower and any predecessor, except
for changes mandated by the Financial Accounting Standards Board or any similar
accounting authority of comparable standing.
"GNMA" means the Government National Mortgage Association.
"GNMA CERTIFICATE" means a certificate which is issued pursuant to
Title III of the NHA backed by VA or FHA mortgages and which is guaranteed by
GNMA pursuant to Section 306(G) of the NHA.
-4-
<PAGE> 6
"GNMA POOL" means a pool of Conforming FHA/VA Mortgages certified to
the GNMA Transfer Agent under HUD Form 11706 with respect to which a GNMA
Certificate shall be issued.
"INTEREST COVERAGE RATIO" has the meaning set forth in Section 8.10
hereof.
"LOAN DOCUMENTS" means this Agreement, the Note, the Collateral and
all other documents executed pursuant hereto or delivered in connection
herewith.
"MATERIAL ADVERSE CHANGE" means any material adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Borrowers.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, condition (financial or otherwise), operations, performance,
properties or prospects of any Borrower, (b) the rights and remedies of the
Bank under any Loan Document, (c) the ability of any Borrower to perform its
obligations under any Loan Document to which it is or is to be a party or (d)
the Collateral or any part thereof.
"MORTGAGE" means a first mortgage on an owner-occupied primary
residence in Puerto Rico and, unless the context otherwise indicates, includes
the promissory note secured thereby.
"MORTGAGE LOANS" has the meaning set forth in Section 2.1 hereof.
-5-
<PAGE> 7
"MORTGAGE NOTE" means a valid and enforceable promissory note of the
owner of the property for which a Mortgage has been issued as security, and, in
the case of an FHA Mortgage, guaranteed or insured by the FHA and in the case
of a VA Mortgage, guaranteed or insured by the Veterans Administration.
"NHA" means the National Housing Act of 1934, as amended.
"NOTE" has the meaning set forth in Section 3.1 hereof.
"OBLIGATIONS" means and includes all loans, advances, debts,
liabilities, obligations, covenants and duties due and owing by any Borrower to
the Bank, of any kind or nature, present or future, whether or not evidenced by
any note, guaranty or other instrument, arising under this Agreement and the
Note or under any other agreement, instrument or document related to this
Agreement, the Note or the Collateral, due or to become due, now existing or
hereafter arising and however acquired. The term includes, but without
limitation, all interest, charges, expenses, fees, attorneys' fees and other
sums chargeable to Borrowers under this Agreement and the Note.
"PERSON" means and includes any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, entity, party or government (whether national,
federal, state, county, city, municipal, or otherwise, including, without
limitation, any instrumentality, division, agency, body or department thereof),
and including the Borrowers.
"PURCHASE COMMITMENT" means a written agreement pursuant to which a
purchaser acceptable to the Bank has agreed to purchase
-6-
<PAGE> 8
the FHA Mortgages, VA Mortgages, Conforming Conventional Mortgages or Committed
Non-Conforming Mortgages pledged to the Bank pursuant to this Agreement (or
mortgage-backed securities issued by GNMA, FNMA or FHLMC with respect to
Mortgages pledged pursuant to this Agreement) upon such terms and conditions as
are acceptable to the Bank.
"REQUEST FOR ISSUANCE" has the meaning set forth in Section 3.4(b)
hereof.
"SECURITY AGREEMENT" has the meaning set forth in Section 4.1 hereof.
"TANGIBLE NET WORTH" means the excess of tangible assets over all
liabilities of the Borrowers and their respective subsidiaries on a
consolidated basis. Tangible assets shall include all assets except for all
patents, patent applications, trademarks, copyrights, trade names, goodwill,
and treasury stock.
"TERMINATION DATE" has the meaning set forth in Section 2.2.
"TOTAL LIABILITIES" all liabilities of DFC except for subordinated
debt.
"UNCOMMITTED MORTGAGE LOANS" means a Mortgage lacking a firm Purchase
Commitment from an institutional investor acceptable to the Bank.
"VA MORTGAGE" means a Mortgage guaranteed by the Veterans
Administration under the applicable title and section of the Servicemen's
Readjustment Act of 1944, as amended, to the extent
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<PAGE> 9
of 60% of the unpaid principal amount thereof or FIFTY THOUSAND SEVEN HUNDRED
FIFTY DOLLARS ($50,750), whichever is less, but in no event shall the
unguaranteed portion of the loan exceed 75% of the value of the property as
determined in the Certificate of Reasonable Value thereof, and constituting a
valid first lien on the premises mortgaged thereby.
ARTICLE 2
COMMITMENT, AMOUNT AND PURPOSE
2.1 WAREHOUSING LOAN FACILITY. The Bank agrees, on the terms and
conditions hereinafter set forth, to make revolving credit advances (each, an
"Advance") from time to time to the Borrowers in an aggregate principal amount
not to exceed FIFTY MILLION DOLLARS ($50,000,000) at any time outstanding (the
"Warehousing Loan Facility") for the purpose of (i) warehousing first mortgage
loans (hereinafter referred to as "Mortgage Loans") secured by Mortgages on
completed single-family units (detached houses, townhouses and condominium
units), (each, a "Regular Sub-line Advance") and (ii) financing Mortgage Loans
held by the Borrowers that have been included in a GNMA Pool with respect to
which a GNMA Certificate shall be issued (each, a "Gestation Sub-line
Advance").
2.2 LENDING PERIOD AND TERMINATION. The commitment of the Bank
under the Warehousing Loan Facility (the "Commitment") shall terminate on April
28, 2000 (the "Termination Date").
2.3 FEES. The Borrowers agree that, in addition to all other sums
payable hereunder, they shall pay to the Bank (i) a processing fee equal to
$100.00 for each Gestation Sub-line Advance, payable on the date of each such
Advance and
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<PAGE> 10
(ii) a collateral handling fee equal to twelve and one half (12 1/2) basis
points per annum (based on a 360 day year) of the average principal amount
outstanding during each calendar month under the Warehousing Loan Facility,
payable monthly in arrears on the 10th day of the following month and on the
date the Warehousing Loan Facility is paid in full.
ARTICLE 3
INTEREST AND REPAYMENT
3.1 WAREHOUSING LOAN FACILITY. Upon fulfillment of all conditions
precedent to a Regular Sub-line Advance or a Gestation Sub-line Advance, as the
case may be, and upon notice given by a Borrower to the Bank by not later than
twelve noon (12:00 Noon) on the day of such Advance, the Bank shall make
Regular Sub-line Advances and Gestation Sub-line Advances to such Borrower
under the Warehousing Loan Facility.
No Advance shall exceed the following respective limits (the
"Disbursement Percentage"):
<TABLE>
<CAPTION>
COLLATERAL AMOUNT OF ADVANCE
---------- -----------------
<S> <C>
Committed FHA/VA Mortgage Loans .................. 97%
Uncommitted FHA/VA/Mortgage Loans ................ 95%
Committed Conforming Conventional
Mortgage Loans ................................... 95%
Uncommitted Conforming Conventional Mortgage
Loans ............................................ 95%
Committed Non-Conforming
Mortgages ........................................ 95%
</TABLE>
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<PAGE> 11
provided, however, that (a) no Advance for committed loans shall exceed the
lower of (i) the Disbursement Percentage multiplied by the commitment price of
such loan, and (ii) the Specified Amount, and (b) no Advance for uncommitted
loans shall exceed the lower of (i) the Disbursement Percentage multiplied by
the New York market value of such loan, and (ii) the Specified Amount. As used
herein, the Specified Amount for a particular Mortgage Loan shall mean, in the
case of a Mortgage Loan originated within 180 days of the proposed date of the
Advance, the total amount disbursed by the Borrowers for such loan and, in the
case of a Mortgage Loan originated more than 180 days prior to the proposed
date of the Advance, the principal amount outstanding of such loan. The Bank
shall not make Advances to finance Committed Non-Conforming Mortgages
designated as B or C Rated based on Borrower's internal credit rating system.
The Bank may adjust the aforementioned percentages in its discretion by
notifying Borrowers fifteen (15) Business Days before the change is effective.
Borrowers agree to maintain the aforesaid stipulated margins throughout the
period of time any Advance remains outstanding by providing or pledging to the
Bank additional Collateral or by reducing the outstanding principal amount of
such Advance to comply with such limits.
The Warehousing Advances shall be evidenced by a promissory note of
the Borrowers to the order of the Bank (the "Note") in the principal amount of
FIFTY MILLION DOLLARS ($50,000,000) substantially in the form of Exhibit A.
Each Regular Sub-line Advance made shall be payable on the date which
is the earlier of (i) the date on which the Borrowers request a Gestational
Sub-line Advance in respect of the Mortgages financed with such Regular
Sub-line Advance and duly complies with the conditions precedent set forth in
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<PAGE> 12
Section 5.1.6.2 hereof or (ii) if the Mortgages financed with such Regular
Sub-line Advance were originated by a Borrower, one hundred eighty (180) days
from the origination date or, if the Mortgages financed with such Regular
Sub-line Advance were originated by a third party and purchased by a Borrower,
one hundred eighty (180) days from the date of such purchase. The Regular
Sub-line Advances made under the Note shall bear interest from their respective
dates until full payment of the unpaid balance of principal thereof at a
fluctuating annual rate equal to one point one two five percent (1.125%) over
and above the Bank's Eurodollar Floating Pool Rate, or, if Eurodollar Funds are
not available to the Bank for such Advance, a fluctuating annual rate equal to
the Base Rate, each change in such fluctuating rate to take effect
simultaneously with the corresponding change in the Base Rate.
Each Gestation Sub-line Advance made under the Note shall be used
solely for the purpose of repaying a Regular Sub-line Advance and shall be in
the same principal amount, and subject to the same Disbursement Percentage, as
the Regular Sub-line Advance repaid therewith. Each Gestation Sub-line Advance
shall be payable on the date which is the earlier of (i) sixty days from the
date on which the Gestation Sub-line Advance is made or (ii) the date on which
the corresponding Borrower transfers (by sale, repurchase agreement or
otherwise) the GNMA Certificate backed by the Mortgages in the GNMA Pool
financed by the Gestation Sub-line Advance. The Gestation Sub-line Advances
made under the Note shall bear interest at a fluctuating annual rate to zero
point eight seventy-five (0.875%) over and above the Bank's Eurodollar Floating
Pool Rate, or, if Eurodollar Funds are not available to the Bank for such
Advance, a fluctuating annual rate equal to point twenty-five percent (0.25%)
below the Base
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<PAGE> 13
Rate, each change in such fluctuating rate to take effect simultaneously with
the corresponding change in the Base Rate.
Interest due on Advances under the Note shall be payable monthly in
arrears on the first day of each month.
Principal and interest payments on Advances under the Note shall be
made by debiting DFC account number 0425633015 (the "Account") with the Bank.
DFC hereby authorizes the Bank to debit the Account for the corresponding
amounts of principal and interest.
3.2 PAYMENTS AND COMPUTATIONS. The Borrowers shall make each
payment to the Bank hereunder and under the Note not later than 12:00 noon (San
Juan, Puerto Rico time) on the day when due in lawful money of the United
States of America in immediately available funds. The Borrowers hereby
authorize the Bank to charge from time to time against the Account any amount
so due, and the Bank shall promptly thereafter notify the Borrowers of such
action; provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application. All computations of
interest under the Note and fees hereunder shall be made by the Bank on the
basis of a year of 360 days.
3.3 PAYMENTS ON NON-BUSINESS DAYS. Whenever any payment to be made
hereunder or under Note shall be stated to be due on a day other than a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of
payment of interest or fees, as the case may be.
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<PAGE> 14
3.4 INCREASED COSTS. If, due to either (a) the effectiveness of,
or any change (including, without limitation, any change by way of imposition
or increase of any reserve requirements) in, or in the interpretation of, any
law or regulation, or (b) the compliance with any formal guideline or formal
request from any central bank or other governmental authority (whether or not
having the force of law), there shall be any increase in the cost to the Bank
of agreeing to make or making, funding or maintaining Advances funded with
Eurodollar Funds made to the Borrowers hereunder, then the Borrowers shall from
time to time, upon demand by the Bank, pay the Bank additional amounts
sufficient to indemnify the Bank against such increased cost. A certificate in
reasonable detail as to the amount of such increased cost submitted to the
Borrowers by the Bank shall constitute prima facie evidence of the amount of
such increased cost.
