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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
X THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
-----
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
----- THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-17224
FIRST FINANCIAL CARIBBEAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico 66-0312162
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1159 Franklin D. Roosevelt Avenue
San Juan, Puerto Rico 00920
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (809) 749-7100.
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1 PAR VALUE
10- 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
$75,302,665 approximately, based on the last sale price of $16 3/8 per
share on the NASDAQ National Market System on March 14, 1994.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock: 6,923,248 shares as of March 14, 1994. (continued)
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DOCUMENTS INCORPORATED BY REFERENCE
PART III
Item 10 Directors and Executive Officers of the Information in response to this Item is
Registrant. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Election of Directors and Related Matters" in
the Company's definitive Proxy Statement for
use in connection with its 1994 Annual Meeting
of stockholders (the "Proxy Statement").
Item 11 Executive Compensation. Information in response to this Item is
incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Executive Compensation" in the Company's
Proxy Statement.
Item 12 Security Ownership of Certain Beneficial Information in response to this Item is
Owners and Management. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Security Ownership of Management and
Principal Holders" in the Company's Proxy
Statement.
Item 13 Certain Relationships and Related Information in response to this Item is
Transactions. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Election of Directors and Related Matters" in
the Company's Proxy Statement.
--------------------
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FIRST FINANCIAL CARIBBEAN CORPORATION
1993 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 23
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 23
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 26
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . 35
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 35
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 36
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 36
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . 36
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PART I
ITEM 1. BUSINESS
GENERAL.
First Financial Caribbean Corporation ("FFCC" or the "Company"),
together with its wholly-owned subsidiaries, including Doral Mortgage
Corporation ("Doral"), its principal subsidiary, is primarily engaged in a wide
range of mortgage banking activities, including the origination, servicing,
purchase and sale of mortgages on single-family residences, the issuance and
sale of various mortgage-backed securities, the holding and financing of
mortgage loans and mortgage-backed securities for sale or investment and, from
time to time, the purchase and sale of servicing rights associated with such
mortgage loans (the "Mortgage Banking Business"). Substantially all of FFCC's
income is from its Mortgage Banking Business which, until the opening of a
branch in Florida in March 1992, was exclusively conducted in Puerto Rico. On
September 10, 1993, the Company acquired Doral Federal Savings Bank ("Doral
Federal"), a federal savings and loan association which operates through two
branches in Puerto Rico. A subsidiary of the Company also acts as agent to
residents of Puerto Rico in the sale of houses located in the State of Florida.
References herein to the "Company" or "FFCC" shall be deemed to refer to the
Company and its consolidated subsidiaries, unless the context requires
otherwise.
The Company, a mortgagee approved by the United States Department of
Housing and Urban Development ("HUD"), has been engaged in the Mortgage Banking
Business since its incorporation in Puerto Rico in 1972. The Company's
Mortgage Banking Business is principally conducted through two operating units:
Doral and HF Mortgage Bankers Division ("HF"), a division of the Company.
During the first quarter of 1994, the Company activated another mortgage
banking subsidiary, Centro Hipotecario de Puerto Rico, Inc., to serve primarily
real estate brokers and corporate employees. The Company acquired Doral and
RSC Corp. ("RSC") from Culbro Corporation ("Culbro") in September 1988 for $6
million in cash. FFCC was a wholly-owned subsidiary of Culbro from December
1976 until December 1988 when all then outstanding shares of FFCC's common
stock held by Culbro were distributed to Culbro shareholders. Prior to 1976,
FFCC was owned by Salomon Levis and David Levis. FFCC's principal executive
office is located at 1159 Franklin D. Roosevelt Avenue, San Juan, Puerto Rico
00920, and its telephone number is (809) 749-7100.
The business and profitability of FFCC depend, to a large degree, on
its ability to sell mortgage loans to investors in the secondary mortgage
market at prices that are higher than the prices at which FFCC originates or
purchases such loans. The growth of the secondary mortgage market is
attributable in large part to programs maintained by the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and the Government National Mortgage Association ("GNMA"). In
addition, part of the Company's business is dependent upon the continuation of
various programs administered by the Federal Housing Administration ("FHA") for
HUD, which insures mortgage loans, and the Veterans Administration ("VA"),
which partially guarantees mortgage loans. Although the Company is not aware
of any proposed discontinuation of, or significant reduction in, the various
programs administered by FNMA, FHLMC, GNMA, FHA or VA, any such discontinuation
or reduction in the operation of such programs could have a material adverse
effect on the Company's operations. See "Mortgage Banking Business - Sale of
Loans; Issuance of Mortgage Backed Securities."
The Company is subject to the rules and regulations of, and
supervision by, several Federal and Puerto Rico entities, including, FNMA,
FHLMC, GNMA, FHA, VA, HUD, the Commissioner of Financial
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Institutions of Puerto Rico (the "Commissioner") and the Department of the
Treasury of Puerto Rico ("Puerto Rico Treasury"), with respect to, among other
things, licensing requirements, establishment of maximum interest rates,
required disclosure to customers and the originating, processing, underwriting,
selling and securitizing of mortgage loans. See "Regulation" herein.
The Company's operations are significantly affected by Federal and
Puerto Rico laws and regulations designed to promote economic development in
Puerto Rico, particularly the various Puerto Rico Industrial Incentives Acts
(the "Industrial Incentives Acts") and Section 936 ("Section 936") of the
United States Internal Revenue Code of 1986, as amended (the "Code"). For a
discussion of these matters, see "Puerto Rico Secondary Mortgage Market and
Favorable Tax Treatment."
The Company's principal revenues from mortgage banking business are
loan servicing fees, loan origination fees, interest on mortgage loans and
various mortgage-backed securities held prior to sale, gains from the sale of
mortgage loans and various mortgage-backed securities, sales of servicing
rights and other income (primarily sales of real estate owned). The Company is
an approved seller/servicer for FHLMC and FNMA, an approved issuer for GNMA and
an approved servicer under the GNMA, FNMA and FHLMC mortgage-backed securities
programs. In addition, FFCC is qualified to originate FHA insured and VA
guaranteed mortgage loans. The Company is the largest mortgage banking
institution in Puerto Rico in terms of the volume of origination of first
mortgage loans on single-family residences.
To enter a new market and thereby expand its source of mortgage loan
originations and its servicing portfolio, Doral opened a branch in Royal Oak
Village Mall in the Orlando, Florida, metropolitan area in March 1992. This
office represents the first branch office opened by the Company outside of
Puerto Rico. The office is staffed by five employees and originates
residential mortgage loans. The Orlando office originated approximately $24
million in mortgage loans during the year ended December 31, 1993. In February
1994, Doral opened its second office in the State of Florida in the City of
Miami. FFCC's operations in the state of Florida are subject to supervision by
the Florida Department of Banking and Finance.
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The following table sets forth the components of FFCC's revenues and
the percentage contribution of each component for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1993 1992 1991
------------- ---------------------- --------------
(DOLLARS IN THOUSANDS)
Revenues:
Mortgage loan sales and fees . . . . . . . . $35,230 50% $24,560 49% $15,693 40%
Servicing income . . . . . . . . . . . . . . 8,627 12% 7,163 14% 5,498 14%
Interest income . . . . . . . . . . . . . . 23,775 34% 16,983 34% 17,331 44%
Gain on sale of servicing rights . . . . . . 2,378 4% 935 2% 764 2%
Rental and other income . . . . . . . . . . 218 (1) 163 (1) 144 (1)
------- ----- ------- ---- ------- ----
Total(2) $70,228 100% $49,804 100% $39,430 100%
- ---------------- ======= ==== ======= ==== ======= ====
(1)Represents less than one percent of revenues.
(2)Sums of the columns may not add up to the totals due to rounding.
MORTGAGE BANKING BUSINESS
ORIGINATION AND PURCHASE OF MORTGAGES. FFCC has the most extensive
system of branch offices for originating mortgages loans of any mortgage
banking institution in Puerto Rico. HF operates two branches in the San Juan
Metropolitan area. Doral operates 15 branches in Puerto Rico located in
Arecibo, Bayamon (2 branches), Caguas, Carolina, Cayey, Fajardo, Guayama, Hato
Rey (2 branches), Humacao, Mayaguez, Ponce, Rio Piedras and Vega Baja. Centro
Hipotecario operates an additional branch in the San Juan metropolitan area.
FFCC originates both (a) conventional mortgages on single-family
residences, which generally (i) are insured by private mortgage insurers or
(ii) do not exceed 80% of the appraised value of the mortgaged property, and
(b) mortgages on single-family residences, guaranteed by the VA ("VA loans") or
insured by HUD ("FHA loans"). VA loans and FHA loans qualify for inclusion in
the mortgage-backed securities program sponsored by GNMA. A majority of the
conventional loans are conforming loans which qualify for inclusion in
guarantee programs sponsored by FNMA or FHLMC. The Company also originates
construction loans for owner-occupied single family residences and other real
estate developments and mortgage loans on commercial properties. Construction
loans and mortgage loans on commercial properties constituted less than 1% of
the total dollar volume of loans originated by the Company during the year
ended December 31, 1993.
While the Company makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all the loans are fixed rate
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mortgages. The average loan size for FHA/VA mortgage loans and conventional
mortgage loans was approximately $64,000 and $71,000, respectively, for the
year ended December 31, 1993.
Although the Company continues to offer second mortgages, this product
has been deemphasized recently due to decreased demand for the product. The
decreased demand is due in part to the tendency of consumers to refinance their
first mortgages during periods of prevailing low interest rates. During 1993,
second mortgages constituted less than 2% of the total loans originated by the
Company. The maximum loan-to-appraised value ratio on second mortgages
permitted by the Company is 80% (including the amount of any first mortgage).
Loan origination activities performed by FFCC include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined
for compliance with underwriting criteria and, if all requirements are met,
FFCC issues a commitment to the prospective borrower specifying the amount of
the loan and the loan origination fees, points and closing costs to be paid by
the borrower or seller and the date on which the commitment expires.
FFCC purchases FHA loans and VA loans from Doral and other mortgage
banks for resale to institutional investors in the form of GNMA securities.
The Company's strategy is to increase its servicing portfolio through internal
originations through its branch network rather than purchasing loans from third
parties. The Company purchased only $1.0 million in loans from third parties
during the year ended December 31, 1993 as compared to $29 million, $48
million, $117 million and $185 million for the years ended December 31, 1992,
1991, 1990 and 1989, respectively.
In recent years, the Company has placed greater emphasis on the
origination of conventional conforming first mortgage loans which have a larger
loan size than loans qualifying under the FHA and VA programs. The maximum
loan size for FHA loans and VA loans has not increased proportionally with the
increase in real estate values in Puerto Rico. The Company's continued
emphasis on origination of conventional conforming first mortgage loans is
dependent on market conditions, the relative return available on the
origination and sale of different types of mortgage loans and maximum loan
amounts for the various types of loans.
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The following table sets forth the number and dollar amount of the
Company's mortgage loan production for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except average loan balances)
FHA/VA LOANS:
Number of Loans . . . 8,364 3,224 2,182 2,419 2,484
Volume of Loans . . . $ 532,654 $207,239 $132,005 $139,720 $140,247
Percent of Total Volume 37% 30% 37% 43% 51%
CONVENTIONAL AND OTHER
LOANS:(1)
Number of Loans . . . 12,658 7,637 4,856 5,296 3,619
Volume of Loans . . . $ 899,794 $486,484 $228,411 $181,681 $137,328
Percent of Total Volume 63% 70% 63% 57% 49%
TOTAL LOANS:
Number of Loans . . . 21,022 10,861 7,038 7,715 6,103
Volume of Loans . . . $1,432,448 $693,723 $360,416 $321,401 $277,575
AVERAGE INITIAL LOAN
BALANCE:
FHA/VA Loans . . . . . $ 63,700 $ 64,300 $ 60,500 $ 57,800 $ 56,500
Conventional and other 71,100 $ 63,700 $ 47,000 $ 34,300 $ 37,900
Loans(1) . . . . .
REFINANCINGS(2) . . . . . 78% 67% 67% 60% 60%
________________
(1) Includes second mortgage loans and non-conforming loans
(conventional loans that do not qualify for inclusion in
the guarantee programs sponsored by FNMA or FHLMC) which
generally have lower average initial loan sizes than
conforming first mortgage loans.
(2) As a percentage of the total dollar volume of loans
originated.
Unlike many mortgage banking institutions in the United States, a high
proportion of the Company's total mortgage loans has consistently been
comprised of refinancing loans. For the years ended December 31, 1993, 1992
and 1991, refinancing activity represented approximately 78%, 67% and 67%,
respectively, of the Company's total dollar volume of mortgage loans
originated. The increase from 1992 to 1993 was principally due to the
Company's greater market share in refinancings coupled with a decline in
average mortgage interest rates which has stimulated demand for refinancing of
existing mortgage loans. A significant future increase in mortgage interest
rates in Puerto Rico could adversely affect the Company's business if it
resulted in a significant decrease in refinancing of first mortgage loans.
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For the years ended December 31, 1993, 1992 and 1991, non-conforming
conventional loans represented approximately 15%, 19% and 24%, respectively, of
the Company's total volume of mortgage loans originated.
SERVICING. When FFCC sells the mortgage loans it has originated or
purchased, it generally retains the rights to service such loans and receives
the related servicing fees. Loan servicing includes collecting principal and
interest and remitting the same to the holders of the mortgage loans or
mortgage-backed securities to which such mortgage loan relates, holding escrow
funds for the payment of real estate taxes and insurance premiums, contacting
delinquent borrowers, supervising foreclosures in the event of unremedied
defaults and generally administering the loans. FFCC receives annual loan
servicing fees ranging from 0.25% to 0.50% of the declining principal amount of
the loans serviced plus any late charges. In general, FFCC's servicing
agreements are terminable by the investor for cause. Substantially all of
FFCC's mortgage servicing portfolio is composed of mortgages secured by real
estate in Puerto Rico. At December 31, 1993, approximately $30 million of the
Company's mortgage servicing portfolio related to mortgages originated outside
Puerto Rico (all of which were originated in Florida).
The following table sets forth certain information regarding the total
loan servicing portfolio of FFCC for the periods indicated:
Year ended December 31,
--------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ---------- --------- --------- ---------
(Dollars in thousands)
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA Mortgage
Loans . . . . . . . . . $ 955,624 $ 851,853 $ 858,261 $ 813,123 $643,423
Conventional Mortgage
Loans . . . . . . . . 1,420,031 885,571 554,745 379,944 187,464
---------- ---------- ---------- ---------- --------
Total Servicing Portfolio $2,375,655 $1,737,424 $1,413,006 $1,193,067 $830,887
========== ========== ========== ========== ========
BEGINNING SERVICING
PORTFOLIO . . . . . . . $1,737,424 $1,413,006 $1,193,067 $830,887 $830,449
ADD:
Loans Funded and
Purchased(1) . . . . . 1,433,448 693,723 386,695 411,595 235,947
LESS:
Servicing Sales
Transferred . . . . . 198,700 53,400 51,460 --- 166,000
Run-off(2) . . . . . . . 596,517 315,905 115,296 49,415 69,509
---------- ---------- ---------- ---------- --------
ENDING SERVICING PORTFOLIO $2,375,655 $1,737,424 $1,413,006 $1,193,067 $830,887
========== ========== ========== ========== ========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of Loans . . . . 48,272 39,562 34,897 31,199 23,801
Weighted Average Interest
Rate . . . . . . . . . 8.15% 9.09% 10.06% 10.53% 11.00%
Weighted Average Maturity
(months) . . . . . . . 226 204 224 228 234
Weighted Average Servicing
Fee Rate . . . . . . . .4195 .4040 .4242 .4396 .4410
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Year ended December 31,
---------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------- -------- --------- -------- -------
(Dollars in thousands)
DELINQUENT MORTGAGE LOANS
AND PENDING FORECLOSURES
AT PERIOD END:(3)
60-89 days past due . . . 1.49% 1.39% 2.01% 2.36% 2.29%
90 days or more past due . 1.62% 1.55% 2.26% 3.54% 2.51%
----- ----- ----- ----- -----
Total delinquencies . . . 3.11% 2.94% 4.27% 5.90% 4.80%
===== ===== ===== ===== =====
Foreclosures Pending . . . 1.21% 1.44% 1.47% 1.10% 2.69%
____________________
(1) Loans funded and purchased represent that portion of loans
originated or purchased with respect to which the servicing
rights were retained by the Company. In 1991, there is also
included $49.2 million of servicing rights acquired from a
financial institution.
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(3) Expressed as a percentage of the total number of loans serviced.
The amount of principal prepayments on mortgage loans serviced by the
Company was $537 million, $242 million and $66 million for the years ended
December 31, 1993, 1992 and 1991, respectively. This represented approximately
26%, 15.4% and 5.3% of the aggregate principal amount of mortgage loans
serviced during such periods and the average size of the loans prepaid were
$54,600, $44,500 and $37,801, respectively. The primary means used by the
Company to reduce the sensitivity of its servicing fee income to changes in
interest and prepayment rates is the development of a strong internal
origination capability that has allowed the Company to continue to increase the
size of its servicing portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA, and certain other investors, require FFCC to advance
funds to make scheduled payments of principal, interest, taxes and insurance,
if such payments have not been received from the borrowers. During 1993, the
monthly average amount of funds advanced by FFCC under such servicing
agreements was $2.2 million. Funds advanced by FFCC pursuant to these
arrangements are generally recovered by FFCC within two weeks. FFCC sells
certain mortgage loans to FNMA and FHLMC with recourse, which means that FFCC,
as servicer, is responsible for the outstanding amount of the loan, for
advancing defaulted payments on the loan and repurchasing the properties on all
foreclosed mortgages. For the years ended December 31, 1993 and 1992, only
$23.1 million and $28.5 million, or approximately 2.7% and 5.5%, respectively,
of all FHMLC and FNMA conforming loans serviced by FFCC were represented by
mortgages sold with recourse. In November of 1993, the Company entered into a
commitment to deliver by May 15, 1994 approximately $100 million of mortgage
loans to FHLMC on a recourse basis. "See" Sale of Loans; Issuance of Mortgage
Backed Securities" herein.
The Company has also traditionally sold most of its non-conforming loans
to local financial institutions with recourse to the Company. The amount of
such recourse obligations as of December 31, 1993 and 1992, was $141 million
and $215 million, respectively. In 1993, the Company continued to reduce sales
of its non-conforming loans with recourse by pooling such loans into private
label mortgage-backed securities for sale in the Puerto Rican market through
broker-dealers. See "Sale of Loans; Issuance of Mortgage-Backed Securities"
below. In connection with the sale of such mortgage-backed securities the
Company has entered into servicing arrangements that require the Company to
advance funds under conditions similar to those that apply to servicers under
the FNMA and FHLMC programs.
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FFCC's servicing rights, although not reflected as an asset on FFCC's
financial statements (except for purchased servicing rights), provide a
significant continuing source of income for FFCC. There is a market in Puerto
Rico for servicing rights, which are generally valued in relation to the
present value of the expected income stream generated by the servicing rights.
Among the factors which influence the value of a servicing portfolio are
servicing fee rates, loan balances, loan types, loan interest rates, expected
average life of underlying loans (which may be reduced through foreclosure or
prepayment), the value of escrow balances, delinquency and foreclosure
experience, servicing costs, servicing termination rights of permanent
investors, and any recourse provisions. In the years ended December 31, 1993,
1992 and 1991, FFCC sold servicing rights on $198.7 million, $53.4 million and
$51.5 million, respectively, of mortgages. FFCC may from time to time sell
additional portions of its servicing portfolio.
The mortgage loan delinquency rate in Puerto Rico is generally higher than
in the mainland United States. At December 31, 1993 and 1992, 3.11% and 2.94%,
respectively, of the number of loans in FFCC's servicing portfolio were 60 or
more days past due and, in addition, 1.21% and 1.44%, respectively, were in
foreclosure. During the years ended December 31, 1993 and 1992, the percentage
of loans in FFCC's servicing portfolio which were over 60 days past due but not
in foreclosure at month end varied from 3.11% to 3.71%, and 2.12% to 4.28%,
respectively. For the year ended December 31, 1993, the percentage of the
number of serviced loans in foreclosure ranged from 1.19% to 3.37%. The
percentage of the number of serviced loans in foreclosure during 1992 ranged
from 1.06% to 1.77%. During 1991, the percentage of loans in FFCC's portfolio
which were 60 days or more past due at month end varied from 4.27% to 5.43% and
the percentage of the number of such loans in foreclosure varied from 1.13% to
1.83%.
HRU, Inc. provides mailing and electronic data processing services for
FFCC's mortgage servicing and earns fees from FFCC based on the volume of
mortgage loans serviced. Such fees are determined at fair market value and
amounted to approximately $617,000, $410,000 and $348,000 for the years ended
December 31, 1993, 1992 and 1991, respectively. FFCC owns a 25% interest in
HRU, Inc.
FORECLOSURE EXPERIENCE AND REAL ESTATE OWNED. While delinquency rates in
Puerto Rico are generally higher than in the mainland United States, these
rates are not necessarily indicative of future foreclosure rates or losses on
foreclosures. As of December 31, 1993 and 1992, FFCC held real estate owned as
a result of foreclosures ("REO") with a book value of approximately $2.9
million and $3.6 million, respectively. As of December 31, 1993 and 1992, an
additional amount of REO consisting of approximately $74,000 and $108,000 was
rented under a United States government subsidy program. Sales of REO resulted
in net losses to FFCC of approximately $1.05 million for the year ended
December 31, 1993 and $439,150 for the year ended December 31, 1992. There is
no liquid secondary market for the sale of the Company's REO.
With respect to mortgage loans securitized through GNMA programs, the
Company is fully insured as to principal by the FHA against foreclosure loss
while the VA guarantee is subject to a limitation of the lesser of 25% of the
loan or $46,000. As a result of these programs, foreclosure on these loans had
generated no loss of principal as of December 31, 1993, FFCC, however, incurs
about $2,200 per loan foreclosed in interest and legal charges during the time
between payment by FFCC and FHA or VA reimbursement. Although FNMA and FHLMC
are obligated to reimburse the Company for principal and interest payments
advanced by the Company as a servicer, the funding of delinquent payments or
the exercise of foreclosure rights involves costs to the Company which may not
be recouped. Of the total number of loans serviced by the Company at December
31, 1993 and 1992, 3.11% and 2.94%, respectively,
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were delinquent and 1.21% and 1.44%, respectively were in foreclosure. (See
the delinquency of mortgage loans serviced in the table above.)
Any significant adverse economic developments in Puerto Rico, FFCC's
primary service area, could result in an increase in defaults or delinquencies
on mortgage loans that are serviced by FFCC or held by FFCC pending sale in the
secondary mortgage market, thereby reducing the resale value of such mortgage
loans. See "Amendments to Section 936."
In December 1990, the Company sold REO consisting of 89 residential
properties containing 104 housing units with a cost of approximately $4.7
million including previously incurred rehabilitation costs and construction
interest to a Puerto Rico partnership (the "Partnership") formed under a
private syndication. The general partner of the Partnership was a corporation
that was unrelated to the Company or its officers or directors. Several
members of senior management of the Company, invested as limited partners.
The Company also invested approximately $135,000 in the Partnership, and owns
a 15% interest in the Partnership which is included at cost in "Other Assets"
in the Company's Balance Sheet. The REO was sold to the Partnership for $4.7
million which was based on an estimate of the market value of the REO as
reflected in an independent appraisal report. The appraisal took into
consideration the cost of the improvements to be made which were reflected
in the sales price to the Partnership. The Company believes that the sales
price of the REO was comparable to that which the Company could have obtained
in arm's length transactions with unaffiliated parties. Approximately $600,000
of the purchase price was paid in cash at the closing of the sale of the REO
and the remainder was evidenced by promissory notes (the "Notes") of the
Partnership issued to the Company in the amount of approximately $4.1 million.
The Notes bear interest payable on the first day of each month at the
prime rate of Citibank, N.A. (with a maximum and minimum rate of 13.5% and 9%,
respectively) and mature on April 1, 2006. During December 1990, February 1991
and March 1992, the Company sold a total of $2.8 million principal amount of
the Notes to a local financial institution with recourse.
On July 31, 1992, pursuant to a mutual agreement between the Company and
the general partner, due to what the Company believed was unsatisfactory
performance, the general partner withdrew from the Partnership and a new
non-profit corporation became the general partner. The Board of Directors of
the new non-profit corporation is composed of three members of FFCC's senior
management. In connection with such withdrawal, the Company agreed to
indemnify the original general partner from certain liabilities incurred during
the period it acted as general partner. The Partnership intends to sell or
lease the REO and the Company believes that the change in the general partner
together with existing market conditions should facilitate such process and
that the matters set forth above will not result in any material adverse affect
on the financial condition of the Company.
As of December 31, 1993, the principal balance of the Notes held by the
Company was approximately $400,000. At December 31, 1993, the Partnership owed
the Company $483,000 in past due interest. In addition, the Company holds
$54,685 of the Partnership's funds as security. As of December 31, 1993, the
Company also had accounts receivable due from the Partnership of approximately
$550,000, corresponding primarily to repairs and improvements made to the
rental properties that were funded by the Company.
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SALE OF LOANS; ISSUANCE OF MORTGAGE-BACKED SECURITIES. FFCC, as do most
mortgage bankers, customarily sells most of the loans that it originates. FFCC
issues GNMA-guaranteed mortgage-backed securities, which involve the packaging
of FHA loans or VA loans into pools of $1 million or more ($2.5 million to $5
million for serial notes) for sale primarily to broker-dealers in Puerto Rico.
During the year ended December 31, 1993, FFCC issued approximately $485 million
in GNMA-guaranteed mortgage-backed securities.
Most GNMA-guaranteed mortgage-backed securities sold by FFCC are in the
form of GNMA serial notes which permit the investor to receive interest monthly
and to select among several maturity dates of the notes included in an issue,
each maturity having a specific yield. GNMA serial notes are sold in pools of
$2.5 million to $5 million. Such pools are composed solely of FHA loans or VA
loans originated in Puerto Rico. GNMA serial notes are sold to investment
banks in packages consisting of notes of different yields and maturities, which
range from 1 to 30 years and have an average maturity of 12 years, taking into
account historical experience with prepayments of the underlying mortgages.
The rates on the serial notes or GNMA pools must be 1/2 of 1% less than the
rates on the mortgages comprising the pool. Upon completion of the necessary
processing, the GNMA-guaranteed mortgage-backed securities are offered to the
public through securities broker-dealers. During the year ended December 31,
1993, FFCC issued GNMA serial notes totalling approximately $200 million.
With respect to loans securitized through GNMA programs, the Company is
insured against foreclosure loss by HUD with respect to FHA loans or partially
guaranteed against foreclosure loss by the VA (at present, generally 25% of the
loan, up to a maximum amount of $46,000, depending upon the amount of the loan
with respect to VA loans). According to the applicable VA guidelines, the
maximum amount of a VA loan originated in Puerto Rico is presently $184,000.
According to applicable FHA guidelines, the maximum amount of a FHA loan ranges
from $67,500 to $121,600 depending on the municipality where the mortgaged
property is located.
Conventional conforming mortgage loans originated or purchased by FFCC are
generally grouped into pools of $1 million or more in aggregate principal
balance and sold to FNMA or FHLMC in exchange for FNMA- or FHLMC-issued
mortgage-backed securities which FFCC sells to securities broker-dealers. The
issuance of mortgage-backed securities provides FFCC with flexibility in
selling the mortgages which it originates or purchases and also provides income
by increasing the value and marketability of the loans.
In addition to the issuance and sale of GNMA, FNMA and FHLMC certificates,
the Company also sells to institutional investors conventional loans that do
not conform to FNMA or FHLMC requirements. In the past, the Company often sold
such non-conforming loans to financial institutions with recourse to the
Company. In 1993, the Company continued to implement the strategic decision
made during 1992 to reduce the sale of such non-conforming loans with recourse
and instead pool such loans into so-called "private label" mortgage-backed
securities that can be sold in the local market through broker-dealers without
recourse to the Company. Each issue of mortgage-backed securities normally
consists of several classes of senior, subordinate and residual certificates.
The residual certificates evidence a right to receive payments on the mortgage
loans after payment of all required amounts on the senior and subordinate
certificates then due. Some form of credit enhancement such as an insurance
policy or letter of credit will generally be used to increase the credit rating
of the senior certificates and thereby improve their marketability. During the
year ended December 31, 1993, the Company completed sales of approximately $115
million aggregate principal amount of mortgage-backed securities in similar
transactions, of which $106 million consisted of senior certificates insured by
Financial Security Assurance, Inc. ("FSA"). Subject to market conditions, the
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Company contemplates entering into similar transactions in the future. As part
of its arrangement with FSA, the Company has agreed to retain and pledge to FSA
the residual certificates issued by the respective trusts.
While the Company normally sells mortgage loans on a non-recourse basis,
it also engages in the sale of mortgage loans on a recourse basis. At December
31, 1993, the Company had loans in its servicing portfolio with provisions for
recourse in the principal amount of approximately $164 million, as compared to
$244 million as of December 31, 1992. Of these recourse loans, approximately
$23 million in principal amount consisted of loans sold to FNMA and FHLMC, and
approximately $141 million principal amount consisted of non-conforming loans
sold to other private investors. In November 1993, the Company entered into a
commitment to sell $100 million of mortgage loans on a recourse basis to FHLMC
by May 15, 1994. The Company will attempt to obtain future FHLMC commitments
on a non-recourse basis. The Company estimates the fair value of the retained
recourse obligation at the time mortgage loans are sold. Normally, the fair
value of any retained recourse is immaterial because the Company is able to
resell repurchased loans for at least their carrying costs. Accordingly, to
date, the Company has not deemed it necessary to establish reserves for
possible losses related to recourse obligations.
In addition to the sale of the "private label" mortgage-backed securities
referred to above, the Company has, from time to time, sold mortgage-backed
securities in bulk to local broker-dealers or financial institutions. These
mortgage-backed securities are normally converted into collateralized mortgage
obligations by the purchasers and sold in the local market.
INTEREST RATE MANAGEMENT. The sale of mortgage loans and mortgage-backed
securities can generate a gain or a loss. Cash losses on sales of loans occur
when FFCC sells loans at a discount from their book value. A loss from the
sale of loans may occur if interest rates rise between the time FFCC fixes the
interest rates charged to the borrowers on the loans and the time the loans are
sold to investors.
FFCC manages this interest rate risk through the use of forward
commitments and other hedging techniques. In the case of FNMA and FHLMC
conforming loans and FNMA and FHLMC mortgage-backed securities and GNMA
certificates, the Company often seeks to obtain commitments from third parties
for the purchase of loans or mortgage-backed securities at the time it fixes
the interest rates for the loans. At December 31, 1993, the amount of such
forward commitments was $175 million or approximately 43% of the total mortgage
loans and mortgage-backed securities held for sale as of such date. The
Company normally holds GNMA certificates for longer periods prior to sale to
investors in order to maximize its net interest income and to take advantage of
the tax exempt status of the interest on such securities under Puerto Rico law.
The Company has in place long-term reverse repurchase agreements secured by
GNMA certificates with a principal amount of approximately $42 million. The
Company does not obtain forward commitments for such GNMA certificates because
they are financed pursuant to long-term repurchase agreements. The Company
has the right to substitute GNMA certificates subject to the repurchase
agreements with similar GNMA certificates at any time. Prices for GNMA
certificates in Puerto Rico tend to be more stable than on the mainland U.S.
because of the tax exempt status of interest paid on these securities under
Puerto Rico law. In the case of FNMA and FHLMC conforming loans and
mortgage-backed securities the Company also seeks to protect itself from
interest rate risk by purchasing options on eurodollar certificates of deposit,
futures contracts and, to a lesser extent, options on treasury bond futures
contracts. Contracts designated as trading hedges are marked-to-market on a
monthly basis with the resulting gains and losses charged to operations.
Changes in the market value of futures contracts that qualify as hedges of
existing assets and liabilities are recognized as an adjustment to the book
value of the asset or liability being hedged. The level of investment in such
options is increased or decreased as
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interest rates change and may reach significant levels relative to the
Company's current liabilities. As of December 31, 1993, FFCC had hedged a
portion of its short-term liabilities through this strategy. In the future,
FFCC may utilize alternative hedging techniques including futures, options or
other synthetically created hedge vehicles to help mitigate interest rate and
market risk. However, there can be no assurance that any of the above hedging
techniques will be successful. For the years ended December 31, 1993, 1992 and
1991, FFCC experienced losses of approximately $1,367,000, $1,376,000 and
$999,000, respectively, from its hedging activities. Losses on hedging
activities are generally indicative of higher profits realized on the sale of
mortgage loans and mortgage-backed securities.
MARKET INTEREST RATES AND NET INTEREST INCOME. A greater proportion of
the Company's net income has generally been composed of net interest income
than is typical of mortgage banking institutions in the mainland United States.
This is primarily due to the fact that the Company traditionally has held
mortgage loans and mortgage-backed securities, particularly GNMA certificates,
for longer periods prior to sale than is typical for mortgage banking
institutions in the mainland United States. For the years ended December 31,
1993 and 1992, the Company held mortgage loans for an average period of 98 and
118 days, respectively, as compared to 185 days for 1991. The decrease in the
average period mortgage loans were held prior to sale during the year ended
December 31, 1993 as compared to the prior year was primarily due to favorable
market conditions that allowed the Company to increase its sale of
mortgage-backed securities, the continued pooling and selling of non-conforming
loans as mortgage backed securities and a shift in emphasis from origination of
FHA and VA loans to FHLMC and FNMA conforming loans which the Company normally
sells within 60 days of origination.
The continued emphasis on the origination of FHLMC and FNMA conforming
loans versus FHA and VA loans is dependent on market conditions, the relative
pricing and return on origination of the different types of mortgage loans and
the maximum loans amounts for the various types of loans. Mortgage loans and
mortgage-backed securities have been held for longer periods by the Company
primarily for two reasons. The first relates to Puerto Rico regulatory
requirements and the operation of the GNMA serial note program in Puerto Rico.
In order to be able to fund the origination of mortgage loans with
tax-advantaged 936 Funds (see "Puerto Rico Secondary Mortgage Market and
Favorable Tax Treatment" below), mortgages qualifying for favorable tax
treatment must be segregated and separately funded from non-qualifying
mortgages. This requirement, together with the fact that the GNMA serial note
pools consist of a minimum of $2.5 million principal amount of mortgage loans
as compared to $1 million for other GNMA programs, obligates the Company to
hold mortgage loans and mortgage-backed securities for longer periods prior to
sale in order to assemble such pools. In addition to the foregoing regulatory
constraints, the Company has made a strategic decision to hold GNMA
certificates for longer periods to take advantage of attractive interest rate
spreads and thereby maximize the Company's net interest income and tax exempt
income. The fact that interest rate spreads on certain mortgage loans and
mortgage-backed securities in Puerto Rico have traditionally been high due to
the ability of mortgage banking institutions to finance their inventory of
mortgage loans and mortgage-backed securities with lower-cost tax advantaged
funds has also helped the Company maximize its net interest income. See
"Interest Rate Management."
While holding mortgage loans and mortgage-backed securities for longer
periods has allowed FFCC to maximize its net interest income, changes in
prevailing market interest rates between the time FFCC commits to an interest
rate on a mortgage loan and the time the mortgage loan is sold to permanent
investors could reduce FFCC's net interest income on mortgage loans held prior
to sale and gains from the sale of loans and thereby reduce FFCC's net income.
FFCC attempts to manage these risks by securing commitments for future delivery
or engaging in managed hedging transactions such as those described under
"Interest Rate Management."
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PUERTO RICO SECONDARY MORTGAGE MARKET AND FAVORABLE TAX TREATMENT. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, United States and Puerto Rico tax
laws provide an economic incentive for Puerto Rico residents and Section 936
Corporations (defined below) to invest in certain mortgage loans and
mortgage-backed securities originated in Puerto Rico, including FHA and VA
loans and GNMA certificates, thereby increasing the secondary market demand
for, and resale value of, such mortgage loans and mortgage-backed securities.