3.5 ILLEGALITY. Notwithstanding any other provision of this
Agreement, if the effectiveness of, or any change in, or in the interpretation
of, any law or regulation shall make it unlawful, or any central bank or other
governmental authority shall assert that it is unlawful, for the Bank to
perform its obligations hereunder to fund or maintain Advances hereunder with
Eurodollar Funds, then, on notice thereof and demand therefor by the Bank to
the Borrowers, (a) the obligation of the Bank to fund or maintain such Advances
with Eurodollar Funds shall terminate, and (b) the Bank shall convert all
outstanding Advances funded with Eurodollar Funds into Advances funded with
funds other than Eurodollar Funds. In the event that the Bank suffers any loss
or expense as a result of the conversion of the Advances as aforesaid, the
Borrowers shall, upon demand by the Bank, pay the Bank additional amounts
sufficient to indemnify the Bank against such loss or expense. A certificate in
reasonable detail as to
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<PAGE> 15
the amount of such loss or expense submitted to the Borrowers by the Bank shall
constitute prima facie evidence of the amount of such increased cost. The Bank
need make no Advance hereunder which it may not make lawfully under then
existing conditions.
ARTICLE 4
SECURITY
4.1 As security for the Advances, the Borrowers shall deliver to
the Bank a Security Agreement, Pledge and Assignment (the "Security Agreement")
and such other documents as may be necessary to create a first priority
security interest over the following:
4.1.1 The Mortgage Notes and related documents referred to
in Section 5.1.6, GNMA Certificates, Mortgage-Backed Securities and any other
investment instrument financed under the Warehousing Loan Facility;
4.1.2 Mortgage Delivery Commitments financed under the
Warehousing Loan Facility;
4.2 In addition, all obligations of each Borrower under this
Agreement and under the other Loan Documents shall be guaranteed by the other
Borrower pursuant to Section 11 hereof.
4.3 When duly pledged, issued or assigned, all such security and
related rights and interests shall guarantee the Advances and all obligations
of the Borrowers hereunder and under the other Loan Documents shall be also
sometimes collectively referred to as "Collateral".
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<PAGE> 16
ARTICLE 5
CONDITIONS OF LENDING
5.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of the
Bank to make the initial Advance hereunder is subject to the following
conditions precedent:
5.1.1 CONTINUING ACCURACY OF REPRESENTATIONS AND
WARRANTIES. The representations and warranties contained in this Agreement
shall be true and correct on and as of the date of the Advance with the same
effect as though such representations and warranties had been made on and as of
such date.
5.1.2 DELIVERY OF LOAN AGREEMENT, NOTE, CERTIFICATES AND
OPINIONS. Borrowers shall have duly executed and delivered this Agreement and
the Note together with (i) copies of authorizing resolutions of the Boards of
Directors of Borrowers certified by the Secretary or an Assistant Secretary
each Borrower as of the date of such execution and delivery; (ii) current
incumbency certificates showing the titles and signatures of all officers of
Borrowers executing this Agreement and any documents executed in connection
herewith; and (iii) an opinion of counsel for Borrowers dated the date hereof,
addressed to the Bank and in form and substance satisfactory to the Bank and
its counsel as to such matters as the Bank may reasonably require. All
documents are to be executed and delivered to the Bank on the date hereof (the
"Closing Date") unless otherwise agreed by the Bank and shall be in form and
substance satisfactory to the Bank. In addition, Borrowers shall deliver at or
before the Closing Date, certified copies of Borrowers' certificates of
incorporation and by-laws, and such other similar documentation or reports
reasonably required by the Bank or its
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<PAGE> 17
counsel as may be specified in closing instructions delivered to Borrowers or
their counsel prior to the Closing Date.
5.1.3 NO MATERIAL ADVERSE CHANGE. There shall have occurred
no Material Adverse Change since September 30, 1998.
5.1.4 ABSENCE OF LITIGATION. There shall exist no action,
suit, investigation, litigation or proceeding affecting the Borrowers pending
or threatened before any court, governmental agency or arbitrator that (i) is
reasonably likely to have a Material Adverse Effect or (ii) purports to affect
the legality, validity or enforceability of this Agreement, any Note, any other
Loan Document or the consummation of the transactions contemplated hereby or
thereby.
5.1.5 DELIVERY OF COLLATERAL AND ADVANCE REQUEST.
Borrowers shall have delivered to the Bank sufficient Collateral to qualify for
the Disbursement Amount of the Advance requested. Borrowers shall also have
delivered to the Bank an Advance Request, executed in duplicate, substantially
in the form of Exhibit B attached hereto and made to form a part hereof, or
such other form as the Bank shall approve, which Advance Request shall show, in
a manner satisfactory to the Bank, the computation of the collateral value of
all Collateral.
If any Mortgage or accompanying instrument(s) or
document(s) pledged in connection with any Advance shall not, in the opinion of
the Bank or its counsel, comply in all respects with the conditions and
requirements of this Agreement, the Bank may, in its sole discretion, reject
the same and/or advance to the Borrowers within a reasonable time only such
amount as the Bank may determine is proper on the basis of acceptable
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<PAGE> 18
Collateral and accompanying instruments and, in such event, the relevant
Advance Request shall be deemed amended to specify the amount actually advanced
by the Bank.
5.1.6 COLLATERAL DELIVERY REQUIREMENTS. The instruments and
documents assigned and delivered to the Bank under the Security Agreement shall
be satisfactory in form and substance to the Bank, shall include all
instruments and documents required to give the Bank full and effective security
in accordance with the provisions of this Agreement, and shall include, but
shall not be limited to, the following:
5.1.6.1. In the case of each Mortgage in respect
of which a Regular Sub-line Advance is requested:
5.1.6.1.1 The original Mortgage Note of the
owner of the mortgaged premises payable to the order of a Borrower, as obligee,
endorsed by such Borrower in blank.
5.1.6.1.2 If the Mortgage is an FHA
Mortgage, such original Mortgage Note shall bear the endorsement of FHA, or in
the event the Mortgage Note has not been endorsed, the corresponding FHA
Mortgage Insurance Certificate shall have been issued or applied for (such
certificate to be pledged and assigned to the Bank by a Borrower but retained
by such Borrower until such time as the Bank may request possession thereof).
If the Mortgage is a VA Mortgage, the corresponding VA loan guaranty
certificate shall have been issued or applied for (such certificate to be
pledged and assigned to the Bank by such Borrower but retained by such Borrower
until such time as the Bank may request possession thereof). If the Mortgage is
a Conforming Conventional Mortgage and if the loan is to have private mortgage
insurance, the corresponding mortgage insurance
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<PAGE> 19
certificate shall have been issued or applied for (such certificate to be
pledged and assigned to the Bank by such Borrower but retained by such Borrower
until such time as the Bank may request possession thereof).
5.1.6.1.3 The certified, recorded copy of
the Deed of Mortgage bearing the same date as, and by its terms securing, the
Mortgage Note. If the certified copy is pending recordation, then a simple copy
of said deed accompanied by a letter or other form of acknowledgment acceptable
to the Bank from the Notary certifying that the certified copy has been
presented for recordation in the appropriate Section of the Registry of
Property. The corresponding Borrower shall have in its possession (if
available) a copy of the Registry of Property presentation minute duly stamped
as received by the Registry of Property; provided, however, if such
presentation minute is not immediately available, the corresponding Borrower
shall receive such presentation minute within five (5) days following the
delivery of the Mortgage Note to the Bank (such minute to be pledged and
assigned to the Bank by such Borrower but retained by such Borrower until such
time as the Bank may request possession thereof).
5.1.6.1.4 A title insurance policy shall
have been issued by a title insurance company acceptable to the Bank (the
"Insurer") in form and substance acceptable to the Bank, naming the
corresponding Borrower as its successors and assigns as insureds thereunder and
certifying that the mortgage deed has been filed for recording as a first lien,
and showing the Registry of Property presentation or recordation data. Said
title insurance policy shall contain all affirmative insurance required, and
only such exceptions as are permitted, by the FHA, VA or, if applicable, the
investor which issued the Purchase
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<PAGE> 20
Commitment, if applicable, or as may otherwise be approved in writing by the
Bank. In the event a title insurance policy has not been issued, the
corresponding Borrower shall have obtained a commitment letter (binder) issued
by the Insurer in form and substance acceptable to the Bank, and the Borrowers
covenant to take all reasonable steps to have the title insurance policy issued
and delivered to the corresponding Borrower within twenty (20) days from the
date of the Mortgage. Such documents shall be pledged and assigned to the Bank
by the corresponding Borrower but retained by such Borrower until such time as
the Bank may request possession thereof.
5.1.6.1.5. Copy of the hazard insurance
policy covering the mortgaged property with standard mortgage endorsement in
favor of the corresponding Borrower (certificate in the case of loans covered
by a master policy), both in form and substance acceptable to the Bank and, if
applicable, to the financial institution which issued the Purchase Commitment,
in an amount not less than the full insurable value of the mortgaged property
issued by a company satisfactory to the Bank and in such form as will prevent
the mortgagor, such Borrower or the Bank from becoming a co-insurer under the
terms of the policy (such documents to be pledged and assigned to the Bank by
the corresponding Borrower but retained by such Borrower until such time as the
Bank may request possession thereof).
5.1.6.1.6 Schedule of Mortgage Loans to be
attached to the corresponding Advance Request.
5.1.6.1.7 A copy of the FHA mortgage
insurance certificate or VA loan guaranty certificate or private mortgage
insurance certificate, as applicable (to be pledged and assigned to the Bank by
the corresponding Borrower but retained
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<PAGE> 21
by such Borrower until such time as the Bank may request possession thereof),
for each Mortgage.
5.1.6.1.8 Any and all other related
documents which are required by the FHA or VA or by the permanent investor
committed to purchase the Mortgage Loans (such documents to be pledged and
assigned to the Bank by the corresponding Borrower but retained by such
Borrower until such time as the Bank may request possession thereof).
5.1.6.1.9 For an FHA Mortgage, the
following additional documents (such documents to be pledged and assigned to
the Bank by the corresponding Borrower but retained by such Borrower until such
time as the Bank may request possession thereof):
(a) FHA Form 1800-5 Conditional
Commitment for Mortgage Insurance;
(b) FHA Form 2900-4 Firm Commitment;
(c) Disclosure Statement required by the
Federal Truth-in-Lending Act;
(d) Survey or Plot Plan;
(e) Copy of the Disclosure-Settlement
Statement (Form HUD-1).
5.1.6.1.10 For a VA Mortgage, the following
additional documents (such documents to be pledged and assigned to the Bank by
the corresponding Borrower but retained by such
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<PAGE> 22
Borrower until such time as the Bank may request possession thereof):
(a) Copy of Certificate of Reasonable
Value (VA Form No. 26-1843A or B);
(b) Survey or Plot Plan;
(c) Disclosure Statement required by
the Truth-in-Lending Act.
5.1.6.1.11 For a Conforming Conventional
Mortgage (such documents to be pledged and assigned to the Bank by the
corresponding Borrower but retained by such Borrower until such time as the
Bank may request possession thereof):
(a) Copy of the commitment to issue
mortgage insurance, if applicable;
(b) Survey or Plot Plan;
(c) Disclosure Statement required by the
Truth-in-Lending Act.
5.1.6.1.12 For a Committed Non-Conforming
Mortgage (such documents to be pledged and assigned to the Bank by the
corresponding Borrower but retained by such Borrower until such time as the
Bank may request possession thereof):
(a) Copy of the Purchase Commitment;
(b) Survey or Plot Plan;
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<PAGE> 23
(c) Disclosure Statement required by the
Truth-in-Lending Act.
5.1.6.1.13 Right of Rescission Notice (such
documents to be pledged and assigned to the Bank by the corresponding Borrower
but retained by such Borrower until such time as the Bank may request
possession thereof).
5.1.6.1.14 Borrowers shall provide the Bank
with a copy of each Purchase Commitment, if applicable, prior to the physical
delivery of the Mortgage Notes sold to the investors.
5.1.6.2. In the case of the Mortgages in respect
of which a Gestation Sub-line Advance is requested, a copy of HUD Form 11706
with a detailed schedule of the corresponding Mortgage Loans attached thereto.