These tax advantages also significantly affect FFCC's net interest income by
helping create a pool of lower-cost funds that FFCC can access through
financial intermediaries such as banks and broker-dealers and use to fund
mortgage loans and mortgage-backed securities pending sale.
The Company's operations are significantly affected by Federal and Puerto
Rico laws and regulations designed to promote economic development in Puerto
Rico, particularly the Industrial Incentives Acts and Section 936. Under the
Industrial Incentives Acts, certain investment income earned by qualified
manufacturing entities or service enterprises ("Exempt Companies") is exempt
from Puerto Rico income tax.
The various Puerto Rico Industrial Incentive Acts (the "Incentives Acts")
also encourage investment in Puerto Rico by allowing Exempt Companies to reduce
the otherwise applicable 10% tax (the "Tollgate Tax") on distributions to
shareholders by investing their exempt industrial development income ("IDI") in
Puerto Rico for fixed periods of time, generally from five years to ten years.
Investment income that qualifies for this exemption includes interest on
certain mortgage loans and interest on funds of Exempt Companies ("936 Funds")
placed with eligible institutions in Puerto Rico (primarily savings and loan
associations, commercial banks and registered broker-dealers) provided such
funds are invested in certain "eligible activities" in accordance with
regulations promulgated by the Commissioner, including certain mortgage loans
and mortgage-backed securities.
On October 25, 1993 the Legislature of Puerto Rico enacted two bills
amending certain provisions of the Incentives Acts and the Puerto Rico Income
Tax Act of 1954, as amended (the "TIA"). In general, one of the bills has the
effect of increasing the minimum Tollgate Tax paid by an Exempt Company under
the Incentives Acts upon distribution of its IDI. Under that bill, any Exempt
Company under the TIA may reduce the 10% tollgate tax imposed on distributions
of IDI accumulated during taxable years beginning after December 31, 1992 to 6%
or 5% (compared to 5% and 2% under current law) if at least 50% of the net IDI
is invested in investments described in Section 2(j) for more than five years
or more than eight years, respectively. The law also eliminates the provisions
of the Incentives Acts and those of the Tax Act that provide special Tollgate
Tax reduction benefits to investments of IDI in obligations of the Commonwealth
government and its instrumentalities and for investments for a period of more
than five years.
Under the other bill, Exempt Companies will generally be allowed to pay an
up-front 14% income tax (the "Alternative Tax") on the IDI derived including
investment income other than interest on government obligations during taxable
years beginning after December 31, 1992 payable in the taxable year earned, in
lieu of payment of the otherwise applicable income tax on non-exempt income and
of the Tollgate Tax on future distributions of such IDI. The Alternative Tax
can be reduced to 11% or 9% if the Exempt Company invests 25% or 50%,
respectively, of its net IDI in certain Puerto Rico investments for a period of
five years. An Exempt Company may satisfy up to one half of the 50% investment
requirement by investing in property, plant and equipment with a depreciable
life of at least ten years.
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The amendments, while maintaining important incentives for investing in
Puerto Rico could have the effect of reducing the amount of funds invested in
Puerto Rico by Exempt Companies as a result of the changes in the relative
costs to an Exempt Company of distributing IDI to its shareholders and,
therefore, could result in an increase in the costs of funds for Puerto Rico
borrowers, including the Company, and a reduction in the demand for Puerto Rico
investments, including mortgage loans and mortgage-backed securities sold by
the Company. While the final impact on the Company of the adoption of the
amendments cannot be determined at this time, to date the adoption of the
amendments to date has not had a material adverse effect on the Company's
business or financial condition nor does the Company expect such an effect in
the future.
Most Exempt Companies are United States corporations which operate in
Puerto Rico under Section 936 of the Code ("Section 936"). Corporations that
meet certain requirements and elect the benefits of Section 936 ("Section 936
Corporations") are entitled to credit against their United States corporate
income tax a portion of such tax attributable to (i) income derived from the
active conduct of a trade or business within Puerto Rico ("active business
income") or from the sale or exchange of substantially all assets used in the
active conduct of such trade or business and (ii) qualified possession source
investment income ("QPSII"). Interest derived from Puerto Rico mortgage loans
and mortgage-backed securities consisting of Puerto Rico mortgage loans
generally qualifies as QPSII.
To qualify under Section 936 in any given taxable year a corporation must
derive (i) for the three-year period immediately preceding the end of such
taxable year, 80% or more of it gross income from sources within Puerto Rico
and (ii) for taxable years beginning after December 31, 1986, 75% or more of
its gross income from the active conduct of a trade or business in Puerto Rico.
A Section 936 Corporation may elect to compute its active business income
eligible for the Section 936 credit under one of three formulas: (i) a cost
sharing formula, whereby it is allowed to claim all profits attributable to
manufacturing intangibles and other functions carried out in Puerto Rico,
provided it contributes to the research and development expenses of its
affiliated group or pays certain royalties; (ii) a profit split formula,
whereby it is allowed to claim approximately 50% of the net income of its
affiliated group from the sale of products manufactured in Puerto Rico; or
(iii) a cost plus formula, whereby it is allowed to claim a reasonable profit
on the manufacturing costs incurred in Puerto Rico. To be eligible for the
first two formulas, a Section 936 Corporation must have a significant business
presence in Puerto Rico for purposes of a Section 936 rules. Section 936 was
amended on August 10, 1993, and the benefits thereunder were modified in
certain important respect. See "Recent Amendments to Section 936 and
Industrial Incentives Acts" below.
In addition to the foregoing incentives, interest derived from FHA loans
or VA loans secured by real property in Puerto Rico originated after June 30,
1983, and, under certain circumstances, on or before February 15, 1973, and
from GNMA certificates consisting of such mortgages, is exempt from Puerto Rico
income tax. FHA and VA mortgage loans are also exempt from Puerto Rico gift
and estate taxes. Individuals who are bona fide residents of Puerto Rico are
also not subject to United States federal income tax on income from Puerto Rico
sources, including interest income derived from mortgage loans originated in
Puerto Rico whose mortgagors are residents of Puerto Rico.
The tax benefits available to investors of mortgage loans decrease the
yield Puerto Rico investors, including, Exempt Companies, require; therefore,
certain loans, specifically FHA, VA and FHLMC and FNMA conforming conventional
loans, are generated at interest rates which are lower than the prevailing
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interest rates in the mainland United States. FFCC is also able to sell them
to local investors at prices higher than those at which comparable instruments
would be sold in the mainland United States. In addition, the tax incentives
available to Exempt Companies, particularly Section 936 Corporations, on
investments in Puerto Rico have created a large pool of tax-advantaged funds in
Puerto Rico that make it possible for FFCC to finance its loan originations and
inventory of mortgage loans at interest rates that generally are lower than
would be available otherwise and thereby generate a higher level of net
interest income than would otherwise be possible. FFCC borrows 936 Funds
through short-term repurchase agreements and warehousing lines of credit with
banks and broker-dealers. See "Borrowing Arrangements."
Any change in the United States or Puerto Rico tax laws that would reduce
or eliminate the tax benefits available to Section 936 Corporations, financial
institutions or individuals on investments in Puerto Rico mortgage loans and
mortgage-backed securities, could have a material adverse effect on the
liquidity of the secondary mortgage market and the profitability of FFCC. See
"Amendment to Section 936" below. In addition, a change in Puerto Rico's
political status could result in the elimination or modification of these tax
benefits. See "Relationship of Puerto Rico with the United States."
AMENDMENT TO SECTION 936. The Omnibus Budget Reconciliation Act of
1993, which was signed into law by President Clinton on August 10, 1993,
contains certain amendments (the 936 "Amendments") to Section 936. In general,
the 936 Amendments, which are generally effective for taxable years beginning
after December 31, 1993, will permit a taxpayer to compute the tax credit
available under Section 936 as under prior law but would limit the amount of
credit allowed as determined under one of two alternatives to be selected at
the option of the taxpayer. Under the first alternative, the limit would be
equal to a fixed percentage of the amount of tax credit allowable under current
law. This fixed percentage would commence at 60% for taxable years beginning
in 1994 and would be reduced by 5% per year until 1998. For taxable years
beginning in 1998 such percentage would be 40%. Under the second alternative,
which is based on the amount of economic activity conducted by the taxpayer in
Puerto Rico, the credit may not exceed the sum of the following three
components: (i) 60% of the qualified possession wages and 15% allocable fringe
benefits paid by the taxpayer, (ii) applicable percentages of certain
depreciation deductions claimed for regular tax purposes by the taxpayer with
respect to qualified tangible property and (iii) a portion of the possession
income taxes paid by the taxpayer except where the taxpayer uses the
profit-split method for determining its income. Unlike certain earlier
proposals, the 936 Amendments would not limit the 100% credit currently
available under Section 936 for qualified possession source investment income,
including income received from investment in certain Puerto Rico mortgage loans
and mortgage-backed securities.
It is not possible at this time to predict what effect the 936
Amendments will have on the economy of Puerto Rico. The 936 Amendments could
have an adverse effect on the general economic condition of Puerto Rico by
reducing incentives for investment in Puerto Rico. Any such adverse effect on
the general economy of Puerto Rico could lead to an increase in mortgage
delinquencies and a reduction in the level of residential construction and
demand for mortgage loans. The adoption of the 936 Amendments could also
indirectly lead to a decrease in the amount of funds invested in Puerto Rico
financial assets by 936 Corporations to the extent that the level of operations
and production in Puerto Rico by such 936 Corporations is decreased over time.
While the impact on the Company cannot be determined at this time, the Company
does not believe that the adoption of the 936 Amendments will have a material
adverse effect on its business or financial condition.
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BORROWING ARRANGEMENTS. Historically, a period of two to four months has
normally elapsed between the origination of a mortgage loan by FFCC and its
sale to permanent investors. The Company may hold GNMA certificates for longer
periods to take advantage of tax exempt interest income on such certificates
while FNMA and FHLMC conforming loans are normally sold within 60 days of
origination. During this period, FFCC generally completes the loan process,
obtains a VA guarantee or HUD/FHA insurance certificate or private mortgage
insurance on the loan, and pools the loans for resale in the secondary mortgage
market.
Prior to issuance of GNMA or other mortgage-backed certificates, FFCC's
mortgage loans are funded almost entirely by borrowings under warehousing lines
of credit or other financing agreements with financial institutions. FFCC has
existing lines of credit with three commercial banks and a line of credit for
commercial loans in the amount of $3 million with the Economic Development Bank
for Puerto Rico. During 1993, the Company also entered into a presale or
gestation facility with a financial institution with an aggregate borrowing
capacity of $150 million which permits the Company to obtain more favorable
financing rates once mortgage loans have been assigned to a pool but prior to
securitization and to the actual issuance of the mortgage-backed security.
Typically, FFCC finances on a monthly weighted average basis between 90% and
95% of the principal amount of its mortgage loans and secures advances under
these lines of credit by pledging such loans and the servicing agreements
relating thereto to such banks or financial institutions, a practice commonly
referred to as "warehousing." On an absolute basis, the percentage of
principal amount will range from 90% for conventional mortgages (one bank will
only lend up to 80% of the principal amount of conventional mortgages) to 95%
for FHA and VA loans. The rates of interest FFCC pays under its warehousing
lines of credit fluctuate depending upon changes in the lending bank's cost of
funds. During 1993, FFCC's cost of funds under its warehousing lines of credit
ranged from 3.93% to 4.57%. The monthly weighted average cost of funds
borrowed under its warehousing lines of credit during the years ended December
31, 1992 and 1991 was 5.3% and 7.45%, respectively, compared to 4.2% for the
year ended on December 31, 1993. FFCC warehousing lines of credit are
generally terminable at the discretion of the lender.
FFCC pays interest on its lines of credit at floating rates which vary
with market conditions. The interest rates on these lines of credit have been
lower than the interest rates which FFCC earns on the mortgage loans pledged to
secure such financing. Amounts borrowed under lines of credit are payable upon
demand and are usually repaid after FFCC packages such mortgage loans into
GNMA, FNMA or FHLMC certificates and receives the proceeds from the sale of
such certificates or the financing of such securities under repurchase
agreements.
During 1993 the Company made a strategic to diversify its sources of
funding and to obtain funding from sources outside of Puerto Rico. Obtaining
credit from financial institutions located outside Puerto Rico generally
permits the Company to obtain larger lines of credit and reduces its dependence
on tax advantaged funding available in the local market.
FFCC also obtains short-term financing through repurchase agreements with
financial institutions and investment banking firms. Under these agreements,
FFCC sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed securities and
simultaneously agrees to repurchase them at a future date at a fixed price.
FFCC uses the proceeds of such sales to repay borrowings under its bank
warehousing lines of credit. The effective cost of funds under repurchase
agreements is typically lower than the costs of funds borrowed under FFCC's
warehousing lines of credit. FFCC's continued use of repurchase agreements
will depend upon the cost of repurchase agreements relative to the cost of
borrowing under lines of credit from banks.
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The monthly weighted average cost of funds borrowed through repurchase
agreements for the years ended December 31, 1992 and 1991 was 4.03% and 5.44%,
respectively, compared to 3.34% for the year ended on December 31, 1993.
DORAL FEDERAL SAVINGS BANK
On September 10, 1993, the Company acquired all the outstanding common
stock of Doral Federal, Doral Federal is a federal savings association whose
deposit accounts are insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation. As of December 31, 1993, Doral Federal
had total assets of approximately $34 million and a net worth of $6.2 million.
During the year ended December 31, 1993, Doral Federal did not have a
significant impact on the financial results of the Company experiencing a loss
of approximately $50,000 from the date of acquisition through December 31,
1993. During 1993, Doral Federal did experience substantial growth in assets
growing from $12 million in assets as of September 10, 1993 to $34 million in
assets as of December 31, 1993. This growth was financed largely through a
$5.0 million capital contribution from the Company, retail deposits, escrow
accounts associated with the Company's servicing portfolio and advances from
the Federal Home Loan Bank of New York. This rate of growth is not necessarily
indicative of future growth.
Doral Federal operates through two branches located in the San Juan
metropolitan area. These branch locations serve primarily as deposit-taking
operations, since to date most loans have been originated pursuant to the
Master Loan Production Agreement referred to below. As of December 31, 1993,
Doral Federal had deposits of approximately $26.4 million. Escrow accounts
associated with the Company's servicing portfolio, commercial accounts of the
Company and retail deposits, constituted approximately 32%, 11% and 57%,
respectively, of Doral Federal's total deposit accounts.
Doral Federal has entered into a Master Loan Production Agreement with the
Company whereby the Company has agreed to meet its stated production goals by,
among other things, (1) advertising, promotion and marketing to the general
public, (2) interviewing prospective borrowers and initial processing of loan
applications, consistent with Doral Federal's underwriting guidelines, and (3)
providing personnel and facilities with respect to the execution of loan
agreements. The terms of the Master Loan Production Agreement are believed to
be at least as favorable to Doral Federal as those prevailing for comparable
transactions with or involving other non-affiliated companies. In the future,
Doral Federal may determine to engage in direct mortgage loan originations
through its branch network.
Doral Federal has also entered into a Master Purchase, Servicing and
Collection Agreement (the "Master Purchase Agreement") with the Company
providing for the sale by Doral Federal to the Company of the servicing rights
to all first and second mortgage loans secured by residential properties, all
loans secured by commercial real estate, all commercial business loans, all
consumer and any other loans which presently are, or will become, part of Doral
Federal's loan portfolio (the "Loans"). The Master Purchase Agreement further
provides that the Company, exclusively, will service the Loans, and that Doral
Federal will continue to process collections of payments of the Loans, all
according to a fee schedule contained in the Master Purchase Agreement. The
fee schedule provides that the purchase price of the servicing rights with
respect to the Loans is a percentage of the outstanding principal amount of
such Loans, and depends on the term to maturity of the Loans. The terms of the
Master Purchase Agreement are believed to be at least as favorable to Doral
Federal as those prevailing for comparable transactions with or involving other
non-affiliated companies.
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As of December 31, 1993, Doral Federal met all its fully phased-in capital
requirements (i.e. tangible capital and core capital of at least 1.5% and 3.0%,
respectively, of adjusted assets and risk based capital of at least 8% of risk
adjusted assets). As of December 31, 1993, Doral Federal had tangible capital
and core capital equal to $5.6 million, or 17% of adjusted assets. As of such
date, it had risk based capital of $5.8 million or 41% of risk adjusted assets.
MARKET AREA AND COMPETITION. Prior to March 1992, Puerto Rico was FFCC's
exclusive service area. Within Puerto Rico, FFCC's primary market area is the
metropolitan San Juan area, which accounted for approximately 79% of FFCC loan
originations in 1993. The competition in Puerto Rico for the origination of
mortgages is substantial. Competition comes not only from other mortgage
bankers, but also from major banks and savings and loan associations. There
are approximately 36 mortgage banks, seven savings institutions and 16
commercial banks operating in Puerto Rico, including affiliates of banks
headquartered in the United States, Canada and Spain. The Company competes
principally by offering loans with competitive features, by emphasizing the
quality of its service and pricing its range of products at competitive rates.
In March 1992, Doral opened a branch office in the Orlando, Florida
metropolitan area. In February 1994, Doral opened an additional office in
Miami, Florida. The Company is considering the possibility of opening
additional offices in the State of Florida.
Puerto Rico, the fourth largest of the Caribbean islands, is located
approximately 1,600 miles southeast of New York, New York and 1,000 miles
east-southeast of Miami, Florida. It is approximately 100 miles long and 35
miles wide.
The population of Puerto Rico for 1990, as determined by the United States
Census Bureau, was approximately 3.6 million as compared to 3.2 million in
1980. The Puerto Rico Planning Board estimates that the San Juan metropolitan
area has a population in excess of 1.0 million.
RELATIONSHIP OF PUERTO RICO WITH THE UNITED STATES.