5.1.6.3. Any and all other related documents which
are required by the permanent investor committed to purchase the Mortgage
Loans, if applicable, (such documents to be pledged and assigned to the Bank by
the corresponding Borrower but retained by such Borrower until such time as the
Bank may request possession thereof).
5.1.7 CONDITIONS TO SUBSEQUENT ADVANCES. The making or
issuance of all Advances after the initial Advance shall be subject to the
conditions precedent set forth in Articles 5 and 6, which conditions must be
complied with at the time of and for each Advance, together with an updating of
the certificates and opinions referred to in Section 5.1.2, as may reasonably
be required by the Bank from time to time.
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<PAGE> 24
ARTICLE 6
GENERAL PROVISIONS AS TO COLLATERAL
6.1 ELIGIBILITY OF MORTGAGES AS COLLATERAL. (a) No Mortgage shall
be eligible as Collateral pursuant hereto, unless it complies with the
following conditions:
(i) The Mortgage complies with all applicable
legal requirements as to its validity and enforceability and with all
other requirements set forth in this Agreement, and such Mortgage is
accompanied by all other corresponding instruments and documents
described in Section 5.1.4 hereof.
(ii) A default has not occurred under the
Mortgage.
(iii) (A) The Mortgage constitutes a valid first
mortgage lien on real estate in the Commonwealth of Puerto Rico
improved by a completed one-family house, townhouse or condominium
apartment, and such Mortgage is in recordable form; and
(B) The entire face amount thereof shall
have been fully disbursed by the corresponding Borrower to or for the
account of the mortgagor.
(iv) The Mortgage by its own terms secures payment
of a Mortgage Note which:
(A) has been executed by the owners of the
mortgaged property and is payable to the order of the
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<PAGE> 25
corresponding Borrower as obligee or has been endorsed to the order of
a Borrower by the original lender;
(B) is fully negotiable;
(C) bears interest at a rate not exceeding the
maximum rate permitted for such Mortgage Note by the laws of the
Commonwealth of Puerto Rico and, if applicable, the rules and
regulations of the FHA; and
(D) has a maturity date not later than the
maximum permitted at the time of closing by applicable law, rules and
regulations, and in no event later than thirty (30) years from the
date on which the Mortgage Note is executed.
(b) No Mortgage Note shall be accepted as Collateral
sufficient to back an Advance pursuant to this Agreement if it has at any time
prior to the pledge thereof been granted by any Borrower as security to the
Bank or to any other Person under any other agreement, or if such Mortgage Note
or the corresponding Mortgage is covered by any other agreement between any
Borrower and the Bank. The Bank may waive this requirement at its discretion.
6.2 RIGHTS IN COLLATERAL. No Borrower shall have any right to
modify, amend or waive any material term or condition of any Mortgage, Mortgage
Note or any other item of Collateral or related document without the Bank's
written consent. In the absence of an Event of Default hereunder, the
corresponding Borrower shall be entitled to collect and retain all regularly
scheduled principal and interest payments from all Mortgage Loans included in
the Collateral. After the occurrence of an Event of
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<PAGE> 26
Default hereunder, the Bank shall have the sole right, at the Bank's option, to
enforce and collect the Mortgage Loans and other instruments and documents
pledged as Collateral, and the rights under title and casualty insurance
policies and other rights related to Collateral and may, in its discretion,
modify, amend or otherwise vary by waiver, settlement of any claim, or
otherwise, any terms or conditions of any instruments or documents delivered as
Collateral or any related rights.
6.3 ADDITIONAL COLLATERAL. The Borrowers agree to deliver to the
Bank from time to time such additional Collateral as shall be necessary so that
no outstanding Advance exceeds the limits established in the second paragraph
of Section 3.1.
6.4 RELEASE OF COLLATERAL AND WITHDRAWAL OF PLEDGED MORTGAGES.
6.4.1 RELEASED COLLATERAL. Provided that there exists no
Event of Default hereunder, the Bank shall release to the corresponding
Borrower the Collateral delivered with respect to a particular Advance upon
full payment of the principal amount of and accrued interest on such Advance;
provided, however, that in the case of Regular Sub-line Advances under the
Warehousing Loan Facility that are repaid with Gestational Sub-line Advances
under the Warehousing Loan Facility such Collateral shall remain pledged and
assigned to the Bank as collateral until such time as the conditions set forth
in 5.1.6.2 are duly complied with. In connection with each release of
Collateral, Borrowers shall deliver to the Bank a computation showing
compliance with the foregoing condition for the release of Collateral, in the
form of an Advance Request, even if no Advance is requested (in such case, the
amount requested on the Advance Request form shall be
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<PAGE> 27
set forth as zero) and even if no Collateral is being delivered therewith (in
such case, the Advance Request form shall be submitted without a Schedule of
Mortgage Loans being delivered).
6.4.2 DEFECTIVE COLLATERAL. If at any time the Bank shall
notify any Borrower that, in the sole judgment of the Bank, any Collateral
delivered as security hereunder, or any instrument or document relating
thereto, is unsatisfactory for the Advance hereunder, whether because of
failure of the Collateral or any instrument(s) or document(s) relating thereto
to conform to the requirements of this Agreement, or for any other reason, and
shall demand that Borrowers withdraw said Collateral, Borrowers shall, within
five (5) Business Days after such demand, (i) pay to the Bank the amount of the
Advance in respect of which such Collateral was delivered as security and
withdraw such Collateral and the instruments and documents relating thereto
from pledge hereunder, or (ii) deliver and provide a lien on additional
Collateral acceptable to the Bank.
6.5 FORM AND SUBSTANCE SATISFACTORY TO BANK'S COUNSEL. All legal
details and proceedings in connection with the transactions contemplated by
this Agreement shall be in form and substance reasonably satisfactory to the
Bank's legal counsel.
6.6 SALE TO PERMANENT BUYER; POOLING OF MORTGAGES.
6.6.1 At such time as any Borrower shall desire to transmit
to a permanent buyer (other than FNMA or FHLMC) for sale any one or more of the
Mortgages delivered as Collateral hereunder, such Borrower shall issue a
written request to the Bank substantially in the form of Exhibit G hereto
describing the relevant Mortgage(s) and requesting the Bank to deliver the
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<PAGE> 28
relevant documentation to the Custodian. Within one (1) Business Day after
receipt of such request, the Bank shall deliver said Mortgage(s) to the
Custodian which will hold such Mortgage(s) on behalf of the Bank. Upon receipt
of such documentation by the Custodian, the Custodian shall deliver to the Bank
a written confirmation of receipt substantially in the form of Exhibit H
hereto. Simultaneously with the confirmation of receipt by the Bank or
Custodian of an amount equal to the principal amount due to the Bank from the
Borrowers on the Advances secured by the Mortgages being delivered, the
Custodian shall deliver the relevant Collateral to the permanent buyer. The
Borrowers agree that upon such delivery by the Custodian neither the Bank nor
the Custodian shall have any responsibility of any nature in the event that the
Mortgages and related documents are not received by the permanent buyer
thereof. At any time the Bank may, in its sole discretion, require that any
payments required to be made to the Bank by the Borrowers simultaneously with
the Bank's release of any Collateral be made to the Bank in immediately
available funds.
6.6.2 (i) At such time as any Borrower shall desire to
transmit to FNMA or FHLMC for cash payment any one or more of the Mortgages
delivered as Collateral hereunder, such Borrower shall issue a written request
to the Bank, substantially in the form of Exhibit C hereto, describing the
relevant Mortgage(s) and requesting the Bank to deliver the relevant
documentation to such Borrower. Within one (1) Business Day after receipt of
such request, the Bank shall deliver said Mortgage(s) to such Borrower which
will hold such Mortgage(s) in trust on behalf of the Bank for the sole purpose
of transmitting them to FNMA or FHLMC for sale. Upon receipt of such
documentation by the corresponding Borrower, such Borrower shall deliver to the
Bank a written
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confirmation of receipt, substantially in the form of Exhibit D hereto.
(ii) If for any reason the corresponding payment
made by FNMA or FHLMC is (A) not received by the Bank in immediately available
funds within seven calendar days from the date on which the Bank released the
corresponding Collateral or (B) insufficient to pay in full the outstanding
principal amount of the Advances secured by the Mortgages delivered to the
Borrower, the Bank may, at its option, charge the corresponding amount to any
account of any Borrower with the Bank (including, without limitation, the
Account), and if sufficient funds are not then available in said account to
cover such charge, the Borrowers covenant and agree that such amount shall be
immediately due and payable and that they will make the corresponding payment
to the Bank forthwith.
6.6.3 (i) At such time as any Borrower shall desire to
transmit to a financial institution located in Puerto Rico for cash payment any
one or more of the Mortgages delivered as Collateral hereunder, such Borrower
shall issue a written request to the Bank, substantially in the form of Exhibit
E hereto, describing the relevant Mortgage(s) and requesting the Bank to
deliver the relevant documentation to such Borrower. Within one (1) Business
Day after receipt of such request, the Bank shall deliver said Mortgage(s) to
such Borrower which will hold such Mortgage(s) in trust on behalf of the Bank
for the sole purpose of transmitting them for sale to a financial institution
located in Puerto Rico. Upon receipt of such documentation by the corresponding
Borrower, such Borrower shall deliver to the Bank a written confirmation of
receipt, substantially in the form of Exhibit F hereto.
(ii) If for any reason the corresponding payment
made by such financial institution is (A) not received by the
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Bank in immediately available funds within one business day from the date on
which the Bank released the corresponding Collateral or (B) insufficient to pay
in full the outstanding principal amount of the Advances secured by the
Mortgages delivered to the Borrower, the Bank may, at its option, charge the
corresponding amount to any account of any Borrower with the Bank (including,
without limitation, the Account), and if sufficient funds are not then
available in said account to cover such charge, the Borrowers covenant and
agree that such amount shall be immediately due and payable and that they will
make the corresponding payment to the Bank forthwith.
6.6.4 (i) At such time as any Borrower shall desire to
transmit to a GNMA, FNMA or FHLMC custodian any one or more of the Mortgages
delivered as Collateral hereunder for the purpose of forming a pool of such
Mortgages, such Borrower shall issue a written request to the Bank,
substantially in the form of Exhibit G hereto, listing the Mortgages to be
included in the pool and requesting that the Bank deliver the relevant
documentation to the Custodian, which will hold such Mortgages on behalf of the
Bank. Within one (1) Business Day after receipt of such request, the Bank shall
deliver said Mortgage(s) to the Custodian which will hold such Mortgage(s) on
behalf of the Bank. Upon receipt of such documentation by the Custodian, the
Custodian shall deliver to the Bank a written confirmation of receipt
substantially in the form of Exhibit H hereto. Once the pool of Mortgages is
ready to be submitted to GNMA, FNMA or FHLMC, as the case may be, the
corresponding Borrower may request that the Custodian deliver the relevant
documentation to the GNMA, FNMA or FHLMC custodian and, in the case of GNMA
Pools, that the Bank execute and deliver HUD Form 11711A, releasing its lien on
the relevant Collateral. Prior to the Custodian's release of its possession of
the relevant Collateral, the corresponding Borrower shall deliver evidence to
the Bank or the Custodian that it has instructed GNMA, FNMA or FHLMC, as the
case
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may be, in writing, to deliver the corresponding mortgaged-backed security
directly to the Bank as set forth below in subsections (iii) and (iv).
(ii) In the case of certificated securities issued
in connection with subsection (i) above, the corresponding certificate shall be
delivered directly to the Bank or the Custodian on behalf of the Bank and shall
be immediately endorsed in blank by the corresponding Borrower. Such
certificate shall be held by the Bank or the Custodian on behalf of the Bank
until its transfer as hereafter set forth in subsection 6.6.4.
(iii) In the case of securities issued in book-entry
form in connection with subsection (i) above, the same shall be delivered
directly to the Bank's account number 086896 at the Bank (the "Collection
Account") and the corresponding notations of the Bank's interest therein shall
be made by the Bank. Such security shall remain in the Collection Account until
its transfer as hereafter set forth in subsection 6.6.4.
(iv) In the case of any FNMA or FHLMC
mortgage-backed security for which no Borrower holds a Purchase Commitment, the
Borrowers shall make full payment of the Advances corresponding to the
Mortgages comprising the underlying mortgage pool within three (3) days after
the delivery to the Bank or the Custodian on behalf of the Bank of such
security.
6.6.5 At such time as any Borrower shall desire to transfer
(whether by sale, repurchase agreement or otherwise) any one or more of the
securities held as collateral hereunder, such Borrower shall issue a written
request to the Bank describing the relevant securities and listing the
Mortgages comprising the underlying mortgage pool. Simultaneously with the
confirmation
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of transfer to the Bank or Custodian of an amount equal to the principal amount
due to the Bank from the Borrowers on the Advances secured by the securities
being delivered, the Bank or its Custodian shall deliver the relevant
securities in accordance with the instructions of the corresponding Borrower.
At any time the Bank may, in its sole discretion, require that any payments
required to be made to the Bank by the Borrowers simultaneously with the Bank's
release of any Collateral be made to the Bank in immediately available funds.
6.6.6 Anything herein to the contrary notwithstanding, no
Collateral transferred by the Bank to the Custodian for the purposes set forth
in subsections 6.6.4 above, may be held by the Custodian for periods in excess
of sixty (60) days. If any Collateral remains in the possession of the
Custodian for a period in excess of sixty days, the same shall be immediately
returned to the Bank by the Custodian on the sixty-first day following the day
on which the Custodian received such Collateral.
6.6.7 The Borrowers hereby acknowledge and agree that the
Bank may at any time, in its sole discretion, terminate the custodial
arrangement with the Custodian, and thereafter, if the context so requires, any
references herein to the Custodian shall be deemed to be a reference to the
Bank. Upon such termination, the Bank agrees that it shall make available to
the Borrowers (but shall not release from its physical possession) the
Mortgages which from time to time the Borrowers request for the purposes set
forth in subsections 6.6.1 and 6.6.4. The release of such Mortgages by the Bank
upon the sale or submission thereof to a permanent buyer, GNMA, FNMA or FHLMC,
as the case may be, shall continue to be effected pursuant to the terms set
forth herein.
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ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF THE BORROWERS
In order to induce the Bank to make the Advances, each Borrower makes
the following representations and warranties to the Bank, each of which shall
be deemed re-made upon submitting an Advance Request and each of which shall
survive the execution and delivery of this Agreement:
7.1 EXISTENCE AND QUALIFICATION. It is a corporation duly
organized and existing and in good standing under the laws of Puerto Rico and
is, and will continue to be, duly licensed or qualified in all jurisdictions in
which the character of the property owned or leased or the nature of the
business transacted by it makes licensing or qualification necessary; and it
has all requisite power to own its properties and to carry on its business as
now conducted and carried on.
7.2 ORGANIZATIONAL ACTIONS AND AUTHORITY. It has the power and
authority to execute, deliver and carry out this Agreement, the Note and the
security instruments identified in Section 4 hereof to be executed by such
Borrower; and each of said documents and instruments has been duly authorized
by all necessary action of such Borrower's Board of Directors (and of its
stockholders, if required); and this Agreement, the Note and the said security
instruments, when issued, will be valid and enforceable in accordance with
their respective terms.
7.3 NO MATERIAL LITIGATION. There are no suits or proceedings
pending or, so far as the officers of the Borrowers know, threatened before any
court, administrative body or
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governmental agency which will materially and adversely affect the financial
condition of any Borrower or the legality of this Agreement.
7.4 OTHER AGREEMENTS. It is not a party to any contract or
agreement, or subject to any charter or other legal restriction of any kind
which in the opinion of its Board of Directors materially and adversely affects
its business properties or assets or its condition, financial or otherwise, and
neither the execution and delivery of this Agreement, the consummation of the
transactions contemplated hereunder, nor the compliance with the terms,
conditions and provisions of this Agreement and of the Note will conflict with
or result in a breach of the terms, conditions or provisions of, or constitute
a default under, the charter or by-laws of such Borrower, or of any indenture
or other agreement or instrument to which such Borrower is a party or by which
it is bound, or result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever, upon any of the properties or assets of
such Borrower, except as permitted by the provisions hereof.
7.5 LICENSES AND OTHER RIGHTS. It possesses all patents, patent
rights and licenses necessary for the conduct of its business as now, or
proposed to be, conducted, without substantial known conflict with the rights
of others.
7.6 FINANCIAL STATEMENTS. The financial statements of each
Borrower and the consolidated financial statements of DFC dated as of December
31, 1998 heretofore furnished to the Bank correctly set forth the financial
condition of such Borrower as of such date, and the results of the operations
of such Borrower for the period then ended; and there has been no material
adverse
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change in the financial condition of such Borrower since the date of such
statements.
7.7 USE OF THE PROCEEDS OF THE ADVANCES. The proceeds of the
Advances to be made by the Bank to the Borrowers hereunder shall be applied
only for the purposes set forth in Article 2 hereof.
7.8 COMPLIANCE WITH REGULATION U. Neither Borrower nor any
corporation, partnership or other type of organization controlled, directly or
indirectly, any Borrower presently owns any "margin stock" within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System, or any
regulations, interpretations or rulings thereunder, and neither Borrower nor
any corporation, partnership or other type of organization controlled, directly
or indirectly, by any Borrower will, directly or indirectly, apply any part of
the proceeds of any Advance for the purchase or carrying of any "margin stock"
within the meaning of said Regulation U of the Board of Governors of the
Federal Reserve System or any regulations, interpretations or rulings
thereunder.
7.9 QUALIFICATIONS AS MORTGAGEE. It is an FHA approved mortgagee,
servicer, originator and seller as defined in the NHA, and it is approved,
qualified and/or licensed, as applicable, by the Commonwealth of Puerto Rico,
FHLMC, GNMA and FNMA, is eligible to participate as an approved lender under
the VA guarantee program and none of such approvals or qualifications has been
suspended or is subject to any proceeding leading toward censure, probation, or
suspension of such Borrower.
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7.10 TITLE TO COLLATERAL. Borrowers are the sole legal owner of all
items of Collateral pledged or assigned, or to be pledged or assigned, under
this Agreement, free of any liens or encumbrances of any kind.
7.11 REPRESENTATIONS CONCERNING MORTGAGE LOANS. By the submission
of each Advance Request, and each report required under Section 8.16.1 of this
Agreement, such Borrower shall be deemed to have represented and warranted with
respect to each Mortgage forming a part of the Collateral, as follows:
7.11.1 ENFORCEABILITY AND PREPAYMENT. Each Mortgage Note,
each Mortgage and all other related documents have been duly executed and
delivered at a closing held in compliance with all requirements of law; such
documents are valid and enforceable in accordance with their terms, without
defense or offset, and have not been modified or amended or any requirements
thereof waived, except as may be reflected in documentation delivered to the
Bank upon delivery of the Collateral; and the full amount of each Mortgage Note
has been advanced in the form of cash or other good funds collected by the
mortgagor or other payee and there have not been any prepayments or discount
points other than as set forth on the latest Advance Request or in the latest
report delivered under Section 8.16.1.
7.11.2 DEFAULT. No Mortgage, at the time of delivery as part
of the Collateral, is delinquent in respect of payment, and each such Mortgage
is free of any other breach or default and no Borrower has any notice of any
event which has occurred which may, with the passage of time or the giving of
notice, or both, become such a breach or default. With respect to any breach or
default which has occurred after such delivery, no Mortgage which
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is part of the Collateral has been delinquent in payment or other performance
for more than sixty (60) days. A Mortgage is delinquent if any payment is not
made within thirty (30) days of its due date or if there is any other material
breach or default in the terms thereof. The Borrowers shall give the Bank
written notice within ten (10) days after any Mortgage held by the Bank as
Collateral becomes delinquent, clearly identifying the delinquent Mortgage in
such notice.
7.11.3 MORTGAGE LOAN TERMS. Each Conforming Conventional
Mortgage complies and will comply, in all respects, with all applicable
requirements for purchase under the FNMA and/or FHLMC standard form of
conventional selling contract and any supplement thereto then in effect.
7.11.4 PRIORITY OF MORTGAGE LOANS. Each Mortgage is a first
mortgage on an owner-occupied primary residence described therein located in
the Commonwealth of Puerto Rico; the corresponding Borrower has obtained and
delivered to the Bank evidence of title insurance (or binder therefor) from an
Insurer insuring the priority of such lien in a manner satisfactory to the Bank
and meeting all requirements of the applicable Purchase Commitment, if
applicable, for the sale of such Mortgage; and such premises are as shown by a
survey or plot plan of recent date (or a copy of the filed condominium
declaration and exhibits) in such Borrower's possession.
7.11.5 CASUALTY INSURANCE. Such Borrower has in its
possession fire and casualty policies or binders naming such Borrower and its
assigns as an insured (under a standard mortgagee clause acceptable to the
Bank) and insuring the premises covered by the Mortgage against fire and other
casualty,
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together with flood hazard insurance, if required under the National Flood
Insurance Program administered by the U.S. Department of Housing and Urban
Development.
7.11.6 PREVIOUSLY PLEDGED AND REJECTED MORTGAGE LOANS. No
Mortgage Loan which is part of the Collateral (i) has been previously pledged
or assigned to the Bank, or, except for the purpose of forming a GNMA or
similar pool, to any other lender; or (ii) is subject to any lien or
encumbrance of any type; or (iii) has been previously submitted to an investor
for purchase and not accepted for such purchase.
7.11.7 FORECLOSURE. At the time of the delivery of
Collateral, no foreclosure proceedings have been instituted and are currently
pending in any court with respect to said Collateral.
7.11.8 TYPE OF MORTGAGE LOANS. Every Mortgage Loan which is
part of the Collateral shall be an FHA Mortgage, a VA Mortgage, a Conforming
Conventional Mortgage or a Committed Non-Conforming Mortgage.
7.12 REPRESENTATIONS CONCERNING PURCHASE COMMITMENTS. By the
submission of each Advance Request and each report submitted under Section
8.13.1, each Borrower shall be deemed to have represented and warranted that
such Borrower has Purchase Commitments for not less than one hundred percent
(100%) of all Committed Mortgages assigned to the Bank in connection with such
Advance Request; that such Purchase Commitments are valid and enforceable
Purchase Commitments, from a financially responsible institutional purchaser
not previously disapproved by the Bank, pursuant to which all Mortgage Loans
delivered as Collateral
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under this Agreement may be delivered at the prices used in computing the
collateral value of such Mortgage Loans hereunder, and that no such Purchase
Commitments held by such Borrower have been assigned or pledged or any security
interest therein created other than to the Bank. Such Borrower specifically
represents that no Purchase Commitment held or to be held by such Borrower with
respect to any Mortgage serving as Collateral contains any terms, covenants or
conditions which may only be complied with, performed or satisfied by such
Borrower, which are conditioned upon the financial condition or continued
existence of such Borrower, or which do not specifically relate to the Mortgage
Loan or security being purchased, its amount, terms, origination, yield,
collateral security or underwriting. Copies of all Purchase Commitments shall
be delivered to the Bank with each monthly listing of Mortgage Loan Collateral
under Section 8.13.1. The Bank shall have the right to review all Purchase
Commitments from time to time, and such Purchase Commitments must comply with
the foregoing requirements to the Bank's reasonable satisfaction. The Bank
shall notify the corresponding Borrower as promptly as practicable if it
disapproves of the identity of any investor issuing a Purchase Commitment or if
it disapproves of any other term or condition of any Purchase Commitment. If
the Bank shall disapprove of any Purchase Commitment or the issuer thereof,
such Purchase Commitment may not be utilized in computing the collateral value
of any Mortgage Loans. In such event, the corresponding Borrower must replace
such Purchase Commitment as soon as possible and in any event within thirty
(30) days after any such notice of disapproval. Valuation of such Mortgage
Loans prior to replacement of such Purchase Commitment shall be on the basis of
the market price therefor as determined in the reasonable judgment of the Bank.
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ARTICLE 8
AFFIRMATIVE COVENANTS
Each Borrower covenants that it will, until payment in full of the
Note, termination of the Commitment and satisfaction of all other liabilities
hereunder:
8.1 USE OF PROCEEDS OF LOAN. Apply the proceeds of the Advances
made hereunder as set forth in Article 2 hereof.
8.2 RECORDS. Maintain proper books of record and account in
accordance with sound accounting practices in which full, true and correct
entries shall be made of its dealings and business affairs, and cause such
books to be audited at the end of each fiscal year by independent public
accountants of recognized standing satisfactory to the Bank.