The Constitution of Puerto Rico was drafted by a popularly elected
constitutional convention, overwhelmingly approved in a special referendum and
approved "as a compact" by the United States Congress and the President,
becoming effective upon proclamation of the Governor of Puerto Rico on July 25,
1952. Puerto Rico's relationship to the United States under the compact is
referred to herein as "commonwealth status." The United States and Puerto Rico
share a common defense, market and currency. Puerto Rico exercises virtually
the same control over its internal affairs as a state government does. The
people of Puerto Rico are citizens of the United States, but do not vote in
national elections and they are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives but only limited
voting rights. Most federal taxes, except those such as social security taxes
which are imposed by mutual consent, are not levied in Puerto Rico. No federal
income tax is collected from Puerto Rico residents on ordinary income earned
from sources within Puerto Rico, except for Federal employees who are subject
to taxes on their salaries. Corporations organized under the laws of Puerto
Rico are treated as foreign corporations for federal income tax purposes. For
many years there have been two major views in Puerto Rico with respect to the
island's relationship to the United States, one essentially favoring the
existing commonwealth status and the other favoring statehood.
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On November 14, 1993, a plebiscite was held in Puerto Rico to allow
eligible voters an opportunity to express their preference between statehood,
Commonwealth (with certain changes) and independence for Puerto Rico. The
Commonwealth status obtained the most votes receiving 48.6% of the votes cast,
statehood and independence received 46.3% and 4.4% of the votes casts,
respectively.
A change in the political status of Puerto Rico could result in
modifications to or elimination of Section 936 and of the Puerto Rico laws
providing favorable tax treatment for investment in Puerto Rico mortgages and,
therefore, could have a material adverse effect on the Company's cost of
borrowing, the liquidity of the secondary mortgage market and the financial
performance of FFCC. See "Puerto Rico Secondary Mortgage and Favorable Tax
Treatment" herein.
PUERTO RICO INCOME TAXES.
FFCC is subject to Puerto Rico income taxes. The income tax rates range
from 22%, on taxable income of $25,000 or less, to 42% on taxable income in
excess of $300,000.
The net interest income derived by FFCC from FHA loans or VA loans secured
by residential properties located in Puerto Rico originated after June 30, 1983
is excluded from FFCC's gross income in computing its regular income tax.
Therefore, such income is tax-exempt to FFCC. However, under the Puerto Rico
Income Tax Act of 1954, as amended ("PRITA"), to the extent that FFCC holds
obligations on which the interest is not subject to Puerto Rico income tax,
including FHA loans or VA loans acquired after December 31, 1987 ("Exempt
Obligations"), FFCC's interest expense deduction in computing its regular
corporate income tax will be reduced in the same proportion that said Exempt
Obligations bear to its total assets. Income tax savings of FFCC attributable
to this exemption amounted to $2.7 million, $2.2 million and $1.0 million in
1993, 1992 and 1991, respectively.
The Company is also subject to an alternative minimum tax of 22% on its
alternative minimum tax net income. In computing the Company's alternative
minimum tax net income its interest expense deduction will be reduced in the
same proportion that its Exempt Obligations (irrespective of the date on which
the same were acquired by the Company) bear to its total assets. Therefore, to
the extent that the Company holds FHA loans or VA loans and other Exempt
Obligations, it may be subject to the payment of the 22% alternative minimum
tax.
Under PRITA, corporations are not permitted to file consolidated returns
with their subsidiaries and affiliates. FFCC is entitled to an 85% dividend
received deduction on dividends received from Doral or any other Puerto Rico
corporation subject to tax under PRITA, which, assuming a maximum corporate tax
rate of 42%, results in an effective income tax rate on such dividends of 6.3%.
UNITED STATES INCOME TAXES.
FFCC and Doral are corporations organized under the laws of Puerto Rico.
Accordingly, FFCC and Doral are subject generally to United States income tax
only on their income, if any, from sources within the United States. Prior to
1992, the Company did not earn any income that was subject to United States
income tax. However, in March 1992, Doral opened a branch in Florida. This
will make Doral subject to both Florida income and franchise and federal income
tax on income effectively connected with the conduct of the trade or business
of this branch. The maximum United States corporate income tax rate is
presently 34% and the Florida income and franchise tax rate is currently 5.5%.
In addition, the United
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States may impose a branch profits tax of 30% in the event that profits from
the Florida branch are repatriated to Puerto Rico. Both the federal tax as
well as the branch profit tax may be claimed as a credit in Puerto Rico,
subject to certain limitations.
Doral Federal, as a federal savings association, is also subject to
U.S. income taxes. It will be entitled to a foreign tax credit for a portion
of income taxes paid to the Puerto Rico Treasury Department. Doral Federal has
also elected to qualify for the benefits provided under Section 936 which
allows an income tax credit for a portion of the U.S. income taxes attributable
to the earnings derived from sources within Puerto Rico. See "Amendment to
Section 936" for a description of these benefits. The election of the benefits
available under Section 936 together with the fact that Doral Federal has
substantial tax loss carryforwards will result in Doral Federal not having a
significant U.S. income tax liability for several years.
EMPLOYEES.
At December 31, 1993, FFCC employed 927 persons, of whom 252 were
administrative personnel, 143 were loan originators, 283 were involved in
processing of loan applications (including quality control auditors), 13 were
loan underwriters, and 236 were involved in loan servicing activities. None of
FFCC's employees is represented by a labor union and FFCC considers its
employee relations to be excellent.
REGULATION.
The Company's Mortgage Banking Business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans and the issuance and sale of
mortgage-backed securities. Those rules and regulations, among other things,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts, and with respect to VA
loans, fix maximum interest rates. Moreover, lenders such as the Company are
required annually to submit to FNMA, FHA, FHLMC, GNMA and VA audited financial
statements, and each regulatory entity has its own financial requirements. The
Company's affairs are also subject to supervision and examination by FNMA, FHA,
FHLMC, GNMA, HUD and VA at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. The Company is also
subject to regulation by the Commissioner, with respect to, among other things,
licensing requirements and establishment of maximum interest rates. Although
the Company believes that it is in compliance in all material respects with
applicable Federal and Puerto Rico laws, rules and regulations, there can be no
assurance that more restrictive laws or rules will not be adopted in the
future, which could make compliance more difficult or expensive, restrict the
Company's ability to originate or sell mortgage loans or sell mortgage-backed
securities, further limit or restrict the amount of interest and other fees
earned from the origination of loans, or otherwise adversely affect the
business or prospects of the Company. See "General."
HF's rights to sell mortgage loans to FHLMC were suspended on November
3, 1993 because of deficiencies in its origination procedures. FHLMC's action
did not affect HF's ability to continue to service FHLMC loans. HF has worked
closely with FHLMC to address the shortcomings. In the meantime, HF has
increased substantially the sale of conventional loans to FNMA and other
investors. While no assurances can be given, the Company believes that HF
will be reinstated as a FHLMC seller.
The Company believes that the FHLMC action has not had nor will it have a
material adverse effect on HF or the Company. Doral, the Company's principal
mortgage banking unit, has continued to sell conforming conventional loans to
FHLMC. Such sales are currently being made on a recourse basis. See
"Business-Mortgage Banking Business Sale of Loans; Issuance of Mortgage-Backed
Securities".
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FFCC is licensed by the Commissioner as a mortgage banking institution in
Puerto Rico. Such authorization to act a mortgage banking institution must be
renewed as of January 1 of each year. In the past, FFCC has not had any
difficulty in renewing its authorization to act as a mortgage banking
institution, and management is unaware of any existing practices, conditions or
violations which would result in FFCC being unable to receive such
authorization in the future. FFCC operations in the State of Florida are
subject to supervision by the Florida Department of Banking and Finance.
Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the
"Mortgage Banking Law") requires the prior approval of the Commissioner for the
acquisition of control of any mortgage banking institution licensed under the
Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term
"control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to Section 5
of the Mortgage Banking Law, upon receipt of notice of a proposed transaction
that may result in change of control, the Commissioner is obligated to make
such inquiries as he deems necessary to review the transaction. Under the
Mortgage Banking Law, the determination of the Commissioner whether or not to
authorize a proposed change of control is final and non-appealable.
As a result of the acquisition of Doral Federal, FFCC became a savings and
loan holding company ("SLHC") subject to the restrictions and requirements of
the Home Owners' Loan Act of 1933, as amended (the "HOLA"). As an SLHC, FFCC
was required to register with the Director (the "Director") of the OTS and is
be subject to the various requirements of Sections 10 and 11 of the HOLA and
the regulations thereunder, including examination, supervision and reporting
requirements. Of particular importance, is the requirement that a subsidiary
savings association give the Director at least 30 days advance notice of the
proposed declaration by its directors of dividends on its stock. Any such
dividend declared within the 30 day notice period, or declared without giving
such notice, is invalid. Payment of cash dividends by a savings association on
shares of its capital stock is also subject to the limitations on capital
distributions imposed by the OTS. Under this regulation, the amount available
for the payment of dividends during any calendar year depends on whether such
association meets or exceeds certain specified tiers or levels of capital
requirements (i.e., the "fully phased-in capital requirement," the "minimum
capital requirement," or less than the "minimum capital requirement," for which
latter tier specific written approval is required for the payment of any cash
dividend). Even though an association may meet one of the specified levels of
capital requirements, the OTS may prohibit such payment if it determines that
the making of such payment would constitute an unsafe or unsound practice. The
OTS may object to or authorize capital distributions in excess of the safe
harbor amount specified in such Sections.
Federal law and OTS regulations place certain limits on the types of
activities in which a SLHC and its subsidiaries may engage. However, in
general, these activity restrictions do not apply to a holding company that
controls only one savings and loan association, provided such association meets
the "qualified thrift lender" test which generally requires an association to
have 65% of its portfolio assets in "qualified thrift investments" for nine
months out of the immediately preceding 12 months. For Puerto Rico based
institutions, these investments include, among other things, home mortgages,
mortgage-backed securities, and personal loans. Under some circumstances
(principally not holding sufficient "qualified thrift assets" to meet the
"qualified thrift lender test") an SLHC may be deemed for regulatory purposes
to become a bank holding company. In such event, it would become subject to
additional regulatory restrictions including the application of the statutes
and regulations governing the payment of dividends by a national bank in the
same
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manner and to the same extent as though it were a national bank. Under the
National Bank Act, national banks are only permitted to pay dividends out of
"net profits" (as defined therein) subject to the requirement that a certain
portion of net profits must be carried periodically to the bank's surplus fund
until the surplus fund shall equal its common capital. Capital may not be used
to pay dividends. Doral Federal currently is in compliance with the "qualified
thrift lender" test and expects to continue to comply with this requirement.
With certain specific exceptions, a SLHC is prohibited from acquiring more
than 5% of the "voting shares" of a savings association that is not a
subsidiary, or of another SLHC that is not a subsidiary. An association which
is a subsidiary of a SLHC is prohibited from or subject to restrictions upon
engaging in certain transactions involving its affiliates under the provisions
of Sections 23A and 23B of the Federal Reserve Act,which are made applicable,
with certain exceptions, to savings associations by Section 11(a) of the HOLA.
In general, the term "affiliate" with respect to such subsidiary savings
association would include the SLHC, its subsidiaries and companies controlled
by it, and would also include a bank subsidiary of a savings association, but
not a non-bank subsidiary thereof (unless a contrary determination were made
pursuant to Section 23A as to such non-bank subsidiary). As a general rule, a
savings association may borrow up to the amount authorized by the laws under
which the savings association operates. However, if the savings association
fails to meet its regulatory capital requirement, it must notify the Director
of its intent to issue securities evidencing such borrowings. Such securities
may not be issued if the OTS disapproves.
Because of the Company's statutes as an SLHC, owners of the Company's
Common Stock are subject to certain restrictions and disclosure obligations
under various federal laws, including the Change in Bank Control Act (the
"Control Act") and the Savings and Loan Holding Company Act (the "Holding
Company Act"). Regulations pursuant to the Control Act and the Holding Company
Act generally require prior OTS approval for an acquisition of control of an
insured institution (as defined) or holding company thereof by any person (or
persons acting in concert). Control is deemed to exist if, among other things,
a person (or persons acting in concert) acquires more than 25% of any class of
voting stock of an insured institution or holding company thereof. Control is
presumed subject to rebuttal if a person (or persons acting in concert)
acquires more than 10% of any class of voting stock or 25% of any class of
nonvoting stock and is subject to any of the "control factors" set forth in
such regulations. The control factors relate, among other matters, to the
percentage of such company's debt or equity owned by the person (or persons
acting in concert), agreements giving the person (or persons acting in concert)
influence over a material aspect of the company's management or policies, and
the number of seats on the board of directors of the company held by the person
(or persons acting in concert). One of the "control factors" is a holder's
status as one of the two largest holders of any class of voting stock. The
concept of acting in concert is very broad and also is subject to certain
rebuttable presumptions, including among others, that relatives, business
partners, management officials, affiliates and others are presumed to be acting
in concert with each other and their businesses.
FFCC has also considered from time to time engaging in the business of
acting as an intermediary between Exempt Companies and depository institutions
for certain money market deposits in Puerto Rico.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
1159 Franklin D. Roosevelt Avenue, Puerto Nuevo, San Juan, Puerto Rico and
consist of approximately 11,136 square feet of office
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space. Doral's executive and administrative offices are located at 650 Munoz
Rivera Avenue, San Juan, Puerto Rico and consist of approximately 33,000 square
feet of office space. The Company also leases additional office space of
approximately 31,000 square feet throughout Puerto Rico. These offices are
leased for various terms expiring through 2005. Annual aggregate rental
payments made in the years 1993, 1992 and 1991 were $1,445,000, $817,000 and
$586,000, respectively. The Company does not own any real estate except for
its interest in real estate held in the ordinary course of business (including
real estate owned as a result of foreclosures).
ITEM 3. LEGAL PROCEEDINGS
Other than legal proceedings in the normal course of its business, the
Company is not a party to any material legal proceedings and, to the knowledge
of management of the Company, there are no material legal proceedings
threatened. In the opinion of the Company's management, the pending and
threatened legal proceedings of which management is aware will not have a
material adverse effect on the financial condition or results of operation of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
FFCC's Common Stock, $1.00 par value (the "Common Stock"), is traded on
the over-the-counter market and is quoted on the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ NMS")
under the symbol "FRCC." The Company's Common Stock began trading on the
NASDAQ NMS on December 19, 1988.
FFCC's 10-1/2% Cumulative Convertible Preferred Stock, Series A, $1.00 par
value (the "Series A Preferred Stock") is traded on the over-the-counter market
and is quoted on the NASDAQ system under the symbol FRCCP. The Company's
Series A Preferred Stock began trading on the NASDAQ system on July 1, 1991.
The table below sets forth, for the calendar quarters indicated, the high
and low sales prices on the NASDAQ NMS and the high and low bid quotes on the
NASDAQ system, for the Common Stock and Series A Preferred Stock, respectively,
and the dividends declared on the Common Stock and Series A Preferred Stock
during such periods. The quotations for the Series A Preferred Stock represent
inter-dealer prices, without retail mark-up, mark-down or commissions and do
not necessarily represent actual transactions.
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MARKET PRICE*
----------------------------------------------- DIVIDENDS DECLARED*
Common Series A Preferred ---------------------
Calendar -------------------- ------------------ Series A
Year Quarter High Low High Low Common Preferred
---- ------- ---- --- ---- --- ------ ---------
1992 1st $ 8 1/2 $ 5 3/8 $16 1/2 $10 1/2 $0.075 0.2625
2nd 7 7/8 6 1/2 16 14 0.075 0.2625
3rd 9 5/8 8 3/4 19 15 0.075 0.2625
4th 11 3/8 9 1/4 22 1/4 18 0.075 0.2625
1993 1st $12 1/2 $ 9 7/8 $24 1/2 $20 1/2 $0.10 $0.2625
2nd 12 1/2 10 1/2 24 1/4 22 1/2 0.10 0.2625
3rd 15 3/8 11 3/4 30 23 1/4 0.10 0.2625
4th 17 3/4 14 1/4 35 1/2 28 1/2 0.10 0.2625
---------------
* All share prices and dividend information with respect to the
Common Stock have been adjusted to reflect a two for one start
split effective December 10, 1993.
As of March 14, 1994, the approximate number of record holders of the
Company's Common Stock and Series A Preferred Stock was 885 and 88,
respectively, which does not include beneficial owners whose shares are held in
record names of brokers and nominees. The last sales price for the Common
Stock and Series A Preferred Stock as quoted on the NASDAQ NMS and the NASDAQ
System, respectively, on such date was $16 3/8 and $35 1/2 per share,
respectively.
After becoming a public corporation in December 1988, FFCC did not declare
any dividends until the third quarter of 1989 when the Board of Directors
authorized the payment of a regular quarterly cash dividend of $0.050 per
share. The quarterly cash dividend was increased by the Board of Directors to
$0.0625 per share during the second quarter of 1990, to $0.075 per share during
the fourth quarter of 1991 and increased again to $0.10 per share during the
first quarter of 1993. The cash dividend was further increased to $0.13
effective for the first quarter of 1994. The payment of cash dividends in the
future is dependent upon the earnings, cash position and capital needs of the
Company, general business conditions and other matters deemed relevant by the
Company's Board of Directors.
The terms of the Series A Preferred Stock do not permit the payment of
cash dividends on the Company's Common Stock if dividends on the Company's
Series A Preferred Stock are in arrears. The holders of shares of Series A
Preferred Stock are entitled to receive cumulative cash dividends when, as and
if declared by the Board of Directors, out of assets of the Company legally
available therefor at a rate of $1.05 per share of Series A Preferred Stock.
The Company's existing warehousing credit facilities and repurchase
agreements do not impose restrictions on the ability of the Company to pay
dividends.
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PRITA, generally imposes a withholding tax on the amount of any dividends
paid by FFCC to individuals, whether residents of Puerto Rico or not, trusts,
estates and special partnerships at a special 20% withholding tax rate. The
rate of withholding is 25% if the recipient is a foreign corporation or
partnership not engaged in trade or business within Puerto Rico.
Prior to the first dividend distribution for the taxable year, individuals
who are residents of Puerto Rico may elect to be taxed on the dividends at the
regular graduated rates, in which case the special 20% tax will be withheld
from such year's distributions.
United States citizens who are non-residents of Puerto Rico may also make
such an election, and will not be subject to Puerto Rico tax on dividends if
said individual's gross income from sources within Puerto Rico during the
taxable year does not exceed $1,300 if single, or $3,000 if married.