8.3 FINANCIAL STATEMENTS.
8.3.1 Furnish to the Bank within forty-five (45) days after
the close of each quarterly accounting period of such Borrower, quarterly
balance sheets and statements of profit and loss and surplus (individually for
each Borrower and consolidated for DFC), together with a certificate signed by
a responsible officer of each Borrower certifying that no default has occurred
under this Agreement and that no fact or circumstance exists which, with the
lapse of time or the giving of notice or both, would result in an Event of
Default hereunder and (ii) a certificate signed by a responsible officer of DFC
setting forth calculation (including, if applicable, a calculation of the
components thereof) of DFC's (A) Interest Coverage Ratio, (B) Tangible Net
Worth and (C) Adjusted Liability Ratio, all for the
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preceding quarter; furnish to the Bank within ninety (90) days after the end of
each fiscal year of each Borrower a balance sheet and statement of profit and
loss and surplus of such Borrower for such fiscal year certified by independent
public accountants of recognized standing satisfactory to the Bank. Each such
certificate of independent public accountants shall include a written statement
of such accountants that, in making the audit necessary for the giving of such
certificate, they have obtained no knowledge during the fiscal year under audit
of an Event of Default specified in Section 10.1 hereof or of any condition,
event or act which, with the giving of notice or the lapse of time or both,
would constitute such an Event of Default, or, if in the opinion of such
accountants such Event of Default has occurred or there is in existence any
such condition, event or act, such statement shall specify the nature thereof,
it being understood and agreed that the opinion expressed in such statement
shall be deemed to cover and be confined to matters which an independent public
accountant is, by virtue of his profession, authorized and qualified to review
and pass upon and not to express any opinion on matters of law or legal
conclusions.
8.3.2 Furnish to the Bank, simultaneously with the filing
or delivery thereof, copies of all reports required to be filed by DFC with the
Securities and Exchange Commission or delivered to its stockholders, including,
without limitation, copies of its annual report to stockholders, and of its
annual report in Form 10-K and its quarterly report in Form 10-Q of the
Securities and Exchange Commission.
8.4 ACCESS AND ANNUAL AUDIT. At any reasonable time and from time
to time upon reasonable notice, permit the Bank or any of its agents or
representatives to examine and make copies of and abstracts from the records
and books of account of, and visit
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the properties of, the Borrowers and any of their Subsidiaries, and to discuss
the affairs, finances and accounts of the Borrowers and any of their
Subsidiaries with any of their respective officers. At any reasonable time and
from time to time upon reasonable notice, the Borrowers shall permit the Bank
or any of its agents or representatives to conduct an annual audit of all of
the Collateral. All reasonable costs and expenses related to such audit shall
be paid by the Borrowers on demand.
8.5 CONTINUANCE OF BUSINESS; RIGHTS, PRIVILEGES AND FRANCHISES.
Maintain, preserve and renew all rights, powers, privileges and franchises
possessed by it insofar as in the bona fide opinion of the Board of Directors
of each Borrower the failure to maintain, preserve or renew such rights,
privileges and franchises could cause a Material Adverse Effect.
8.6 PAYMENT OF TAXES. Pay and discharge all taxes, assessments and
governmental charges upon the Borrowers or against their properties prior to
the date on which penalties accrue, except to the extent that the same may be
contested by the Borrowers in good faith by appropriate proceedings or except
the failure to pay and discharge such taxes, assessments and governmental
charges which could not cause a Material Adverse Effect.
8.7 PROPERTIES. Maintain, preserve and keep all of its properties
in proper repair, working order and condition and make, or cause to be made,
all necessary or appropriate repairs, renewals, replacements, substitutions,
additions, betterments and improvements, so that the efficiency of all such
properties shall at all times be properly preserved and maintained, provided
that
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nothing herein contained shall be construed as to require any such substitution
or addition which the Boards of Directors of the Borrowers believe in good
faith shall not be in the best interest of the Borrowers.
8.8 INSURANCE. Keep all insurable property, real and personal,
owned by each Borrower insured at all times by policies of fire, extended
coverage and earthquake insurance in amounts not less than that which would be
carried by an ordinarily prudent businessman engaged in a business similar to
that of such Borrower.
8.9 INTEREST COVERAGE RATIO. Maintain at all times an Interest
Coverage Ratio for DFC (on a non-consolidated basis) of not less than 1.20 to
1.00. The term "Interest Coverage Ratio" shall mean the ratio of (i) EBITDA to
(ii) interest expense.
8.10 TANGIBLE NET WORTH. Maintain at all times a Tangible Net Worth
of not less than TWO HUNDRED EIGHTY MILLION DOLLARS ($280,000,000).
8.11 ADJUSTED LIABILITY RATIO. Maintain at all times an Adjusted
Liability Ratio of not more than 3.0 to 1.0. The term "Adjusted Liability
Ratio" shall mean the ratio of (i) total liabilities of DFC (on a
non-consolidated basis) other than liabilities under repurchase agreements to
(ii) Tangible Net Worth.
8.12 REPORTS.
8.12.1 Furnish to the Bank, on a monthly basis, a report
containing a list of all Mortgage Loans held as Collateral
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under this Agreement and describing all Purchase Commitments, if applicable,
pursuant to which such Mortgage Loans are to be sold (including the investors
and the delivery or expiration dates of such Purchase Commitments and their
yield requirements) and, if applicable, indicating that all Mortgage Loans held
as Collateral comply with the representations contained in Section 7.3 of this
Agreement with respect to the existence of Purchase Commitments for the sale of
such Mortgage Loans. Borrowers shall also furnish to the Bank a monthly
statement listing all positions taken by Borrowers in the futures market during
the preceding month. The monthly listings of Mortgage Loans and Purchase
Commitments shall be made as of the close of business of the last day of the
month, and shall be postmarked not later than seven (7) calendar days
thereafter.
8.12.2 Furnish to the Bank, from time to time, at the
request of the Bank, a report listing all indebtedness to other financial
institutions incurred during the preceding quarter and, at the Bank's request,
a detailed description of the collateral for such indebtedness.
8.12.3 Furnish to the Bank, promptly after obtaining
knowledge thereof, a report describing any litigation or threatened litigation
against any Borrower which could reasonably be expected to have a material
adverse effect on the assets, properties, operations, performance or condition
(financial or otherwise) of any Borrower. Among the information to be included
in such reports is the identity of the plaintiff, a summary of the claim or
claims and the relief requested.
8.12.4 Furnish to the Bank, on a quarterly basis, a report
describing any delinquency in respect of any Mortgage
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constituting Collateral hereunder, substantially in the form of, and containing
the information shown in, Exhibit I hereto.
8.12.5 In addition to the information required to be submitted
pursuant to subsections 8.13.1, 8.13.2, 8.13.3 and 8.13.4, the Borrowers will
supply such other information as may be reasonably requested by the Bank from
time to time.
8.13 MAINTENANCE AND SERVICING OF COLLATERAL. Replace any
Collateral which does not at all times conform to the applicable
representations and warranties contained herein; revalue on a monthly basis
Borrowers' inventory of Mortgage Loans which are pledged as Collateral
hereunder, and provide additional Collateral as necessary to maintain the
Collateral at a value equal to or greater than the value necessary to comply
with the corresponding Disbursement Percentages set forth in Sections 3.1 and
3.3 hereof; furnish to the Bank any documentation relating to any Mortgage
Loan; maintain a complete file, including amortization schedule, of each
Mortgage Loan pledged as Collateral; as an independent contractor and at no
cost to the Bank, service all Mortgage Loans pledged as Collateral in
accordance with the standard requirements of the issuers of the Mortgage Loan
Purchase Commitments; and hold all escrow funds collected in trust, without
commingling with non-escrow funds, and apply such funds for the purposes for
which they were collected. At the Bank's request, after an Event of Default has
occurred and is continuing, Borrowers shall turn over all such escrow funds (in
trust nevertheless for such purposes) to or as directed by the Bank.
8.14 MANAGEMENT. Deliver to the Bank thirty (30) prior written
notice of any proposed change in the persons occupying the positions of Chief
Executive Officer, President, Treasurer or
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Chief Financial Officer, except for voluntary retirements or retirements in
accordance with any legal policy any Borrower may have in respect of mandatory
retirement age.
8.15 CONTINUED FHA APPROVAL. Continue to be an FHA approved
mortgagee.
8.16 MAINTAIN MORTGAGES. Except with the prior written consent of
the Bank, which shall not be unreasonably denied or delayed, not consent or
agree to:
(a) any modification or amendment of any Mortgage delivered
as Collateral pursuant hereto,
(b) any agreement for the extension of the term of any such
Mortgage, or
(c) any waiver or release of any obligation of the mortgagor
under any such Mortgage or the release of any security therefor.
8.17 MAINTAIN FHA INSURANCE. Not do, or not fail to do, or not
permit to be done, anything which would operate to impair or invalidate the FHA
insurance of any Mortgage delivered as Collateral hereunder.
8.18 COMPLIANCE WITH LAWS, ETC. Comply with all applicable laws,
rules, regulations and orders (including, without limitation, all Federal
Reserve rules, regulations and orders applicable to DFC) to the extent that
failure to comply could result in a Material Adverse Effect.
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8.19 VERIFICATION OF INFORMATION. Permit the Bank to conduct such
investigations as the Bank deems necessary for the purpose of verifying the
accuracy of all information submitted to the Bank from time to time pursuant to
the terms hereof.
8.20 COMPENSATION. Promptly notify the Bank of any material change
in the compensation packages of any of their directors or their Chief Executive
Officer, President, Treasurer or Chief Financial Officer.
8.21 CORPORATE STATUS; GOING CONCERN. Maintain its status as a
corporation in good standing under the laws of the Commonwealth of Puerto Rico
and take all action to ensure that such Borrower remains a going concern.
8.22 INVESTMENTS. Promptly notify the Bank of the purchase or other
acquisition of any stock or interest in any corporation, partnership or other
entity.
ARTICLE 9
NEGATIVE COVENANTS
Each Borrower covenants that it will not, without the prior written
consent of the Bank, which shall not be unreasonably denied or delayed, until
full payment of the Note, termination of the Commitment and satisfaction of all
other obligations of the Borrowers hereunder:
9.1 DIVIDENDS. Declare or pay any dividend (unless payable in
capital stock of such Borrower) or authorize or make any other distribution on
any shares of capital stock of such Borrower, whether now or hereafter
outstanding (hereafter a "Restricted
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Payment") unless (i) at the time of and after giving effect to the proposed
Restricted Payment, no Event of Default, or event which, after notice or lapse
of time or both, would become an Event of Default, shall have occurred and be
continuing; and (ii) at the time of and after giving effect to the proposed
Restricted Payment, the aggregate amount of all Restricted Payments made during
any fiscal year shall not exceed 50% of the aggregate consolidated net income
of DFC and its subsidiaries for the fiscal year preceding the year of the
Restricted Payment.
9.2 GUARANTIES. Assume, guarantee, endorse or otherwise be or
become liable upon the obligations of any person, firm or corporation, except
by the endorsement of negotiable instruments for deposit or collection or other
financial transactions in the ordinary course of business, including, without
limitation, the issuance by DFC of guaranties of the obligations of its
subsidiaries and affiliates.
9.3 SECURITIES TRADING. Engage in the trading of GNMA or other
securities outside the normal scope of its mortgage banking business as now
conducted or as may be conducted in the future in a manner consistent with
prudent business practices.
9.4 SALE OF ASSETS, ETC. Sell, lease, transfer or otherwise
dispose of any asset, except in the ordinary course of business if any such
sale, lease, transfer or other disposition could result in a Material Adverse
Effect.
9.5 LIQUIDATION, MERGER OR CONSOLIDATION. Consolidate with or
merge into any other Person or convey, transfer or lease all or substantially
all of its property to any Person, or permit any Person to consolidate with or
merge into either Borrower or any of its subsidiaries and affiliates or convey,
transfer or lease
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<PAGE> 49
all or substantially all of its property to either Borrower, unless:
(a) in case either Borrower shall consolidate with or merge
into another Person or convey, transfer or lease all or substantially all of
its property to any Person, the Person formed by such consolidation or into
which the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, all or substantially all of the property of any
Borrower shall be a corporation, partnership or trust, shall be organized and
validly existing under the laws of the United States of America, any State
thereof, the Commonwealth of Puerto Rico or the District of Columbia and shall
expressly assume, by an agreement, in form satisfactory to the Bank, all of the
Obligations;
(b) immediately after giving effect to such transaction, no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have occurred and be continuing;
(c) immediately after giving effect to such transaction, DFC
or such surviving entity shall have a Tangible Net Worth equal to or greater
than the Tangible Net Worth of DFC immediately prior to such transaction.
At any time after any such permitted merger, consolidation or sale of
substantially all assets the Bank may, by notice to the Borrowers or the
surviving entity, terminate the Commitment.
9.6 ENGAGE IN OTHER ACTIVITIES. In the case of DFC, engage in any
activity which is not permitted under the U.S. Bank
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Holding Company Act of 1956, as amended, the regulations issued thereunder and
any successor statute or regulation.
ARTICLE 10
EVENTS OF DEFAULT
10.1 EVENTS OF DEFAULT. Each of the following events shall be
deemed an "Event of Default" hereunder:
10.1.1 DEFAULT IN REPRESENTATIONS AND WARRANTIES. Any
representation or warranty herein made by any Borrower, or any certificate or
statement furnished pursuant to the provisions of this Agreement by any
Borrower or by any other person shall prove to be false or misleading in any
material respect, as of the time made.
10.1.2 DEFAULT IN AFFIRMATIVE OR NEGATIVE COVENANTS. Any
Borrower shall default in the performance of any covenant contained in Articles
8 or 9 hereof and any such default is not cured within ten (10) days after the
Bank sends to the Borrower notice of the occurrence thereof.
10.1.3 DEFAULT IN OTHER PERFORMANCE. Any Borrower shall
default in the performance of any other covenant, condition or provision
hereof, or in the performance of any other obligation which may exist between
such Borrower and the Bank, whether now existing, or arising in the future.
10.1.4 DEFAULT IN PAYMENT. Any Borrower shall default in
the payment of principal or interest on the Note when due.
10.1.5 DEFAULT IN OTHER AGREEMENTS. Any Borrower shall
default in the payment of principal or interest on any
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other obligation for borrowed money in excess of $1,000,000 beyond any period
of grace provided with respect thereto, or in the performance or observance of
any other agreement, term or condition contained therein, or in any agreement
or indenture under which such obligation is created, if the effect of such
default is to cause or permit the holder or holders of such obligation (or a
trustee on behalf of such holder or holders) to cause such obligation to become
due prior to its stated maturity.
10.1.6 DEFAULT UNDER THE SECURITY AGREEMENT. Any Borrower
shall default in its obligations under the Security Agreement or any other
security instrument delivered to the Bank pursuant to Article 4 hereof.
10.1.7 BANKRUPTCY OR INSOLVENCY. Any Borrower shall become
insolvent or unable to pay its debts as they mature, or shall file a voluntary
petition in bankruptcy, or a voluntary petition seeking reorganization, or to
effect a plan or other arrangement with creditors, or shall file an answer
consenting to, or take any other action indicating acquiescence in, an
involuntary petition pursuant to, or purporting to be pursuant to, any
bankruptcy, reorganization or insolvency law of any jurisdiction, or shall be
adjudged a bankrupt or insolvent by any court of competent jurisdiction, or
shall make an assignment for the benefit of creditors or to an agent authorized
to liquidate any substantial amount of its assets, or shall apply for, or
consent to the appointment of any receiver or trustee for it or for a
substantial part of its property.
10.1.8 ENTRY OF ORDER IN BANKRUPTCY OR REORGANIZATION; PLAN
OF ARRANGEMENT WITH CREDITORS; APPOINTMENT OF RECEIVER. An order shall be
entered and shall not be dismissed or stayed within sixty (60) days from its
entry pursuant to, or purporting
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to be pursuant to, any bankruptcy, reorganization or insolvency law of any
jurisdiction, approving an involuntary petition, seeking reorganization, or to
affect a plan or other arrangement with creditors of any Borrower, or
appointing any receiver or trustee for any Borrower or for a substantial part
of the property of any Borrower.
10.1.9 MATERIAL ADVERSE CHANGE. There shall have occurred a
condition or change of circumstance which has or could reasonably be expected
to have a Material Adverse Effect.
10.2 REMEDIES.
10.2.1 Upon the happening of any Event of Default under
Sections 10.1.1, 10.1.2, 10.1.3, 10.1.4, 10.1.5, 10.1.6, and 10.1.9, if such
default shall not have been remedied, the Bank shall be entitled, by written
notice to the Borrowers, to declare the Note, all interest thereon and all
other amounts payable under the Note and this Agreement and all other
obligations of the Borrowers with the Bank to be forthwith due and payable, and
the same shall thereupon become due and payable without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived and the Bank may, by notice to the Borrowers, declare the obligation of
the Bank to make Advances to be terminated, whereupon the same shall forthwith
terminate.
10.2.2 If any Event of Default under Sections 10.1.7 and
10.1.8 shall occur, then the Note, all interest thereon and all other amounts
payable under the Note and this Agreement and all other obligations of the
Borrowers with the Bank shall become forthwith due and payable without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived and
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<PAGE> 53
the obligation of the Bank to make Advances shall be terminated, whereupon the
same shall forthwith terminate.
10.3 LOSSES. In the event that the Bank suffers any loss or expense
as a result of the acceleration of the Note as aforesaid because of the
occurrence of an Event of Default, the Borrowers shall, upon demand by the
Bank, pay to the Bank additional amounts sufficient to indemnify the Bank
against such loss or expense. A certificate as to the amount of such loss or
expense submitted to the Borrowers by the Bank shall constitute prima facie
evidence of the amount of such increased cost.
10.4 SALE OF COLLATERAL. Upon the occurrence of any such Event of
Default, or at any time thereafter, full power and authority are hereby given
to the Bank to sell, assign and deliver all of the Collateral delivered to the
Bank in accordance with the terms hereof, and to exercise all other rights and
remedies to which it may be entitled with respect thereto pursuant to the
applicable laws of the Commonwealth of Puerto Rico. Anything herein to the
contrary notwithstanding, at any such sale, the Bank may itself purchase the
whole or any part of the Collateral sold, free from any right of redemption on
the part of the Borrowers, all such rights being hereby expressly waived and
released by the Borrowers. In the event of any such sale or other disposition
of any of the Collateral delivered in accordance with the terms hereof, after
deducting all costs and expenses of any kind for care, safekeeping, collection,
sale, delivery or otherwise, the Bank may apply the residue of the proceeds of
the sale or other disposition thereof to the payment or reduction, either in
whole or in part, of the amounts owing under the Note and/or any other one or
more obligations or liabilities of the Borrowers with the Bank, whether then
due or not due, making proper allowance for interest on obligations or
liabilities
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<PAGE> 54
not then due, and returning the surplus, if any, to the Borrowers, all without
prejudice to the rights of the Bank as against the Borrowers with respect to
any and all amounts which may be or remain unpaid. No delay on the part of the
Bank in exercising any rights or options hereunder shall prejudice the rights
of the Bank as against the Borrowers.
ARTICLE 11
GUARANTY
11.1 GUARANTY. Each Borrower hereby unconditionally guarantees
jointly and severally (solidariamente) with the other Borrower the punctual
payment when due, whether at stated maturity, by acceleration or otherwise, of
the Obligations of the other Borrower, including all obligations of the other
Borrower now or hereafter existing under this Agreement and the Note whether
for principal, interest, fees, expenses or otherwise and agrees to pay any and
all expenses (including reasonable counsel fees and expenses) incurred by the
Bank in enforcing any rights under this Article 11. The guaranty provided by
each Borrower under this Article 11 is referred to as the "Guaranty".
11.2 GUARANTY ABSOLUTE. Each Borrower guarantees that the
Obligations of the other Borrower will be paid strictly in accordance with the
terms of this Agreement regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Bank with respect thereto. The liability of each Borrower under
its Guaranty shall be absolute and unconditional irrespective of: (i) any lack
of validity or enforceability of this Agreement, the Note or any other
agreement or instrument relating thereto; (ii) any change in the time, manner
or place of payment of, or in any other term of, all or any of the Obligations,
or any other
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<PAGE> 55
amendment or waiver of or any consent to departure from any Loan Document; or
(iii) any exchange, release or non-perfection of any collateral delivered, or
purported to be delivered, to the Bank pursuant to any Loan Document, or any
release or amendment or waiver of or consent to departure from any other
guaranty, for all or any of the Obligations.
The Guaranty of each Borrower hereunder shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the
Obligations is rescinded or must otherwise be returned by the Bank upon the
insolvency, bankruptcy or reorganization of the other Borrower or otherwise,
all as though such payment had not been made.
11.3 WAIVER. Each Borrower hereby waives promptness, diligence,
notice of acceptance and any other notice with respect to any of the
Obligations and its Guaranty and any requirement that the Bank protect, secure,
perfect or insure any security interest or lien or any property subject thereto
or exhaust any right or take any action against the other Borrower or any other
person or entity or any collateral delivered, or purported to be delivered, to
the Bank under the Loan Documents.
11.4 SUBROGATION. No Borrower will exercise any rights which it may
acquire by way of subrogation under its Guaranty, by any payment made hereunder
or otherwise, until all the Obligations shall have been paid in full. If any
amount shall be paid to such Borrower on account of such subrogation rights at
any time when all the Obligations of the Other Borrower shall not have been
paid in full, such amount shall be held in trust for the benefit of the Bank
and shall forthwith be paid to the Bank to be credited and applied upon the
Obligations, whether matured or unmatured, in accordance with the terms of this
Agreement.
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<PAGE> 56
11.5 CONTINUING GUARANTY. The Guaranty provided by each Borrower
hereunder is a continuing guaranty and shall remain in full force and effect
until payment in full of the Obligations and all other amounts payable under
such Guaranty, be binding upon each Borrower, its successors and assigns, and
inure to the benefit of and be enforceable by the Bank and its successors,
transferees and assigns. Without limiting the generality of the foregoing
clause, the Bank may assign or otherwise transfer the Note or other Obligations
and participations therein to any other person or entity, and such other person
or entity shall thereupon become vested with all the rights in respect thereof
granted to the Bank herein or otherwise.
ARTICLE 12
MISCELLANEOUS
12.1 AMENDMENTS, ETC. No amendment or waiver of any provision of
any Loan Document, nor consent to any departure by any loan party therefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Bank, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
12.2 NO WAIVER; REMEDIES. No failure on the part of the Bank to
exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any Loan Document preclude any other or further exercise thereof or
the exercise of any other right. The remedies provided in the Loan Documents
are cumulative and not exclusive of any remedies provided by law.
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<PAGE> 57
12.3 RIGHTS CUMULATIVE. The rights and remedies of the Bank
hereunder are cumulative and not exclusive of any right or remedy which it
would otherwise have.
12.4 RIGHT OF SET-OFF. Nothing in this Agreement shall be deemed to
constitute a waiver or prohibition of either the Bank's right of banker's lien
or set-off.
12.5 NOTICES. (a) Except as provided in paragraph (c) below, all
notices, requests, consents and other communications required or permitted
under this Agreement and the other Loan Documents shall be in writing and shall
be (as elected by the person giving the notice) hand delivered by messenger or
courier service, sent by telecopier, or mailed (airmail if international) by
registered or certified mail (postage prepaid), return receipt requested,
addressed to:
If to the Borrowers:
1159 Roosevelt Ave.
San Juan, PR 00920
Attention: Mr. Mario S. Levis
Telecopier: (787) 756-1780
If to the Bank:
PO Box 71301
San Juan, Puerto Rico 00936-8301
Attention: Ms. Elena Manrara
Financial Institutions
Telecopier: (787) 766-1434 or
(787) 766-1116
(b) Each such notice shall be deemed delivered (i) on the
date delivered, receipt acknowledged, if by personal delivery, (ii) on the date
of transmission with confirmed receipt
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if by telecopier, or (iii) on the date upon which the return receipt is signed
or delivery is refused or the notice is designated by the postal authorities as
not deliverable, as the case may be, if mailed.
(c) Except as otherwise provided in Article 6 hereof, all
items of Collateral required to be delivered to the Bank hereunder or under the
other Loan Documents shall be physically delivered at 252 Ponce de Leon Avenue,
2nd Floor, Hato Rey, Puerto Rico, Attention: Financial Institutions - Doral
Warehouse.