United States income tax law permits a credit against United States income
tax liability, subject to certain limitations, for certain foreign income taxes
paid or deemed paid with respect to such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for the Company on a historical basis for each of the five years ended
December 31, 1993. This information should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis" contained herein.
Year Ended December 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
Income Statement Data:
Revenues $ 70,228 $ 49,804 $ 39,430 $ 44,733 $ 38,328
Interest expense 9,710 9,270 12,303 23,576 17,218
Loan origination costs and
administrative and general
expenses 29,597 24,118 17,407 15,700 14,049
Spin-off expenses None None None 1,218 2,049
Income before income taxes 30,921 16,416 9,720 4,239 5,012
Puerto Rico taxes 9,601 3,371 2,987 1,209 1,151
Net income 21,320 13,045 6,733 3,030 3,861
Cash dividends paid 3,142 2,182 1,620 1,198 470
Balance Sheet Data:
Mortgage loans held for sale and
mortgage notes receivable, net $404,323 $261,063 $230,861 $199,839 $218,434
Mortgage loans held for
investment None None None 38,178 83,210
Total assets 486,431 320,972 270,949 300,706 343,423
Loans payable and securities sold
under agreements to repurchase 335,994 227,179 210,548 254,051 304,486
Stockholders' Equity 76,945 58,467 36,041 26,125 23,108
Per Share Data:(1)
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Year Ended December 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
Net Income- Primary $ 3.15 2.35 1.26 0.60 0.80
- Fully diluted(2) 2.81 2.06 1.25 0.60 0.80
Cash dividends
Common Stock 1.05 0.30 0.2625 0.2375 0.10
Series A Preferred Stock(2) 0.40 1.05 .525 None None
Weighted average shares outstanding:
Primary . . . . . . . . . . . . . . 6,614,854 5,321,600 5,135,206 5,052,700 4,783,550
Fully diluted . . . . . . . . . . . 7,576,964 6,347,392 5,411,744 5,052,700 4,783,550
Operating Data:
Mortgage loans originated . . . . . $1,430,000 $ 694,000 $ 360,400 $ 321,400 $ 277,600
Loan Servicing Portfolio . . . . . . 2,375,000 1,700,000 1,400,000 1,193,000 831,000
--------------------
(1) Adjusted to reflect two-for-one stock split effective December 10, 1993.
(2) The Series A Preferred Stock was issued in July 1991.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
FFCC has experienced a significant growth in its business over the last
several years, which accelerated in 1992 and climbed to a record level in 1993.
The volume of loans originated by FFCC was approximately $1.43 billion, $694
million, $360 million, $321 million and $278 million for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989, respectively.
The increased volume from 1988 to 1989 was primarily the result of
improvements in the Puerto Rico economy, a successful advertising and
promotional campaign by FFCC, and an increase in the number of builders and
developers who used FFCC to finance their projects. The increases in 1990 and
1991 were primarily due to an increased volume of loan originations in the HF
Mortgage Bankers division following an internal reorganization, expansion of
Dorah's branch network and a decline in prevailing interest rates. The
increases in 1992 and 1993 were principally due to declines in average
mortgage interest rates which plunged to their lowest levels in decades during
1993 and strongly stimulated demand for both refinancing loans and loans to
finance the acquisition of new and existing residential units.
The Company's strategy is to increase its servicing portfolio through
internal originations. As a result of increased originations in recent years,
the Company has reduced its purchases of mortgage loans from third parties.
The amount of loans purchased from third parties was approximately $1 million,
$29 million, $48 million, $117 million and $185 million for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989, respectively. As long as the
volume of mortgage loans originated by the Company remains at satisfactory
levels, the Company anticipates that its purchases of mortgage loans from third
parties will not increase significantly.
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On September 10, 1993, the Company acquired all the outstanding stock of
Doral Federal Saving Bank ("Doral Federal"), thereby entering the savings and
loan industry. Doral Federal operates through two branches in Puerto Rico.
During the year ended December 31, 1993, Doral Federal did not have a
significant impact on the financial results of the Company, experiencing a
small loss for 1993. During 1993, Doral Federal did experience substantial
growth in assets growing from $12 million in assets as of September 10, 1993 to
$34 in assets as of December 31, 1993. This growth was financed largely
through a $5.0 million capital contribution from the Company, retail deposits,
escrow accounts held by the Company and advances from the Federal Home Loan
Bank of New York. The rate of growth is not necessarily indicative of the
growth through retail deposits or of future growth.
FFCC's results of operations are primarily influenced by: (i) the level of
demand for mortgage credit, which is affected by such external factors as the
level of interest rates and the strength of the economy in Puerto Rico; (ii)
the direction of interest rates; and (iii) the relationship between mortgage
interest rates and the costs of funds.
The principal components of FFCC's revenues are: (i) loan origination
fees and net gains on sales of mortgage loans and mortgage-backed securities in
the secondary mortgage market; (ii) interest income received on mortgage loans
and mortgage-backed securities during the period FFCC holds them pending sale,
net of interest paid on borrowed funds to finance such mortgage loans and
mortgage-backed securities; (iii) loan servicing fees; (iv) gains on sales of
mortgage servicing rights; and (v) other income.
Year Ended December 31,
---------------------------------
1993 1992 1991
------- ------- -------
(Dollars in thousands)
Revenues from mortgage loan sales
and fees $35,230 $24,560 $15,693
------- ------- -------
Interest income 23,775 16,983 17,331
Interest expense 9,710 9,270 12,303
------- ------- -------
Net interest income 14,065 7,713 5,028
------- ------- -------
Loan servicing fees 8,627 7,163 5,498
Gain on sale of servicing rights 2,378 935 764
Other income 218 163 144
RESULTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1993
REVENUES FROM ORIGINATION FEES AND SALE OF MORTGAGE LOANS AND
MORTGAGE-BACKED SECURITIES. FFCC sells substantially all of the loans that it
originates as part of its mortgage banking business. When FFCC sells mortgage
loans and mortgage-backed securities, it realizes a net gain or loss which is
equal to the difference between FFCC's carrying cost and the selling price of
the loans sold, net of commitment fees paid. Net gain or loss on sale of loans
is affected by interest rate fluctuations on fixed-rate loans and securities,
as well as by the status of interest on mortgage loans under Puerto Rico income
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tax statutes.
Revenues from mortgage loan sales and origination fees increased by 43%
during 1993 and by 57% and 22.5% during 1992 and 1991, respectively. The
increases for years 1993 and 1992 are the result of increased volume of loan
originations as a result of a sharp decline in interest rates and increased
gains on sale of mortgage loans, as a result of favorable market conditions
which permitted the Company to obtain better prices on sales of mortgage loans
and mortgage-backed securities. The total volume of loans originated increased
to approximately $1.432 billion for the year ended December 31, 1993 from $694
million for the prior year. The percentage of mortgage loans that were
refinancing loans was 78% for the year ended December 31, 1993, 67% for the
year ended December 31, 1992 and 67% for the year ended December 31, 1991.
The Company believes that the increase in loan originations was the
result of increased demand for mortgage loans stimulated by a decline in
mortgage interest rates together with increased market share. From time to
time and depending on market conditions, the Company sells mortgages and
mortgage-backed securities in bulk to investors.
During 1993, the Company continued its program of pooling nonconforming
conventional loans into collateralized mortgage obligations (CMOs) to be issued
by grantor trusts for sale to investors. Mortgage loan sales and fees reflect
a pre-tax profit of approximately $3.5 million and $4.7 million for the years
ended December 31, 1993 and 1992, respectively, in connection with the pooling
and sale of approximately $115 million and $99 million in conventional
nonconforming mortgage loans to various independent trusts. While the Company
anticipates that it will enter into similar transactions in the future,
especially with non-conforming loans, future gains on such transactions, if
any, will be dependent on then existing market conditions.
Other bulk sales of mortgages loans were made during 1993 resulting in
the recording of approximately $3 million of excess servicing, while in 1992
only $378,000 of excess servicing on mortgage loans sold was recorded. The
increase in revenues from mortgage loan sales and origination fees in 1993 and
1992 was also due to increased volume as a result of decreasing interest rates.
For the year ended December 31, 1993, 1992 and 1991 increases in mortgage loan
sales and origination fees were partially offset by net losses on the trading
of options on futures contracts used for hedging purposes.
NET INTEREST INCOME. Net interest income is the difference between the
interest income earned on mortgage loans and mortgage-backed securities held
for sale, and the interest paid by FFCC on the short-term warehousing lines of
credit with commercial banks, repurchase agreements and gestation lines of
credit that finance such loans and mortgage-backed securities and advances and
deposits in the case of Doral Federal. The conditions that affect net interest
income from period to period include the relationship between prevailing
mortgage rates and the prime rate, the London Interbank Offered Rate (LIBOR),
cost of tax advantaged funds deposited in Puerto Rico financial institutions
("936 Funds"), interest rates on fixed-rate loans and the Company's average
holding period before mortgage loans are sold.
In each year since FFCC's inception, interest income earned by FFCC on
its mortgage loans and mortgage-backed securities has exceeded interest expense
on FFCC's short-term bank borrowing. The Company's weighted average interest
rate spread was approximately 411 basis points during 1993 as compared with
approximately 335 basis points and 256 basis points during 1992 and 1991,
respectively. The increase in the interest rate spread in the last three years
was due to lower short-term borrowing costs which descended to historically
record levels during 1993. Net interest income increased by approximately 82%
from 1992 to 1993, and by approximately 53% from 1991 to 1992. Such increases
in net interest income are primarily the result of lower interest rates on
borrowing, increased inventory of mortgage loans and mortgage-backed
securities, and innovative financing arrangements made during the year. Net
interest income also reflected the Company's strategic decision to hold
mortgage loans and mortgage-backed
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securities, especially tax exempt GNMA certificates for a longer period of time
prior to sale to maximize net interest income.
Net interest income has generally represented a greater proportion of
the Company's total net income than that of typical mortgage banking
institutions. This results primarily from the fact that the Company is able to
finance a substantial portion of the mortgage loans that it originates with
lower cost funds and holds mortgage-backed securities, mainly GNMA
certificates, for longer periods of time prior to sale than is customary for
mortgage bankers in the United States, in order to maximize the interest
produced by these securities which is tax-exempt to FFCC under the Puerto Rico
law. During the year ended December 31, 1993, the Company held mortgage loans
and mortgage-backed securities for an average period of 98 days as compared to
118 days for the year ended December 31, 1992. This decrease was due
principally to favorable market conditions which allowed the Company to
increase its sales of mortgage-backed securities, to continue pooling and
selling of nonconforming loans as CMOs, and to its continued shift in emphasis
in the origination of mortgage loans from FHA and VA loans to FHLMC and FNMA
conforming loans. The Company normally sells the latter within 60 days of
origination. The continued emphasis on the origination of FHLMC and FNMA
conforming loans is dependent on market conditions, the relative return of
originating the different types of loans, and the maximum loan amounts
permitted for the same.
LOAN SERVICING FEES. Loan servicing fees represent revenue earned by
FFCC for administering loans. FFCC's typical annual loan servicing fee
depends on the type of mortgage loan being serviced and ranges from 0.25% to
0.50% of the declining outstanding principal amount of such. The size of
FFCC's loan servicing portfolio and the amount of its servicing fees have
increased substantially since FFCC's inception as a result of the increases in
loan originations. Loan servicing fees increased 20% from 1992 to 1993 and 30%
from 1991 to 1992, primarily due to increases in the principal amount of loans
serviced as compared to prior years. The mortgage servicing portfolio was
approximately $2.4 billion at December 31, 1993, an increase of approximately
41% over the December 31, 1992 level. At December 31, 1993, less than $30
million of the Company's servicing portfolio related to mortgages originated
outside Puerto Rico (all of which were originated in Florida).
The increase in refinance activity caused by the decline in mortgage
interest rates, which has affected loan originations favorably, also caused an
increase in loan prepayment from the servicing portfolio. During 1993, the
prepayment rate of the Company's servicing portfolio was 26% compared to
15.4% for 1992. The primary means used by the Company to reduce the
sensitivity of its servicing fees to changes in interest rates is through a
strong internal origination capability that has allowed the Company to
continuously increase the size of its servicing portfolio even in times of
high prepayments.
During 1993, total amortization of acquired servicing rights ("ASRs")
amounted to $492,000 versus $506,000 for 1992. The Company's strategy is to
increase the size of its servicing portfolio through internal originations
rather than through the purchase of servicing rights form third parties. As of
December 31, 1993, the Company only had $4 million in ASR's. During the years
ended December 31, 1993 and 1992 the Company capitalized $14,943 and $251,091,
respectively, of servicing rights. As a result, changes in prevailing interest
rates will not have a significant impact on the revenues of the Company because
of an increase in amortization of ASR's.
GAIN ON SALE OF SERVICING RIGHTS. During the years ended December 31,
1993, 1992 and 1991 the Company sold servicing rights of $198.7 million, $53.4
million and $51.5 million, respectively, realizing
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pre-tax gains of approximately $2.4 million, $935,000 and $764,000,
respectively. While the Company's strategy is to retain the servicing rights
of the mortgage loans it originates, the Company may sell servicing rights from
time to time in the future when market conditions are favorable.
OTHER INCOME. Other income increased 34% in 1993 as compared to 1992,
and 13% from 1991 to 1992. The increase during 1993 was due primarily to
increased fees received for voluntary mortgage life insurance, an increased
servicing portfolio and other commissions and fees earned by Doral Federal.
EXPENSES (OTHER THAN INTEREST EXPENSE). Aggregate expenses (other than
interest expense) in 1993 increased by approximately 57%, before considering
the reclassification of deferrable direct costs related to FAS 91 (see Note 21
to the Company's Consolidated Financial Statements. This reflected increases in
employee costs of approximately 61% as compared to 1992. These expenses were
as a result of additional personnel hired during 1993 due to increased loan
production, normal salary increases and increased income-based incentive
compensation to senior management. Advertising, professional services and rent
expenses increased by 71%, 57% and 77%, respectively as compared to 1992.
The increase in advertising expense was necessary to ensure the Company
maintains and/or increases its share of the Puerto Rico market for mortgage
loans. Professional services and rent expense increases are attributed to the
growth experienced by the Company in both human resources and asset size. For
1992 compared to 1991 aggregate expenses (other than interest expense)
increased by approximately 47.1%, reflecting increases in employee costs of
approximately 51%, as a result of additional personnel hired, increased loan
production, normal salary increases and increased income-based incentive
compensation to senior management.
PUERTO RICO INCOME TAXES. The Puerto Rico maximum statutory corporate
income tax rate is 42%. For 1993, the effective income tax rate of FFCC was
31.0% as compared to 20.5% for 1992, and 30.7% for 1991. The increase in 1993
from 1992 in the effective income tax rate was due principally to the fact
that during the year ended December 31, 1992, the Company received favorable
tax treatment on certain rights with a fair value approximately $3.5 million
received as a dividend from a subsidiary, resulting in the exclusion of 85% of
said amount from gross income. The decrease in 1992 from 1991 in the effective
income tax rate was due to the same reason. In addition, in 1992 $935,000 of
income was taxed at the capital gains rate of 25%.
The lower effective tax rates (as compared to the maximum statutory
rate) experienced by FFCC also reflect the fact that a large portion of the
income derived from certain FHA and VA mortgage loans secured by mortgaged
properties located in Puerto Rico is tax exempt under Puerto Rico law. Income
tax savings to FFCC attributable to this exemption amounted to approximately
$2.7 million, $2.2 million and $1.0 million for the years ended December 31,
1993, 1992 and 1991, respectively. Note 15 to the Company's Consolidated
Financial Statements includes a reconciliation of the provision for income
taxes to the amount computed by applying the applicable Puerto Rico statutory
tax rates to income before taxes.
ASSETS AND LIABILITIES
Total assets were approximately $486 million as of December 31, 1993,
reflecting an increase of approximately $165 million from December 31, 1992.
This increase was primarily due to an increase of $150 million in mortgage
loans and mortgage-backed securities held for sale as a result of the higher
volume of mortgage originations. Total liabilities were approximately $409
million at December 31, 1993 compared to $263 million at December 31, 1992.
The increase reflects increased borrowings related to the record
30
34
volume of mortgage originations experienced during 1993, which resulted in
carrying a much larger base of mortgage loans and mortgage-backed securities
available for sale than in 1992.
As of December 31, 1993, FFCC held approximately $2.9 million of real
estate owned, excluding approximately $74,000 converted to rental property,
compared to $3.6 million of real estate owned, excluding $108,000 converted to
rental property as of December 31, 1992. These rental properties are leased to
individuals under the HUD Section 8 Housing Assistance Payments Program.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $3,653,888 of net cash in 1993 versus net
cash of $5,274,301 in 1992. The major changes were an increase in loans
payable of $98,215,950, an increase in mortgage loans and mortgage-backed
securities held for sale of $139,843,925 and an increase in securities sold
under agreements to repurchase of $14,444,412, all as a result of the higher
volume of mortgage closings experienced during 1993. Net cash provided by
operating activities was $5,274,301 for 1992 whereas net cash used by operating
activities was $26,962,652 for 1991. The strategic decision to hold loans and
mortgage-backed securities for longer periods prior to sale in order to
maximize net interest income resulted in an increase in loans held for sale of
$45,525,650 and an increase in loans payable of $31,534,057 for the year ended
December 31, 1992.
Investing activities provided a net of $4,815,853 of cash flow in 1993,
whereas in 1992 such activities provided a net cash flow of $6,990,368. The
major changes were a decrease in mortgage notes receivable of $6,763,184, and
an increase in accounts receivable of $3,900,941. Redemption of certificates
of deposit contributed cash of $2,500,000. Acquisitions of real estate held
for sale in 1993 used cash of $3,699,118 while disposals of real estate owned
contributed cash of $4,363,585. Acquisitions of servicing rights during 1993
were minimal compared to the $251,091 acquired in 1992. This decrease is due
to a reduction in purchases of loans from third parties. When the Company
purchases loans from third parties a portion of the purchase price is allocated
to the related servicing right. Net cash provided by investment activities was
$6,990,368 in 1992 versus $72,372,632 in 1991. The major changes were a
decrease in mortgage notes receivable of $16,635,365 and an increase in
accounts receivable of $7,203,614, net of cash used to acquire certificates of
deposit in the amount of $2,500,000. Acquisitions of real estate held for sale
in 1992 used cash of $4,955,184 while disposals of real estate owned
contributed cash of $6,219,250. The major sources of cash in 1991 came from a
decrease of $38,178,316 and $28,799,553 in mortgage loans held for investment
and mortgage notes receivable, respectively.
In 1993, there was a net increase of $10,150,037 in cash resulting from
financing activities. This was due primarily to an increase in deposits
following the acquisition of Doral Federal in the amount of $18,141,846,
reduced by $3,142,289 in payments of dividends, $3,845,899 in decreases
in loans payable related to mortgage notes receivable and repayment of
advances from Federal Home Loan Bank of New York in the amount of
$1,003,621. Net cash used by financing activities was $1,562,901 in 1992
versus $61,136,229 in 1991. This decrease was due primarily to the repayment
of securities sold under agreements to repurchase related to mortgage loans
held for investment and to a decrease in loans payable related to mortgage
notes receivable.
Total liabilities were approximately 5.3 and 4.5 times stockholders'
equity at December 31, 1993 and 1992, respectively. The increased leverage at
December 31, 1993 from December 31, 1992 resulted from a net increase of
$108,814,463 in loans payable and securities sold under agreements to
repurchase as
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compared to 1992. Such additional borrowings were necessary to finance
increased volume and higher inventories of mortgage loans and mortgage-backed
securities held for sale. The decreased leverage at December 31, 1992,
resulted from a net increase in capital of $22.4 million as a result of
earnings during 1992, net of dividends paid, and the issuance and sale of
690,000 shares of Common Stock during 1992 that contributed $11.3 million of
capital to the Company.
FFCC borrows money under warehousing lines of credit to fund its
mortgage loan commitments and repays the borrowing as the mortgages are sold.
The warehousing lines of credit then become available for additional borrowing.
FFCC held mortgage loans prior to sale for an average period of approximately
98 days during the year ended December 31, 1993 and 118 days during the year
ended December 31, 1992. The decrease in 1993 was due to sales of
approximately $115 million of conventional nonconforming mortgage loans to
various grantor trusts in 1993, a shift in emphasis in the origination of
mortgage loans from FHA and VA loans to FHLMC and FNMA conforming loans which
the Company normally sells within 60 days of origination, several other sales
of mortgage loans and mortgage-backed securities in bulk. As stated above, The
continued emphasis on the origination of FHLMC and FNMA conforming loans is
dependent on market conditions, relative pricing of the different loan products
and maximum loan amounts for the various types of loans.
FFCC increased its available warehousing lines of credit from $96.5
million at December 31, 1992 to $257.5 million at 1993. Among the additional
warehousing and repurchase agreements lines of credits added to the Company's
existing credit facilities were so-called gestation or pre-sale facilities
which permit the Company to obtain favorable rates once the mortgage loans have
been pooled for securitization but prior to the actual issuance of the
mortgage-backed securities. At December 31, 1993 and 1992, FFCC had used
approximately $90.9 million and $54.3 million, respectively, of credit
available under its warehousing lines of credit. FFCC's warehousing lines of
credit are generally terminable at the discretion of the lender. Interest rate
spreads on certain mortgage loans and mortgage-backed securities in Puerto Rico
have traditionally been high due to the ability of the Company to finance its
mortgage loans and mortgage-backed securities with lower-cost tax advantaged
funds.
FFCC also obtains short-term financing through repurchase agreement lines
of credit with financial institutions and investment banking firms. Under
these agreements, FFCC sells GNMA, FNMA or FHLMC guaranteed mortgage-backed
securities and simultaneously agrees to repurchase them at a future date at a
fixed price. FFCC uses the proceeds of such sales to repay borrowing under its
warehousing lines of credit. The effective cost of funds under repurchase
agreements is typically lower than the cost of funds borrowed under FFCC's
warehousing lines of credit. FFCC available repurchase agreement lines of
credit at December 31, 1993 and December 31, 1992 amounted to $215 million and
$180 million, respectively. At December 31, 1993 and 1992, FFCC had
outstanding repurchase obligations in the aggregate principal amount of
approximately $143 million and $129 million, respectively. FFCC's continued
use of repurchase agreements will depend upon the cost of repurchase agreements
relative to the cost of borrowing under its warehousing lines of credit with
banks and other financial institutions.
The weighted monthly average interest rate of FFCC's borrowings for
warehousing lines of credit and for repurchase agreement lines of credit was
4.2% and 3.34%, respectively, for the year ended December 31, 1993 compared to
5.3% and 4.03%, respectively, for the year ended December 31, 1992.
During the year ended December 31, 1993, the Company collected an average
of approximately $719,000 per month as net servicing fees, including late
charges. At December 31, 1993 and December 31, 1992, the servicing portfolio
amounted to approximately $2.4 billion and $1.7 billion, respectively. The
Company might in the future determine to sell part of the servicing portfolio
to raise additional funds.
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FFCC generally has been able to provide for its growth and expansion and
for continued liquidity with funds from short-term borrowing. Additional
increases in FFCC's lines of credit may be required to support the volume of
loan originations anticipated in the future. FFCC expects that it will have
adequate resources to finance its operations.
During the fourth quarter of 1992, the Company raised additional capital
through the issuance and sale of 690,000 shares of its Common Stock.
The Company will continue to explore alternative and supplementary methods
of financing its operations, including both debt and equity financing. There
can be no assurance, however, that the Company will be successful in
consummating any such transactions.
INFLATION
FFCC is affected by fluctuations in real estate values and interest rates.
Although general and administrative expenses have increased due to inflation,
the increase in real estate values in Puerto Rico in recent years has been a
positive factor for the Company's Mortgage Banking Business. The average size
of loans originated tends to increase as home values appreciate, which serves
to increase loan origination fees and servicing income faster than the cost of
providing such services. Significant increases in interest rates, however,
make it more difficult for potential borrowers to purchase desirable
residential properties and to qualify for mortgage loans and refinance
activity. As a result, higher interest rates may adversely affect the volume
of loan originations and income related to mortgage production. A high
interest rate environment, however, would tend to enhance the value and
earnings of the Company's mortgage loan servicing portfolio.
PROSPECTIVE TRENDS
MARKET TRENDS. The Company has in recent periods increased its market
share and its volume of production benefitting from a decline in average
mortgage interest rates in recent periods. Such decline has led to: (i) new
loan production (particularly from refinancing) resulting in an increase in
related income; (ii) growth in the Company's servicing portfolio resulting in
greater servicing income and (iii) lower interest rate mortgage loans in the
servicing portfolio reducing exposure to future prepayments. An environment
of rising interest rates may adversely affect the Company's volume of loan
originations and loan origination-related income but should increase earnings
from the Company's loan servicing portfolio. If average mortgage interest
rates increase, the Company may have to compensate, in part, for the loss of
volume by concentrating its origination efforts on those mortgage loans for
which it can obtain the most favorable pricing. This may lead to a relative
deemphasis on conforming conventional loans and a greater emphasis on the
origination of FHA/VA loans and non-conforming conventional loans for which
the Company can obtain more favorable sales prices.
AMENDMENT TO SECTION 936. The omnibus Budget Reconciliation Act of 1993,
which was signed into law by President Clinton on August 10, 1993, contains
certain amendments (the "Amendments") to Section 936 of the United States
Internal Revenue Code of 1986. Section 936 provides incentives for eligible
U.S.
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corporations that elect the benefits thereunder ("936 Corporations") to invest
in Puerto Rico by providing a tax credit for income derived form certain Puerto
Rico operations and investments.
In general, the Amendments, which are generally effective for taxable
years beginning after December 31, 1993, will permit a taxpayer to compute the
tax credit available under Section 936 as under present law but would limit the
amount of credit allowed as determined under one of two alternatives to be
selected at the option of the taxpayer. Under the first alternative, the
limit would be equal to a fixed percentage of the amount of tax credit
allowable under current law. This fixed percentage would commence at 60% for
taxable years beginning in 1994 and would be reduced by 5% per year until
1998. For taxable years beginning in 1998 such percentage would be 40%. Under
the second alternative, which is based on the amount of economic activity
conducted by the taxpayer in Puerto Rico, the credit may not exceed the sum of
the following three components: (i) 60% of the qualified possession wages and
15% of allocable fringe benefits paid by the taxpayer, (ii) applicable
percentages of certain depreciation deductions claimed for regular tax purposes
by the taxpayer with respect to qualified tangible property and (iii) a portion
of the possession income taxes paid by the taxpayer except where the taxpayer
uses the profit-split method for determining its income. Unlike certain
earlier proposals, the Amendments would not limit the 100% credit currently
available under section 936 for qualified possession source investment income,
including income received from investment in certain Puerto Rico mortgage loans
and mortgage-backed securities.
It is not possible at this time to predict what effect the Amendments
will have on the economy of Puerto Rico. The Amendments could have an adverse
effect on the general economic condition of Puerto Rico by reducing incentives
for investment in Puerto Rico. Any such adverse effect on the general economy
of Puerto Rico could lead to an increase in mortgage delinquencies and a
reduction in the level of residential construction and demand for mortgage
loans. The adoption of the Amendments could also indirectly lead to a decrease
in the amount of funds invested in Puerto Rico financial assets by 936
Corporations to the extent that the level of operations and production in
Puerto Rico by such 936 Corporations is decreased over time. While the impact
on the Company cannot be determined at this time, the Company does not believe
that the adoption of the Amendments will have a material adverse effect on its
business or financial condition or on the Puerto Rico mortgage market in
general.
NEW ACCOUNTING STANDARDS. In November 1992, the Financial Accounting
Standard Board ("FASB") issued the Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits". This statement,
which the Company must adopt for fiscal years beginning after December 15,
1993, establishes accounting standards for employers who provide benefits to
former or inactive employees after employment but before retirement (known as
"postemployment benefits"). The Statement requires recognition of the cost of
postemployment benefits on an accrual basis.
In May 1993, the FASB issued the Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan." This
statement, which the Company must adopt for fiscal years beginning after
December 15, 1994, requires that impaired loans that are within the scope of
the statement be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
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The Company does not expect the adoption of these statements to have a
material effect on the results of its operations or its financial condition.
In may 1993, the FASB also issued the Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This statement, which the Company must adopt in the first quarter
of 1994, addresses the accounting and reporting for investments on equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments are to be classified in three categories
and accounted for as follows:
- Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
- Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. Mortgage-backed securities held for sale in conjunction
with mortgage banking activities must be classified as trading securities.
- Debt and equity securities not classified as either held-to maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholder's
equity.
Management is currently evaluating the effect of adopting this statement
and believes that had the Company adopted the provisions of this standard at
December 31, 1993, approximately $132,000,000 of mortgage-backed securities
would have been classified as trading securities and the net income for the
year ended December 31,1993 would have increased by approximately $1,500,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information call for by this Item 8 is hereby incorporated by
reference from the Company's Consolidated Financial Statements and Auditor's
Report beginning on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters" contained
in Company's definitive Proxy Statement for its 1994 Annual Meeting of
stockholders (the "Proxy Statement") to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year covered by this report.
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ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
to the section entitled "Executive Compensation" of the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference
to the section entitled "Security Ownership of Management and Principal
Holders" of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters" of the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.*
The information called for by this subsection of Item 14 is set
forth in the Financial Statements and Auditors' Report beginning on
page F-1 of this Form 10-K. The index to Financial Statements is set
forth on page F-2 of this Form 10-K.
(2) Financial Statement Schedules.
All financial schedules have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) Exhibits.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of FFCC, as currently in effect.(1)
3.2 By-laws of FFCC, as amended as of January 31, 1992.(1)
3.3 Amendment to Certificate of Incorporation of FFCC filed with
the Department of State of the Commonwealth of Puerto Rico on
May 23, 1991.(1)
3.4 Certificate of Designation creating the Series A Preferred
Stock.(1)
3.5 Amendment to Certificate of Incorporation of FFCC filed with
the Department of State of the Commonwealth of Puerto Rico on
April 28, 1993(2)
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Exhibit
Number Description
------ -----------
4.1 Common Stock Certificate.(1)
4.2 Series A Preferred Stock Certificate.(1)
10.12(b) Deferred Compensation Agreement dated as of November 14, 1988, between FFCC and Alfredo
Zamora.(3)
10.12(f) Deferred Compensation Agreement dated as of November 14, 1988, between FFCC and Nancy
Hernandez.(3)
10.13 1988 FFCC Stock Option Plan.(3)
10.14 FFCC Restricted Stock Plan.(3)
10.15 Purchase Agreement dated as of September 21, 1988, between FFCC and Culbro Corporation covering
the purchase of RSC Corp. and Doral Mortgage Corporation.(3)
10.16 Loan Agreement between Banco Commercial de Mayaguez and FFCC, dated November 20, 1990.(4)
10.18 Form of Contract of Pledge used by FFCC in connection with the Warehousing Loan Agreement dated
November 25, 1987, as amended, with Scotiabank de Puerto Rico.(5)
10.21 Tax Indemnification Agreement between Culbro Corporation and FFCC.(3)
10.22 Purchase Agreement dated as of November 30, 1976, between CMB, Inc. and David Levis, Salomon
Levis, Aida Levis and Carmen Levis covering the purchase of FFCC together with amendments or
supplements dated August 25, 1977, November 1, 1977, January 1, 1982, February 9, 1982,
January 1, 1986 and January 1, 1987.(3)
10.23 Purchase Agreement dated as of October 15, 1986, between CMI Inc. and Salomon Levis and Carmen
Maria Serracante covering the purchase of RSC Corp.(3)
10.24 Purchase Agreement dated as of October 15, 1986, between DRL, Inc. and Jesus M. Rodriguez and
Marta Melendez covering the purchase of Doral Mortgage Corporation.(3)
10.28 Agreement among Doral Mortgage Corporation, Banco de Ponce, as trustee, and the Puerto Rico
Housing Finance Corporation dated September 25, 1990.(4)
10.30 Loan Agreement between FFCC and Puerto Rico Island Rental Limited Dividend Partnership S.E.,
dated December 27, 1990.(4)
10.32 Warehousing Loan Agreement dated January 29, 1990 between FFCC and Banco Santander Puerto
Rico.(4)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto Rico.(4)
10.34 (b) Master Repurchase Agreement between FFCC and Dean Witter Puerto Rico, Inc., dated as of
October 28, 1987.(4)
(c) Master Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated
March 30, 1989.(4)
(d) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated October 26,
1989.(4)
(e) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated November 28,
1989.(4)
37
41
Exhibit
Number Description
------ -----------
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated December 6,
1989.(4)
(g) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated September 11,
1990.(4)
(h) Master Repurchase Agreement between FFCC and Shearson Lehman Hutton Puerto Rico, Inc.,
dated June 21, 1990.(4)
(i) Repurchase Agreement between FFCC and Banco Central Corp., dated October 11, 1991.(1)
(j) Repurchase Agreement between FFCC and Banco Central Corp., dated December 3, 1991.(1)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc., dated as of March 24,
1992.(5)
10.35 Employment Agreement dated January 1, 1992 between FFCC and Salomon Levis.(1)
10.36 Employment Agreement dated January 1, 1992 between FFCC and Zoila Levis.(1)
10.37 Third Amendment to Loan Agreement dated June 5, 1991 between FFCC and Scotiabank de Puerto
Rico.(1)
10.39 Mark-to-Market Agreement between FFCC and PaineWebber Incorporated, dated as of March 24,
1992.(5)
10.40 Insurance and Indemnity Agreement dated as of May 28, 1992, between FFCC and Financial Security
Assurance Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de Puerto Rico and FFCC confirming the
renewal of the Loan Agreement dated November 25, 1987.(5)
10.42 Financing Agreement dated May 14, 1992, between FFCC and Banco Popular de Puerto Rico.(5)
10.43 Consulting Agreement dated June 1, 1992, between FFCC and Richard F. Bonini.(5)
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991, between FFCC and Banco Santander
Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992, between FFCC and Banco Santander
Puerto Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the Loan Agreement between FFCC and Scotiabank
de Puerto Rico dated November 25, 1987.(5)
10.47 Amendment dated June 29, 1989 to the Loan Agreement between FFCC and Scotiabank de Puerto Rico
dated November 25, 1987.(5)
10.48 Letter Agreement dated September 21, 1992, between FFCC and Banco Bilbao Vizcaya confirming the
extension and renewal of the Loan Agreement between Banco Commercial de Mayaguez and FFCC dated
November 20, 1990.(5)
10.49 Employment Agreement dated as of April 1, 1993 between FFCC and Luis Alvarado.
10.50 Customer Agreement, dated March 9, 1993, between FFCC and Meridian Capital Markets Inc. relating
to the execution of Forward Contracts.(6)
38
42
Exhibit
Number Description
------ -----------
10.51 Master Repurchase Agreement, dated March 24, 1993, between FFCC and Bear Sterns Mortgage Capital
Corporation.(7)
10.52 Master Production Agreement, dated as of September 15, 1993, between FFCC and Doral Federal.(8)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of September 15, 1993, between
FFCC and Doral Federal.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as of November 29, 1993 between
FFCC and Nomura Asset Capital Corporation.
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993, between FFCC and Meridian
Capital markets, a Division of Meridian Bank.
21. List of FFCC's subsidiaries.
28.1 Agreement and Plan of Reorganization dated as of December 11, 1992 between FFCC and Catano
Federal Savings Bank.(10)
____________________
(1) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993
(File No. 0-17224).
(2) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on From 10-Q for the quarter ended March 31, 1993
(File No. 0-17224)
(3) Incorporated herein by reference to the same exhibit number as filed
pursuant to Item 15(b) of the Company's Form 10 filed with the Commission on
October 7, 1988, as amended by Form 8 amendments thereto.
(4) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-1 (No. 33-39651) filed with the
Commission on March 29, 1991.
(5) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.
(6) Incorporated by reference to exhibit number 19.1 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1993 (File No.
0-17224).
(7) Incorporated by reference to exhibit number 19.2 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1993 (File No.
0-17224).
(8) Incorporated by reference to exhibit number 19.3 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1993 (File
No. 0-17224).
39
43
(9) Incorporated by reference to exhibit number 19.4 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1993 (File
No. 0-17224).