(d) By giving to the other party at least fifteen (15)
days written notice thereof, such party and its successors and assigns shall
have the right from time to time and at any time during the term of this
Agreement to change their respective addresses.
12.6 COSTS, EXPENSES AND TAXES; INDEMNIFICATION.
(a) The Borrowers shall reimburse the Bank for all of the
Bank's reasonable expenses incurred in connection with the development,
preparation, execution, delivery, modification, regular review and
administration of this Agreement and all other Loan Documents, including
searches, filings, filing fees and taxes and the reasonable fees and
disbursements of the Bank's attorneys, and all costs and expenses incurred by
the Bank (including attorneys' fees and disbursements) to: (i) commence, defend
or intervene in any court proceeding; (ii) file a petition, complaint, answer,
motion or other pleadings, or to take any other action in or with respect to
any suit or proceeding (bankruptcy or otherwise) relating to the Collateral or
this Agreement or any Loan Document; (iii) protect, collect, lease, sell, take
possession of, or liquidate any of the
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Collateral; (iv) attempt to enforce any security interest in any of the
Collateral or to seek any advice with respect to such enforcement; and (v)
enforce any of the Bank's rights to collect any of the obligations of the
Borrowers under this Agreement, the Note or any other Loan Document. The
Borrowers also agree to pay, and to save harmless the Bank from any delay in
paying, any documentary stamp and other taxes, fees or assessments, if any,
that may be payable in connection with the execution and delivery of this
Agreement, the Note or any of the other Loan Documents, or the recording of any
thereof, or in any modification hereof or thereof. Additionally, the Borrowers
shall pay to the Bank on demand, any and all fees, costs and expenses that the
Bank pays to a bank or other similar institution arising out of or in
connection with (A) the forwarding to any Borrower, or any other person on any
Borrower's behalf, by the Bank of proceeds of Advances made by the Bank to the
Borrowers pursuant to this Agreement and (B) the depositing for collection by
the Bank of any check or item of payment received and/or delivered to the Bank
on account of the obligations of the Borrowers under this Agreement, the Note
or any other Loan Document.
(b) The Borrowers agree to indemnify the Bank and its
directors, officers, stockholders and employees, and hold the Bank and its
directors, officers, stockholders and employees harmless from and against any
and all claims, damages, liabilities and out-of-pocket expenses (including
without limitation, all reasonable fees and disbursements of counsel with whom
the Bank, or its directors, officers, stockholders and employees, may consult
in connection therewith and all reasonable attorney's fees and expenses of
litigation or preparation therefor) which the Bank, its directors, officers,
stockholders and employees, may incur or which may be asserted against it or
any of them in connection with any litigation or investigation involving any
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Borrower or any officer, director, stockholder or employee thereof, other than
litigation commenced by any Borrower against the Bank that (i) arises
hereunder, and (ii) is determined adversely to the Bank.
12.7 RIGHT OF SET-OFF. Upon (a) the occurrence and during the
continuance of any Event of Default, or (b) the Bank's declaring the Note due
and payable, the Bank is hereby authorized at any time and from time to time,
without notice to the Borrowers (any such notice being expressly waived by the
Borrowers), to set off and apply any and all deposits (general or special, time
or demand, provisional or final, matured or unmatured) at any time held and
other indebtedness at any time owing by the Bank to or for the credit or the
account of the Borrowers against any and all of the obligations of the
Borrowers now or hereafter existing with the Bank irrespective of whether or
not the Bank shall have made any demand therefor and although such obligations
may be unmatured. The Bank agrees promptly to notify the Borrowers after any
such set-off and application made by the Bank, provided that the failure to
give such notice shall not affect the validity of such set-off and application.
The rights of the Bank under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off and rights
under the security instruments delivered hereunder) that the Bank may have.
12.8 BINDING EFFECT; GOVERNING LAW. This Agreement shall become
effective when it shall have been executed by the Borrowers and the Bank and
thereafter shall be binding upon and inure to the benefit of the Borrowers and
the Bank and their respective successors and assigns, except that the Borrowers
shall not have the right to assign its rights hereunder or any interest herein.
This Agreement and the Note shall be governed
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by, and construed in accordance with, the laws of the Commonwealth of Puerto
Rico.
12.9 ASSIGNMENTS AND PARTICIPATIONS.
12.9.1 The Bank may assign to one or more banks or other
entities all or a portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of Commitment, the Advances
owing to it, the Note held by it and the remaining Loan Documents).
12.9.2 The Bank may sell participations to one or more
banks or other entities in or to all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Commitment, the Advances owing to it and the Note and the other Loan
Documents);
12.9.3 The Bank may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section,
disclose to the assignee or participant or proposed assignee or participant,
any information relating to the Borrowers furnished to the Bank by or on behalf
of the Borrowers; provided that, prior to any such disclosure, the assignee or
participant or proposed assignee or participant shall agree to preserve the
confidentiality of any confidential information relating to the Borrowers
received by it from the Bank.
12.9.4 The Borrowers agree to execute all such documents as
the Bank may reasonably request in order to effectuate the rights granted to it
pursuant to this Section 12.9; provided, however, that all costs and expenses
related thereto shall be borne by the Bank.
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12.10 SEVERABILITY OF PROVISIONS. Any provision of this Agreement
that is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
12.11 SURVIVAL OF COVENANTS. All covenants, agreements,
representations and warranties made by the Borrowers in this Agreement or in
any other Loan Document or any instrument, document or certificate delivered
pursuant hereto shall be deemed to have been material and relied on by the
Bank, notwithstanding any investigation made by the Bank, and shall survive the
execution and delivery of this Agreement and of such instrument, document or
certificate until repayment of all amounts due hereunder and under the Note.
12.12 APPLICATION OF PAYMENTS. The Bank shall have the continuing
and exclusive right to apply or reverse and reapply any and all payments to any
portion of the obligations of the Borrowers; provided, however, that such
payments shall be applied in such order as is provided in this Agreement. To
the extent that any Borrower makes a payment or payments to the Bank or the
Bank receives any payment or proceeds of the Collateral for Borrowers' benefit,
which payment or proceeds or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid
to a trustee, receiver or any other party under any state, Commonwealth or
federal law, common law or equitable cause, then, to the extent of such payment
or proceeds received, the obligations of the Borrowers or part thereof intended
to be satisfied shall be revived and continue in full force and effect, as if
such payment or proceeds had not been received by the Bank.
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12.13 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with Generally Accepted
Accounting Principles.
12.14 JOINT AND SEVERAL OBLIGATIONS. The obligations of the
Borrowers under this Agreement, the Note and the other Loan Documents shall be
joint and several ("solidarias").
12.15 WAIVER OF JURY TRIAL. THE BORROWERS AND THE BANK HEREBY
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO ANY OF THE LOAN DOCUMENTS, THE LOAN OR THE ACTIONS OF THE BANK IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
DORAL FINANCIAL CORPORATION CITIBANK, N.A.
By: /s/ Mario S. Levis By: /s/ Elena Manrara
------------------------ --------------------------
Mario S. Levis Elena Manrara
Executive Vice President Vice President
and Treasurer
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<PAGE> 64
DORAL MORTGAGE CORPORATION
By: /s/ Mario S. Levis
------------------------
Mario S. Levis
Executive Vice President
Affidavit No. -7287-
------
Acknowledged and subscribed before me in San Juan, Puerto Rico, this
29th day of April, 1999, by the following persons, who are personally known to
me: Mario S. Levis, of legal age, married, executive and resident of San Juan,
Puerto Rico as Executive Vice President and Treasurer of Doral Financial
Corporation and as Executive Vice President of Doral Mortgage Corporation and
Elena Manrara, of legal age, married, executive and resident of San Juan,
Puerto Rico, in her capacity as Vice President of Citibank, N.A.
/s/ Silvestre Miranda
-------------------------------
Notary Public
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EXHIBIT A
PROMISSORY NOTE
$50,000,000.00 San Juan, Puerto Rico
April 29, 1999
FOR VALUE RECEIVED, the undersigned promise to pay to the order of
Citibank, N.A. (the "Bank") at its office at 252 Ponce de Leon Avenue, Hato
Rey, San Juan, Puerto Rico, the sum of FIFTY MILLION DOLLARS ($50,000,000) or,
if less, the aggregate unpaid principal amount of all advances that have been
made by the Bank to the undersigned hereunder and are outstanding on the date
this Note is presented for payment by the Bank to the undersigned. Advances
under this Note shall be payable on demand.
The unpaid balance of principal of each advance hereunder shall bear
interest from the date thereof until full payment thereof, at such interest
rates as are specified in the Loan Agreement referred to below. Interest due on
this Note shall be payable monthly in arrears on the first day of each month.
All advances made by the Bank to the undersigned pursuant hereto, and
all payments made on account of principal hereof shall be recorded by the Bank
and, prior to any transfer hereof, endorsed on the grid that appears attached
hereto.
This Note has been issued pursuant to, and is entitled to the
guaranties, benefits and security provided for by, a Warehousing Loan Agreement
dated as of the date hereof (as the same may be amended, the "Loan Agreement"),
among Citibank, N.A. and the undersigned. This Note is subject to prepayment
and acceleration, all as provided in the Loan Agreement.
The undersigned hereby agrees to pay an additional sum equal to ten
percent (10%) of the unpaid principal hereof as a liquidated and agreed amount
without necessity of further liquidation or approval by the court to cover
costs and expenses, including attorneys' fees and expenses, incurred by the
holder of this Note in the event that the holder shall take recourse of
judicial proceedings for the collection of any amount due hereunder and such
sum shall be due and payable immediately upon the filing of any such
proceedings.
The undersigned hereby waives presentment, protest, demand and notice
of non-payment.
<PAGE> 66
EXECUTED at San Juan, Puerto Rico, on the date first set forth above.
DORAL FINANCIAL CORPORATION DORAL MORTGAGE CORPORATION
By: By:
------------------------ --------------------------
Mario S. Levis Mario S. Levis
Executive Vice President Executive Vice President
and Treasurer
Affidavit No.
---------
Acknowledged and subscribed before me in San Juan, Puerto Rico, this
29th day of April, 1999, by the following person, who is personally known to
me: Mario S. Levis, of legal age, married, executive and resident of San Juan,
Puerto Rico as Executive Vice President and Treasurer of Doral Financial
Corporation and as Executive Vice President of Doral Mortgage Corporation.
-----------------------------
Notary Public
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<PAGE> 67
ADVANCES AND PAYMENT OF PRINCIPAL
<TABLE>
<CAPTION>
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Amount
Principal Unpaid
Amount of Maturity Paid or Pre- Principal Notation
Date Borrower Advance Date Paid Balance Made by
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<S> <C> <C> <C> <C> <C> <C>
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</TABLE>
<PAGE> 68
EXHIBIT B
REQUEST FOR ADVANCE
, 199
--------------------- -
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Advance No.
-----------------
Mortgagor:
-----------------
Gentlemen:
We hereby apply for an advance of $_____________ to be made under the
terms and conditions of the Warehousing Loan Agreement dated ____________, 1999
executed by and among Citibank, N.A., ____________ and the undersigned, as the
same may be amended or modified from time to time, the "Loan Agreement"; all
capitalized terms used herein that are not otherwise defined shall have the
meanings set forth in the Loan Agreement).
We hereby certify that there exists no default in the observance or
performance by us of any of the terms, conditions or agreements set forth in
the Loan Agreement, the other Loan Documents or any other agreement to which
you are a party or in which, to our knowledge, you have an interest.
We enclose the Schedule of Loans and the documents to be retained by
you, in pledge, until the Advance represented by each mortgage is repaid.
In the case of individual mortgages, we enclose the documents required
by Article 5 of the Loan Agreement and hereby represent and warrant that the
documents set forth in Article 5 which are not required to be delivered to the
Bank at this time are in our possession in trust for the benefit of the Bank.
All such documents referred to in Article 5 of the Loan Agreement related to
the mortgages for which the Advance is requested, are hereby pledged and
assigned to you pursuant to the terms of the Security Agreement, Pledge and
Assignment dated __________, 1999, executed by the undersigned in favor of
Citibank, N.A.
These documents constitute the Collateral until the corresponding
Advance, and all accrued interest thereon, is paid in full, or as otherwise
provided in the Loan Agreement.