(10) Incorporated herein by reference to exhibit number 1 of the Company's
Current Report on Form 8-K filed with the Commission on December 16, 1992.
(b) Reports on Form 8-K.
Not applicable
40
44
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, First Financial Caribbean Corporation has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST FINANCIAL CARIBBEAN CORPORATION
By: /s/ Salomon Levis
---------------------------------
Salomon Levis
Chairman of the Board and
Chief Executive Officer
Date: March 30, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Salomon Levis Chairman of the Board and March 30, 1994
- ----------------------------- Chief Executive Officer
(Salomon Levis)
/s/ Luis Alvarado Executive Vice President, March 30, 1994
- ----------------------------- Chief Financial Officer and
(Luis Alvarado) Principal Accounting Officer
/s/ Richard F. Bonini
- -----------------------------
(Richard F. Bonini) Director March 30, 1994
/s/ Edgar M. Cullman, Jr.
- -----------------------------
(Edgar M. Cullman, Jr.) Director March 30, 1994
/s/ Frederick M. Danziger
- -----------------------------
(Frederick M. Danziger) Director March 30, 1994
/s/ John L. Ernst
- -----------------------------
(John L. Ernst) Director March 30, 1994
/s/ Zoila Levis
- -----------------------------
(Zoila Levis) Director March 30, 1994
45
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR INCLUSION IN FORM 10-K
ANNUAL REPORT FILED WITH
SECURITIES AND EXCHANGE COMMISSION
F-1
46
FIRST FINANCIAL CARIBBEAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FEBRUARY 3, 1994
Page
----
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . F-3
Financial Statements
Consolidated Balance Sheet as of December 31, 1993 and 1992 . . . . . F-5
Consolidated Statement of Income and Retained Earnings for the Years
ended December 31,1993, 1992 and 1991 . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Years ended December 31,
1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statement of Changes in Capital Stock for the Years
ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-10
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
F-2
47
Price Waterhouse
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
First Financial Caribbean Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings, of changes in capital
stock and of cash flows present fairly, in all material respects, the
financial position of First Financial Caribbean Corporation and its
subsidiaries at December 31, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
effective January 1, 1993.
/s/ Price Waterhouse
- ----------------------
PRICE WATERHOUSE
San Juan, Puerto Rico
February 3, 1994
Stamp 1196931 of the P.R. Society
of Certified Public Accountants has
been affixed to the file copy of this report
F-3
48
FIRST FINANCIAL CARIBBEAN
CORPORATION
REPORT AND CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
F-4
49
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
December 31
-----------
1993 1992
---- ----
Cash and cash equivalents $ 37,306,845 $ 18,687,067
Certificates of deposit 2,500,000
Accounts receivable, net 22,816,121 19,669,461
Mortgage loans held for sale 272,077,048 128,813,534
Mortgage-backed securities held for sale 131,843,453 124,967,042
Mortgage notes receivable, net 402,579 7,282,003
Property, leasehold improvements and
equipment, net 5,771,193 3,009,516
Cost in excess of fair value of net assets acquired 6,536,570 5,535,146
Real estate held for sale, net 2,928,305 3,647,772
Other assets 6,749,137 6,860,157
------------ ------------
Total assets $486,431,251 $320,971,698
============ ============
Escrow funds (See contra) $ 62,650,000 $ 34,500,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loans payable $192,794,175 $ 98,424,124
Securities sold under agreements to repurchase 143,199,642 128,755,230
Deposits 26,450,846
Advances from FHLB 2,431,379
Payables and accrued liabilities 38,401,583 34,941,102
Income tax payable 3,748,979 383,822
Deferred tax liability 2,460,000
------------ ------------
Total liabilities 409,486,604 262,504,278
------------ ------------
Stockholders' equity:
10.5% Cumulative Convertible Preferred Stock, Series
A, $1 par value, 2,000,000 shares authorized;
414,413 shares issued and outstanding (1992 - 510,895)
(liquidating preference of $10 per share, aggregating
$4,144,130). 414,413 510,895
Common stock, $1 par value, 10,000,000 shares authorized
(1992 - 5,000,000); 6,762,138 shares issued and outstanding
(including 3,381,069 shares issued on December 10, 1993 as
stock split) (1992 - 3,284,587) 6,762,138 3,284,587
Paid-in capital 16,884,486 20,258,555
Retained earnings 53,219,178 35,041,903
------------ ------------
77,280,215 59,095,940
Treasury stock at par value, 14,000
shares (1992 - 7,000) (14,000) (7,000)
Unearned compensation under employment contracts (321,568) (621,520)
------------ ------------
76,944,647 58,467,420
------------ ------------
Commitments and contingencies ___________ ___________
$486,431,251 $320,971,698
============ ============
Liability for escrow funds (See contra) $ 62,650,000 $ 34,500,000
============ ============
The accompanying notes are an integral part of this statement.
F-5
50
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Revenues:
Mortgage loan sales and fees $35,230,405 $24,559,391 $15,692,580
Servicing income 8,627,024 7,163,354 5,498,186
Interest income 23,774,659 16,983,192 17,331,282
Gain on sale of servicing rights 2,378,000 934,697 763,839
Other income 218,123 162,975 143,704
----------- ----------- -----------
70,228,211 49,803,609 39,429,591
----------- ----------- -----------
Expenses:
Interest 9,710,091 9,269,798 12,302,862
Loan origination costs,
administrative and general 29,596,875 24,117,895 17,406,644
----------- ----------- -----------
39,306,966 33,387,693 29,709,506
----------- ----------- -----------
Income before income taxes 30,921,245 16,415,916 9,720,085
Income taxes:
Current 7,141,681 3,371,097 2,987,268
Deferred 2,460,000 -- --
----------- ----------- -----------
9,601,681 3,371,097 2,987,268
----------- ----------- -----------
Net income 21,319,564 13,044,819 6,732,817
Retained earnings at beginning
of year 35,041,903 24,179,049 19,065,739
Less cash dividends:
Convertible preferred stock $1.05
per share in 1993 and 1992 (1991 -
$.525 per share) 496,948 538,547 269,810
Common stock $.40 per share (1992 -
$.30; 1991 - $.26 per share) 2,645,341 1,643,418 1,349,697
----------- ----------- -----------
Retained earnings at end of year $53,219,178 $35,041,903 $24,179,049
=========== =========== ===========
Net income per share:
Primary $3.15 $2.35 $1.26
===== ===== =====
Fully diluted $2.81 $2.06 $1.25
===== ===== =====
The accompanying notes are an integral part of this statement.
F-6
51
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Cash flows from operating activities:
Net income $ 21,319,564 $13,044,819 $ 6,732,817
------------ ----------- -----------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of cost in excess of fair value of net
assets acquired 255,476 247,077 246,579
Amortization of servicing rights 492,000 506,000 560,489
Depreciation and amortization 698,300 519,308 433,096
Deferred tax provision 2,460,000
Gain on sale of servicing rights (2,378,000) (934,697) (763,839)
Allowances for losses 1,012,500 715,055 166,047
Increase in mortgage loans held for sale (132,967,514) (45,525,650) (26,288,371)
Increase in mortgage-backed securities held for sale (6,876,411) (1,310,855) (33,533,241)
(Increase) decrease in interest receivable (18,979) (527,399) 837,581
Increase (decrease) in loans payable 98,215,950 31,534,057 (28,373,567)
(Decrease) increase in interest payable (149,082) 77,917 49,807
Increase (decrease) in securities sold under
agreements to repurchase 14,444,412 (4,193,527) 49,032,405
Increase in payables and accrued liabilities 3,480,563 12,892,958 1,702,597
Increase (decrease) in income tax payable 3,365,157 (2,006,518) 2,077,778
Issuance of common stock under employment contracts 299,952 235,756 157,170
------------- ----------- -----------
Total adjustments (17,665,676) (7,770,518) (33,695,469)
------------- ----------- -----------
Net cash provided (used) by operating activities 3,653,888 5,274,301 (26,962,652)
------------- ----------- -----------
Cash flows provided by investing activities:
Cash resulting from acquisition of Doral Federal
Savings, net of purchase price 227,000
Redemption (purchase) of certificates of deposit 2,500,000 (2,500,000) 2,350,000
Decrease in mortgage loans held for investment 38,178,316
Decrease in mortgage notes receivable 6,763,184 16,635,365 28,799,553
(Increase) decrease in accounts receivable (3,900,941) (7,203,614) 4,524,915
Purchase of property, equipment and leasehold improvements (2,981,977) (990,888) (139,661)
Payments of contingent purchase price of subsidiary (985,900) (450,497) (605,331)
Proceeds from disposal of real estate held for sale 4,363,585 6,219,250 6,024,737
Acquisition of real estate held for sale (3,699,118) (4,955,184) (6,167,829)
Servicing rights acquired (14,943) (251,091) (1,215,034)
Proceeds from sale of servicing rights 2,378,000 934,697 900,546
Decrease (increase) in other assets 166,963 (447,670) (277,575)
------------- ----------- -----------
Net cash provided by investing activities 4,815,853 6,990,368 72,372,637
------------- ----------- -----------
(Continued)
The accompanying notes are an integral part of this statement.
F-7
52
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Cash flows from (used by) financing activities:
Decrease in loans payable related to mortgage
notes receivable (3,845,899) (10,708,935) (25,984,200)
Increase in deposits 18,141,846
Proceeds from issuance of common and preferred stock, net 11,327,999 4,660,720
Decrease in securities sold under agreements to repurchase
related to mortgage loans held for investment (38,178,316)
Repayment of advances from FHLB (1,003,621)
Purchase of treasury stock (14,926)
Payment of dividends (3,142,289) (2,181,965) (1,619,507)
------------ ----------- -----------
Net cash provided (used) by financing activities 10,150,037 (1,562,901) (61,136,229)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 18,619,778 10,701,768 (15,726,244)
Cash and cash equivalents at beginning of year 18,687,067 7,985,299 23,711,543
------------ ----------- -----------
Cash and cash equivalents at end of year $ 37,306,845 $18,687,067 $ 7,985,299
============ =========== ===========
The accompanying notes are an integral part of this statement.
F-8
53
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL STOCK
Preferred Common Paid-in Treasury
stock stock capital stock
----- ----- ------- -----
Balance at December 31,
1990 $2,591,910 $ 5,119,621 ($24,050)
Shares issued on June 28,
1991 $513,572 4,147,148
2,000 shares purchased
at $7.46 (12,926) (2,000)
-------- ---------- ----------- -------
Balance at December 31,
1991 513,572 2,591,910 $ 9,253,843 (26,050)
Shares issued on November 5,
1992 690,000 10,637,999
Shares converted (2,677) 2,677
Shares issued under restricted
stock plan 366,713 19,050
-------- ---------- ----------- -------
Balance at December 31,
1992 510,895 3,284,587 20,258,555 (7,000)
Stock split on
December 10, 1993 3,381,069 (3,374,069) (7,000)
Shares converted (96,482) 96,482
-------- ---------- ----------- -------
Balance at December 31,
1993 $414,413 $6,762,138 $16,884,486 ($14,000)
======== ========== =========== =======
The accompanying notes are an integral part of this statement.
F-9
54
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REPORTING ENTITY:
The consolidated financial statements include the accounts of First Financial
Caribbean Corporation and its wholly-owned subsidiaries ("FFCC" or the
"Company"), Doral Mortgage Corporation ("Doral"), RSC Corp. ("RSC") and Doral
Federal Savings Bank ("Doral Federal"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
On September 10, 1993, the Company acquired all of the outstanding common stock
of Doral Federal Savings Bank (formerly Catano Federal Savings Bank) at a price
of approximately $1,200,000, including transaction expenses. This acquisition
was accounted for using the purchase method of accounting. The acquisition
cost plus direct costs of the merger were allocated to the individual assets
acquired and liabilities assumed based on their fair values. The excess of
acquisition cost over the fair values of assets acquired and liabilities
assumed amounting to approximately $271,000 was recorded as goodwill and will
be amortized over a ten-year period. The consolidated statements of income and
retained earnings for the year ended December 31, 1993 includes the results of
operations of Doral Federal since the date of the acquisition.
The following is a summary of the assets acquired and liabilities assumed as of
September 10, 1993:
Assets
------
Cash and cash equivalents $ 1,427,000
Loans, less allowance for losses 10,319,000
Federal Home Loan Bank stock 200,000
Property and equipment, net 478,000
Real estate owned 45,000
Other assets 604,000
-----------
$13,073,000
===========
Liabilities
-----------
Deposits $ 8,309,000
Advances from FHLB of N.Y. 3,435,000
Other 129,000
-----------
$11,873,000
===========
F-10
55
Proforma results of operations for the current and the preceding period as
though the acquisition had been made at the beginning of such periods are
substantially similar to actual results of operations for the periods and
therefore are not presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
The Company is engaged in the origination, purchase and sale of FHA, VA and
conventional first and second mortgage loans and in providing and/or arranging
for interim financing for the construction of residences and other types of
real estate developments in Puerto Rico and Florida. The Company, in
combination with its subsidiaries, services FHA insured, VA guaranteed and
conventional mortgage loans pooled for issuance of Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) backed securities and collaterized
mortgage obligations certificates issued by grantor trusts established by the
Company (CMO Certificates). Doral Federal is a federal savings bank that
operates through a single branch located in Catano, Puerto Rico.
The following summarizes the more significant accounting policies used by the
Company.
Mortgage-backed securities held for sale
Mortgage-backed securities held for sale consist of GNMA, FNMA, FHLMC
mortgage-backed securities and CMO certificates. These securities are recorded
at the lower of cost or market computed on an aggregate portfolio basis.
Mortgage loans held for sale
Mortgage loans held for sale consist of FHA, VA and conventional loans. These
loans are recorded at the lower of cost or market computed on an aggregate
portfolio basis.
Mortgage notes receivable
Mortgage notes receivable are held principally for investment purposes. These
consist of residential first and second mortgages with maturity dates ranging
from three to ten years.
Allowances for losses
Allowances for losses are provided for estimated losses on mortgage notes
receivable, accounts receivable and real estate held for sale based upon a
review of the loan portfolio, loss experience, economic conditions and other
pertinent factors.
F-11
56
Cost in excess of fair value of net assets acquired
The cost in excess of fair value of net assets acquired is amortized on the
straight-line basis over their estimated useful lives (30 year period for the
acquisition of Doral and RSC, and a 10 year period for the acquisition of Doral
Federal).
Income and expense recognition
Loan origination fees and related direct loan origination costs are deferred
and amortized to income as an adjustment of yield throughout the life of the
related mortgage loan. Such fees and costs related to loans held for sale are
deferred and recognized in income as a component of gain on sale of loans when
the related loans are sold.
Gains on sales of mortgages are recognized at the time of sale of pools, or
individual loans, to investors.
Interest rate risk management
The Company has various mechanisms to reduce its exposure to interest rate
fluctuations, as they affect the values of the portfolio holdings and the
prices of newly created loans and loans to be originated.
The Company enters into options on futures contracts designated as trading
hedges which are marked to market on a monthly basis with the resulting gains
and losses charged to operations. Losses on future contracts are generally
indicative of higher profits on sale of mortgage loans. During the years ended
December 31, 1993, 1992 and 1991 net losses from futures transactions,
designated as trading hedges, amounted to approximately $1,367,000, $1,376,000
and $999,000, respectively.
Changes in the market value of future contracts that qualify as hedges of
existing assets or liabilities are recognized as an adjustment of the carrying
amount of the hedged items.
Loan servicing
The Company pools FHA insured and VA guaranteed mortgages for issuance of GNMA
mortgage-backed securities. Also, conventional loans are pooled and issued as
FNMA or FHLMC mortgage-backed securities and CMO certificates. Mortgages
included in the resulting GNMA, FNMA and FHLMC pools, CMO certificates and
certain pools of conventional loans sold to investors are serviced by the
Company. The Company is required to advance funds to make scheduled payments
to investors, if payments due have not been received from the mortgagors. At
December 31, 1993, accounts receivable include advances to investors of
approximately $2,800,000 (1992 - $1,400,000). The Company is also required to
foreclose on loans in the event of default by the mortgagor, and to make full
payment on foreclosed loans. No asset or liability is recorded on the books of
account of the Company for mortgages serviced, except for servicing rights
acquired. Mortgage loan servicing fees, which are based on a percentage of the
principal balances of the mortgages serviced, are credited to income as
mortgage payments are collected. When the stated servicing fee rate is
materially different from the current servicing fee rate on loans sold with
servicing retained, an excess servicing receivable is recognized at the time of
the sale. Amortization of excess servicing is provided based on the amount and
timing of future cash flows. Amortization of excess servicing for each of the
years ended December 31, 1993, 1992, and 1991 was approximately $161,000,
$28,000 and $16,000, respectively.
F-12
57
Excess servicing receivable at December 31, 1993 amounted to approximately
$3,464,000 (1992 -$500,000).
Servicing rights acquired
The cost of acquiring the rights to service mortgage loans is capitalized. The
amount capitalized is amortized in proportion to, and over the period of,
estimated net servicing income. Any unamortized balance related to rights sold
is charged to income at time of sale.
Capitalized servicing rights are analyzed quarterly by stratifying the mortgage
servicing portfolio and reviewing the payment history on a pool-by-pool basis.
Whenever it is determined that there is a prepayment pattern indicative that
the fair value of the purchased mortgage servicing rights (determined based on
estimated future net cash flows discounted at current rates) will be less than
their carrying amounts, an impairment is recognized by charging such excess to
income.
Real estate held for sale
The Company acquires real estate through foreclosures. These properties are
held for sale and are stated at the lower of fair value, minus estimated costs
to sell, or cost.
Property, leasehold improvements and equipment
Property, leasehold improvements and equipment are carried at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets or the terms of the leases, if shorter,
for leasehold improvements, ranging from five to ten years.
F-13
58
Income taxes
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The adoption of
FAS 109 changes the Company's method of accounting for income taxes from the
deferred method (APB11) to an asset and liability approach. Previously, the
Company deferred the past tax effects of timing differences between financial
reporting and taxable income. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. A valuation allowance is recognized for
any deferred tax asset for which, based on management's evaluation, it is more
likely than not (a likelihood of more than 50%) that some portion or all of the
deferred tax asset will not be realized. The initial application of this
standard has no effect because there was no significant temporary differences
at January 1, 1993.