<PAGE> 69
We hereby certify that we have applied to FHA or VA, FHA mortgage
insurance or VA guaranty as the case may be, for each FHA and VA Mortgage
delivered hereunder.
The Bank may, at its sole discretion, require that all documents
retained by the undersigned in accordance with Article 5 of the Loan Agreement
be immediately delivered to the Bank.
Very truly yours,
[NAME OF BORROWER]
By:
------------------------------
Receipt of the documents herein
specified is hereby acknowledged,
this ____ day of ____________, 199_
CITIBANK, N.A.
By:
--------------------------------
-2-
<PAGE> 70
EXHIBIT C
REQUEST FOR DELIVERY OF MORTGAGES TO BORROWER
(Sale to FNMA or FHLMC)
[Date]
Ms. Elena Manrana
Vice President
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Warehousing Loan - Doral Financial Corporation and Doral
Mortgage Corporation
Gentlemen:
Reference is made to the Warehousing Loan Agreement dated __________,
1999 by and among Citibank, N.A., _____________ and the above referenced
borrowers (as the same may hereafter be amended or modified from time to time,
the "Loan Agreement"; all capitalized terms used herein that are not otherwise
defined shall have the meanings set forth in the Loan Agreement).
We hereby certify that there exists no default in the observance or
performance by us of any term condition or agreement set forth in the Loan
Agreement or any other Loan Document.
We hereby request that you deliver to the undersigned, to hold in
trust on your behalf, subject to the Bank's security interest, in accordance
with Section 6.6 of the Loan Agreement, all documents related to the Mortgages
and/or mortgage-backed certificates listed on Schedule I attached hereto and
made to form a part hereof. Such Mortgages shall be held by the Borrower for
the sole purpose of transmitting them to FNMA or FHLMC for sale.
Very truly yours,
[NAME OF BORROWER]
By:
-----------------------------
Title:
<PAGE> 71
EXHIBIT D
CONFIRMATION OF RECEIPT OF MORTGAGE DOCUMENTATION
(Sale to FNMA or FHLMC)
[Date]
Ms. Elena Manrana
Vice President
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Warehousing Loan - Doral Financial Corporation and Doral
Mortgage Corporation
Gentlemen:
We hereby acknowledge receipt of the documents related to the
Mortgages and/or mortgage-backed certificates listed on Schedule I attached
hereto and made to form a part hereof pursuant to the Warehousing Loan
Agreement dated __________, 1999 by and among Citibank, N.A., _____________ and
the above referenced borrowers (as the same may hereafter be amended or
modified from time to time, the "Loan Agreement"; all capitalized terms used
herein that are not otherwise defined shall have the meanings set forth in the
Loan Agreement).
All such documents shall be held by the undersigned to hold in trust
on your behalf, subject to the Bank's security interest, in accordance with
Section 6.6 of the Loan Agreement. Such Mortgages shall be held by the Borrower
for the sole purpose of transmitting them to FNMA or FHLMC for sale. If for any
reason the corresponding payment made by FNMA or FHLMC is (A) not received by
the Bank in immediately available funds within seven calendar days from the
date on which the Bank released the corresponding Collateral or (B)
insufficient to pay in full the outstanding principal amount of the Advances
secured by the Mortgages delivered to the Borrowers, the Bank may, at its
option, charge the corresponding amount to any account of any Borrower with the
Bank (including, without limitation, the Account), and if sufficient funds are
not then available in said account to cover such charge, the Borrowers covenant
and agree that such amount shall be immediately due and payable and that they
will make the corresponding payment to the Bank forthwith.
Very truly yours,
By:
-----------------------------
Title:
<PAGE> 72
EXHIBIT E
REQUEST FOR DELIVERY OF MORTGAGES TO BORROWER
(Sale to Puerto Rico Investor)
[Date]
Ms. Elena Manrana
Vice President
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Warehousing Loan - Doral Financial Corporation and Doral
Mortgage Corporation
Gentlemen:
Reference is made to the Warehousing Loan Agreement dated __________,
1999 by and among Citibank, N.A., _____________ and the above referenced
borrowers (as the same may hereafter be amended or modified from time to time,
the "Loan Agreement"; all capitalized terms used herein that are not otherwise
defined shall have the meanings set forth in the Loan Agreement).
We hereby certify that there exists no default in the observance or
performance by us of any term condition or agreement set forth in the Loan
Agreement or any other Loan Document.
We hereby request that you deliver to the undersigned, to hold in
trust on your behalf, subject to the Bank's security interest, in accordance
with Section 6.6 of the Loan Agreement, all documents related to the Mortgages
and/or mortgage-backed certificates listed on Schedule I attached hereto and
made to form a part hereof. Such Mortgages shall be held by the Borrower for
the sole purpose of transmitting them for sale to a financial institution
located in Puerto Rico.
Very truly yours,
[NAME OF BORROWER]
By:
-----------------------------
Title:
<PAGE> 73
EXHIBIT F
CONFIRMATION OF RECEIPT OF MORTGAGE DOCUMENTATION
(Sale to Puerto Rico Investor)
[Date]
Ms. Elena Manrana
Vice President
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Warehousing Loan - Doral Financial Corporation and Doral
Mortgage Corporation
Gentlemen:
We hereby acknowledge receipt of the documents related to the
Mortgages and/or mortgage-backed certificates listed on Schedule I attached
hereto and made to form a part hereof pursuant to the Warehousing Loan
Agreement dated __________, 1999 by and among Citibank, N.A., _____________ and
the above referenced borrowers (as the same may hereafter be amended or
modified from time to time, the "Loan Agreement"; all capitalized terms used
herein that are not otherwise defined shall have the meanings set forth in the
Loan Agreement).
All such documents shall be held by the undersigned to hold in trust
on your behalf, subject to the Bank's security interest, in accordance with
Section 6.6 of the Loan Agreement. Such Mortgages shall be held by the Borrower
for the sole purpose of transmitting them for sale to a Financial Institution
located in Puerto Rico. If for any reason the corresponding payment made by
such financial institution is (A) not received by the Bank in immediately
available funds within one business day from the date on which the Bank
released the corresponding Collateral or (B) insufficient to pay in full the
outstanding principal amount of the Advances secured by the Mortgages delivered
to the Borrowers, the Bank may, at its option, charge the corresponding amount
to any account of any Borrower with the Bank (including, without limitation,
the Account), and if sufficient funds are not then available in said account to
cover such charge, the Borrowers covenant and agree that such amount shall be
immediately due and payable and that they will make the corresponding payment
to the Bank forthwith.
Very truly yours,
By:
-----------------------------
Title:
<PAGE> 74
EXHIBIT G
REQUEST FOR DELIVERY OF MORTGAGES TO CUSTODIAN
[Date]
Ms. Elena Manrana
Vice President
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Warehousing Loan - Doral Financial Corporation and Doral
Mortgage Corporation
Gentlemen:
Reference is made to the Warehousing Loan Agreement dated __________,
1999 by and among Citibank, N.A., _____________ and the above referenced
borrowers (as the same may hereafter be amended or modified from time to time,
the "Loan Agreement"; all capitalized terms used herein that are not otherwise
defined shall have the meanings set forth in the Loan Agreement).
We hereby certify that there exists no default in the observance or
performance by us of any term condition or agreement set forth in the Loan
Agreement or any other Loan Document.
We hereby request that you deliver to the Custodian, to hold on your
behalf, in accordance with Section 6.6 of the Loan Agreement, all documents
related to the Mortgages and/or mortgage-backed certificates listed on Schedule
I attached hereto and made to form a part hereof. Such Mortgages shall be held
by the Custodian until such time as the same
Very truly yours,
[NAME OF BORROWER]
By:
-----------------------------
Title:
<PAGE> 75
EXHIBIT H
CONFIRMATION OF RECEIPT OF MORTGAGE DOCUMENTATION
[Date]
Ms. Elena Manrana
Vice President
Citibank, N.A.
P.O. Box 71301
San Juan, Puerto Rico 00936-8301
Re: Warehousing Loan - Doral Financial Corporation and Doral
Mortgage Corporation
Gentlemen:
We hereby acknowledge receipt of the documents related to the
Mortgages and/or mortgage-backed certificates listed on Schedule I attached
hereto and made to form a part hereof.
All such documents shall be held by the undersigned as Custodian for
Citibank, N.A. pursuant to the terms and conditions set forth in (i) that
certain Custody Agreement executed by and between Citibank, N.A. and the
undersigned on __________, 1999, and (ii) Warehousing Loan Agreement dated
___________, 1999 by and among Citibank, N.A. and the above referenced
borrowers.
Very truly yours,
[NAME OF CUSTODIAN]
By:
-----------------------------
Title:
<PAGE> 76
EXHIBIT I
FORM OF DELINQUENCY REPORT
<PAGE> 1
EXHIBIT 12(a)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999
<S> <C>
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $ 17,804
Plus
Fixed Charges (excluding capitalized interest) 32,214
TOTAL EARNINGS $ 50,108
========
FIXED CHARGES:
Interest expensed and capitalized $ 31,764
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 148
An estimate of the interest component within rental expense 338
TOTAL FIXED CHARGES $ 32,250
========
RATIO OF EARNINGS TO FIXED CHARGES (INCLUDING INTEREST ON DEPOSITS) 1.55
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $ 17,804
Plus:
Fixed Charges (excluding capitalized interest) 25,562
TOTAL EARNINGS $ 43,366
========
FIXED CHARGES:
Interest expensed and capitalized $ 25,112
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 148
An estimate of the interest component within rental expense 338
TOTAL FIXED CHARGES $ 25,598
========
RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING INTEREST ON DEPOSITS) 1.69
</TABLE>
<PAGE> 1
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1999
<S> <C>
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $17,804
Plus:
Fixed Charges (excluding capitalized interest) 32,214
TOTAL EARNINGS $50,018
=======
FIXED CHARGES:
Interest expensed and capitalized $31,764
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 148
An estimate of the interest component within rental expense 338
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 32,250
Preferred dividend requirements 707
Ratio of pre tax income to net income 1.133
PREFERRED DIVIDEND FACTOR 801
TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $33,051
=======
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(including interest on deposits) 1.51
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $17,804
Plus:
Fixed Charges (excluding capitalized interest) 25,562
TOTAL EARNINGS $43,366
=======
FIXED CHARGES:
Interest expensed and capitalized $25,112
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 148
An estimate of the interest component within rental expense 338
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 25,598
Preferred dividend requirements 707
Ratio of pre tax income to net income 1.133
PREFERRED DIVIDEND FACTOR 801
TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $26,399
=======
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(excluding interest on deposits) 1.64
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORAL FINANCIAL CORPORATION FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 35,522
<INT-BEARING-DEPOSITS> 141,531
<FED-FUNDS-SOLD> 156,573
<TRADING-ASSETS> 646,901
<INVESTMENTS-HELD-FOR-SALE> 617,233
<INVESTMENTS-CARRYING> 185,426
<INVESTMENTS-MARKET> 187,426
<LOANS> 1,066,837
<ALLOWANCE> 5,435
<TOTAL-ASSETS> 3,138,122
<DEPOSITS> 649,378
<SHORT-TERM> 1,575,373
<LIABILITIES-OTHER> 240,092
<LONG-TERM> 325,589
0
1,503
<COMMON> 40,485
<OTHER-SE> 305,702
<TOTAL-LIABILITIES-AND-EQUITY> 3,138,122
<INTEREST-LOAN> 18,201
<INTEREST-INVEST> 20,036
<INTEREST-OTHER> 3,501
<INTEREST-TOTAL> 41,738
<INTEREST-DEPOSIT> 6,652
<INTEREST-EXPENSE> 25,224
<INTEREST-INCOME-NET> 9,862
<LOAN-LOSSES> 295
<SECURITIES-GAINS> 21,764
<EXPENSE-OTHER> 21,555
<INCOME-PRETAX> 17,804
<INCOME-PRE-EXTRAORDINARY> 17,804
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,671
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 1.27
<LOANS-NON> 3,233
<LOANS-PAST> 60,489
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 973
<ALLOWANCE-OPEN> 5,166
<CHARGE-OFFS> 175
<RECOVERIES> 149
<ALLOWANCE-CLOSE> 5,435
<ALLOWANCE-DOMESTIC> 5,435
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