Employers' Accounting for Postemployment Benefits
and Accounting for Impairment of a Loan
In November 1992, the FASB issued Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits." This statement,
which the Company must adopt for fiscal years beginning after December 15,
1993, establishes accounting standards for employers who provide benefits to
former or inactive employees after employment but before retirement (known as
"postemployment benefits"). The Statement requires recognition of the cost of
postemployment benefits on an accrual basis.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan." This statement, which
the Company must adopt for fiscal years beginning after December 15, 1994,
requires that impaired loans that are within the scope of the statement be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
The Company does not expect the adoption of these statements to have a material
effect on the results of its operations or its financial condition.
Accounting for Certain Investments In Debt and Equity Securities
In May 1993, the FASB also issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This statement, which the Company must adopt in the first quarter of 1994,
addresses the accounting and reporting for investments on equity securities
that have readily determinable fair values and for all investments in debt
securities. Those investments are to be classified in three categories and
accounted for as follows:
o Debt securities that the enterprise has the positive
intent and ability to hold to maturity are classified
as held-to-maturity and reported at amortized cost.
F-14
59
o Debt and equity securities that are bought and held
principally for the purpose of selling them in the
near term are classified as trading and reported at
fair value, with unrealized gains and losses included
in earnings. Mortgage-backed securities held for
sale in conjunction with mortgage banking activities
must be classified as trading securities.
o Debt and equity securities not classified as either
held-to-maturity or trading are classified as
available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings
and reported in a separate component of shareholders'
equity.
Management is currently evaluating the effect of adopting this statement and
believes that had the Company adopted the provisions of this standard at
December 31, 1993, approximately $132,000,000 of mortgage-backed securities
would have been classified as trading securities and the net income for the
year ended December 31, 1993 would have been increased by approximately
$1,500,000.
Statement of cash flows
Cash and cash equivalents include cash in banks and certificates of deposit
(1993 - $1,800,000 and 1992 - $700,000) and other highly liquid securities with
an original maturity of three months or less.
At December 31, 1993, other highly liquid securities include $22,026,203 of
securities purchased under agreements to resell as follows:
Amount Maturity
------ --------
Lehman Brothers Puerto Rico, Inc. $20,021,168 January 3, 1994
Dean Witter 1,004,852 January 3, 1994
Lehman Brothers Puerto Rico, Inc. 1,000,183 February 28, 1994
-----------
$22,026,203
===========
Earnings per share
Primary net income per share is determined by dividing net income, after
deducting preferred stock dividends, by the weighted average number of common
stock outstanding considering the dilutive effect of restricted stock awards.
F-15
60
Fully diluted net income per share has been computed based on the assumption
that all of the convertible preferred stock are converted into common stock as
of July 1, 1991.
On October 25, 1993 the Company declared a two for one stock split on its
shares of common stock outstanding. The stock split was effected in the form
of a stock dividend of one additional share of common stock for each share of
common stock held on record date of November 22,1993. As a result, a total of
3,381,069 shares of common stock were issued on December 10, 1993. Also as a
result of the stock split referred to above, each outstanding share of the
Company's Series A Preferred Stock is now convertible into two shares of common
stock at a conversion price of $5 per share.
For purposes of the computation of earnings per share and common stock
dividends per share, the stock split including the effect of the preferred
stock's change in the computation of common stock equivalents, was
retroactively recognized in all periods presented in the financial statements.
The number of shares of common stock used for computing the primary and fully
diluted net income per share was as follows:
1993 1992 1991
---- ---- ----
Primary 6,614,854 5,321,600 5,135,206
Fully diluted 7,576,964 6,347,392 5,411,744
Primary earnings per share for 1992 would have been $2.33 if the 19,050 shares
issued under the Company's Restricted Stock Plan on December 31, 1992 had been
issued on January 1, 1992.
Fair value of financial instruments
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a
few other cases, fair values have been estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of risk. Accordingly, the fair
values may not represent actual values of the financial instruments that could
have been realized as of year end or that will be realized in the future.
Other
Certain reclassifications of prior years' data have been made to conform to
1993 classifications.
F-16
61
NOTE 3 - COST IN EXCESS OF FAIR VALUE
OF NET ASSETS ACQUIRED:
Doral and RSC were acquired in December 1986 for approximately $3,700,000 in
cash plus a ten-year deferred minimum pay-out of $875,000. These transactions
were accounted for by the purchase method of accounting resulting in $1,620,000
of cost in excess of the fair value of net assets acquired. Subsequent
contingent payments under the purchase agreements are accounted for as
additional cost over the fair value of assets acquired. The amount of such
pay-outs are determined based on a percentage ranging from 1/16% to 1/4% of the
aggregate principal amount of mortgage loans closed. The deferred pay-out
portion has been discounted using an imputed interest rate of 8%.
Contingent payments under the Doral purchase agreement amounted to $985,900,
$450,497 and $605,331 for the years ended December 31, 1993, 1992 and 1991,
respectively.
Total amortization expense charged to operations for each of the years ended
December 31, 1993, 1992, and 1991 was $255,476, $247,077 and $246,579,
respectively. Total accumulated amortization relating to cost in excess of
fair value of net assets acquired amounted to $2,617,405, $2,361,929 and
$2,114,852 at December 31, 1993, 1992 and 1991, respectively.
At December 31, 1993, cost in excess of fair value of net assets acquired
includes approximately $271,000 resulting from the acquisition of Doral
Federal.
NOTE 4 - REGULATORY REQUIREMENTS:
The Company is a U.S. Department of Housing and Urban Development (HUD)
approved, non-supervised mortgagee and must maintain an excess of current
assets over current liabilities and a minimum net worth, as defined by HUD,
GNMA, FNMA and FHLMC. The Company is also required to maintain fidelity bond
and errors and omissions insurance coverages based on the balance of its
servicing portfolio.
As a result of the acquisition of Doral Federal, legally
the Company became a savings and loan holding company ("SLHC") subject to the
restrictions and requirements of the Home Owners' Loan Act of 1933, as amended
(the "HOLA"). As a SLHC, the Company was required to register with the
Director of the Office of Thrift Supervision (the "OTS") and is subject to
various requirements of the HOLA, including examination, supervision and
reporting requirements. Federal law and OTS regulations place certain limits
on the types of activities in which a SLHC and its subsidiaries may engage.
However, in general, these activity restrictions do not apply to a holding
company that controls only one savings and loan association, provided such
association meets the "qualified thrift lender" test which generally requires
the association to have 65% of its portfolio assets in "qualified thrift
investments." For Puerto Rico based institutions, these investments include,
among other things, home mortgages, mortgage-backed securities, and personal
loans. Doral Federal is also subject to certain regulatory capital
requirements.
F-17
62
The Company has complied with these regulatory requirements.
NOTE 5 - MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES HELD FOR SALE:
Mortgage loans and mortgage-backed securities held for sale consist of:
December 31,
------------
1993 1992
---- ----
Mortgage Loans:
FHA/VA loans $ 93,541,434 $ 41,998,561
Conventional loans 168,388,082 82,549,921
Construction loans 7,734,456 4,265,052
------------ ------------
269,663,972 128,813,534
------------ ------------
Commercial and consumer loans 2,413,076
------------ ------------
272,077,048 128,813,534
------------ ------------
Mortgage-backed securities:
GNMA $ 48,652,131 $ 73,545,448
FHLMC 26,401,283 27,114,607
CMO certificates 53,267,904 23,716,153
FNMA 3,522,135 590,834
------------ ------------
131,843,453 124,967,042
------------ ------------
$403,920,501 $253,780,576
============ ============
CMO certificates include the following:
Certificates of other issuers $ 39,769,904 $ 18,505,355
Residual certificates, CMO's
established by the Company 9,448,000 5,210,798
Subordinated certificates, CMO's
established by the Company 4,050,000
------------ ------------
$ 53,267,904 $ 23,716,153
============ ============
F-18
63
At December 31, 1993, the aggregate amortized cost and approximate market value
of are as follows:
Amortized Gross unrealized Gross unrealized Approximate
cost gains losses market value
---- ----- ------ ------------
$403,920,000 $4,298,000 ($1,230,000) $406,988,000
============ ========== ========== ============
Proceeds from sales of mortgage loans held for sale during 1993 were
approximately $1,656,000,000 (1992 - $772,000,000). Gross gains of $49,882,000
(1992 - $27,431,000) and gross losses of $14,652,000 (1992 - $2,872,000) were
realized on those sales.
As of December 31, 1993, Doral Federal has commercial and consumer loans
amounting to approximately $500,000 on which the accrual of interest income had
been discontinued If these loans had been accruing interest, the additional
interest income realized would have been approximately $51,000.
Doral Federal originates adjustable and fixed interest rate loans. The
adjustable rate loans have interest rate adjustment limitations and are
generally tied to various market indexes. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral Federal pays on
the short-term deposits that have primarily funded these loans.
NOTE 6 - MORTGAGE NOTES RECEIVABLE:
Mortgage notes receivable consist of:
December 31,
------------
1993 1992
---- ----
Residential and commercial first and
second mortgage loans at 9% (1992 -
ranging from 9.0% to 12.0%) $402,579 $7,398,243
Less - Allowance for estimated losses (116,240)
-------- ----------
$402,579 $7,282,003
======== ==========
F-19
64
NOTE 7 - ALLOWANCES FOR LOSSES:
The changes in the allowances for losses were as follows:
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Accounts and mortgage notes receivable:
Balance at beginning of period $1,283,925 $1,051,425 $ 975,138
Provision for losses 889,500 315,055 166,047
Losses charged to the allowance (726,862) (82,555) (89,760)
---------- ---------- ----------
Balance at end of period $1,446,563 $1,283,925 $1,051,425
========== ========== ==========
Real estate held for sale:
Balance at beginning of period $400,000 $ - 0 -
Provision for losses 100,000 400,000
Other 25,000
---------- ----------
Balance at end of period $ 525,000 $ 400,000
========== ==========
At December 31, 1993, the reserve for bank loan losses amounted to
approximately $234,000. Losses charged to the allowance, net of recoveries,
and the provision for losses amounted to approximately $305,000 and $23,000,
respectively.
NOTE 8 - PROPERTY, LEASEHOLD IMPROVEMENTS
AND EQUIPMENT:
Property, leasehold improvements and equipment consist of:
December 31,
------------
1993 1992
---- ----
Office furniture and equipment $4,316,131 $2,626,870
Leasehold improvements 2,953,177 1,654,020
Automobiles 334,912 326,276
Real estate under rental agreements 73,660 107,857
Office building 398,695
---------- ----------
8,076,575 4,715,023
Less - Accumulated depreciation
----
and amortization (2,448,353) (1,918,732)
---------- ----------
5,628,222 2,796,291
Construction in progress related to
leasehold improvements 142,971 213,225
---------- ----------
$5,771,193 $3,009,516
========== ==========
F-20
65
NOTE 9 - OTHER ASSETS:
December 31,
------------
Other assets consist of: 1993 1992
---- ----
Servicing rights acquired $6,315,109 $6,245,276
Less - Accumulated amortization (2,320,321) (1,828,321)
---- ---------- ----------
3,994,788 4,416,955
Interest in partnership 135,000 135,000
Prepaid and other assets 2,619,349 2,308,202
---------- ----------
$6,749,137 $6,860,157
========== ==========
Amounts capitalized during the years ended December 31, 1993, 1992 and 1991 in
connection with the acquisition of rights to service mortgage loans amounted to
$14,943, $251,091 and $1,215,034, respectively.
Amortization of servicing rights was $492,000, $506,000 and $560,489, for the
years ended December 31, 1993, 1992 and 1991, respectively. During the year
ended December 31, 1991, $136,707 of unamortized servicing rights acquired
related to the portfolios sold was charged to income.
The Company's servicing portfolio amounted to approximately $2,375,000,000 and
$1,700,000,000 at December 31, 1993 and 1992, respectively, including
$164,000,000 and $244,000,000 respectively, of loans sold with recourse which
are not government guaranteed or insured. The Company estimates the fair value
of the retained recourse obligation at the time the loans are sold. Ordinarily
the amounts involved are minimal insofar as the recourse obligations are met by
substituting loans which the Company has generally been able to rehabilitate
and resell for at least their carrying amount. Accordingly, a reserve for
possible losses arising from recourse obligations has not been deemed
necessary.
During the years ended December 31, 1993, 1992 and 1991, the Company sold
rights to service loans amounting to approximately $198,700,000, $53,400,000
and $51,500,000, respectively. During the year ended December 31, 1991, the
Company purchased servicing portfolios amounting to approximately $49,400,000.
No servicing portfolio was purchased in 1993 and 1992.
NOTE 10 - PAYABLES AND ACCRUED LIABILITIES:
Payables and accrued liabilities consist of the following:
December 31,
------------
1993 1992
---- ----
Amounts retained on mortgage loans,
generally paid within 5 days $11,723,787 $13,604,260
Customer mortgages and closing
expenses payable 5,351,719 2,871,010
Deferred compensation plan 2,663,722 2,256,714
Incentive compensation payable 7,472,221 4,739,670
Accrued expenses and other payables 11,190,134 11,469,448
----------- -----------
$38,401,583 $34,941,102
=========== ===========
F-21
66
NOTE 11 - LOANS PAYABLE:
At December 31, 1993 and 1992, the Company had several mortgage warehousing
lines of credit totalling $257,500,000 and $96,500,000, respectively. Advances
under the mortgage warehousing lines of credit are secured by loans held for
inclusion in GNMA, FNMA and FHLMC pools or for sale to financial investors.
Loans payable consist of the following:
December 31,
------------
1993 1992
---- ----
Loans payable resulting from use
of warehousing lines of credit
at various rates averaging 4.6%
and 5.1% at December 31, 1993
and 1992, respectively, and other
financing arrangements $192,615,644 $93,924,831
Note payable to bank, at 1% over prime
rate collateralized by mortgage notes
receivable, payable in equal monthly
installments of principal plus interest
through 1994. 178,531 4,499,293
------------ -----------
$192,794,175 $98,424,124
============ ===========
Maximum borrowings outstanding at any month-end during 1993 and 1992 under the
mortgage warehousing lines of credit were $98,000,000 and $77,000,000,
respectively. The approximate average outstanding borrowings during the
periods were $81,000,000 and 66,000,000, respectively. The weighted average
interest rate of such borrowings, computed on a monthly basis, was 4.2% in 1993
and 5.3% in 1992.
The existing warehousing credit facilities require the Company to maintain
certain capital ratios and to comply with other requirements. At December 31,
1993, the Company was in compliance with these requirements.
F-22
67
NOTE 12 - SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE:
The Company sells mortgage-backed securities and mortgage loans under
agreements to repurchase. At December 31, 1993 and 1992, the Company had
several repurchase agreement lines of credit, totalling $215,000,000 and
$180,000,000, respectively. At December 31, 1993 and 1992, the Company had a
liability of $143,199,642 and $128,755,230, respectively, relating to such
agreements at interest rates ranging from 2.9% to 9.0% in 1993 and 3.0% to 6.0%
in 1992. These agreements mature at various dates as follows:
December 31, 1993:
Approximate
Book value of market value
underlying Repurchase of underlying
Type of security securities liability securities
---------------- ------------- ---------- -------------
GNMA (1) $ 14,628,596 $ 12,945,001 $ 14,865,127
FHLMC (1) 20,952,707 20,728,297 20,719,930
CMO Certificates (1) 18,737,511 21,574,579 19,327,187
Conventional Loans (1) 34,455,652 28,610,265 34,455,652
------------ ------------ ------------
88,774,466 83,858,142 89,367,896
------------ ------------ ------------
CMO Certificates (2) 16,027,450 15,700,000 16,302,500
------------ ------------ ------------
CMO Certificates (4) 5,054,379 3,120,480 5,045,982
------------ ------------ ------------
CMO Certificates (5) 1,048,182 785,000 1,037,700
------------ ------------ ------------
GNMA (6) 34,476,127 36,671,667 35,796,639
FHLMC (6) 2,527,855 2,688,836 2,543,110
FNMA (6) 353,035 375,517 359,507
------------ ------------ ------------
37,357,017 39,736,020 38,699,256
------------ ------------ ------------
$148,261,494 $143,199,642 $150,453,334
============ ============ ============
F-23
68
December 31, 1992:
Approximate
Book value of market value
underlying Repurchase of underlying
Type of security securities liability securities
---------------- ------------- ---------- -------------
GNMA (1) $ 28,144,318 $ 27,945,500 $ 28,393,689
FHLMC (1) 19,435,037 18,388,000 19,441,646
CMO Certificates (1) 15,308,712 16,290,000 15,320,108
Conventional Loans (1) 19,614,904 17,831,730 19,614,904
------------ ------------ ------------
82,502,971 80,455,230 82,770,347
------------ ------------ ------------
GNMA (2) 966,595 1,025,000 1,063,255
FHLMC (2) 4,303,028 4,125,000 4,281,602
CMO Certificates (2) 3,440,500 3,600,000 3,465,000
------------ ------------ ------------
8,710,123 8,750,000 8,809,857
------------ ------------ ------------
GNMA (6) 37,707,353 36,864,500 38,530,156
FHLMC (6) 3,376,543 2,360,500 3,349,560
FNMA (6) 345,498 325,000 348,157
------------ ------------ ------------
41,429,394 39,550,000 42,227,873
------------ ------------ ------------
$132,642,488 $128,755,230 $133,808,077
============ ============ ============
(1) Term up to 30 days
(2) Term over 30 days to 90 days
(3) Term over 90 days to 1 year
(4) Term between 1 to 3 years
(5) Term between 3 to 5 years
(6) Term between 5 to 8 years
Maximum borrowings outstanding at any month-end during 1993 and 1992 under the
agreements to repurchase were $152,000,000 and $132,000,000, respectively. The
approximate average borrowings outstanding during the periods were $125,000,000
and $102,000,000, respectively. The weighted average interest rate of such
borrowings, computed on a monthly basis was 3.34% in 1993 and 4.03% in 1992.
F-24
69
At December 31, 1993, securities sold under agreements to repurchase are
classified by dealer as follows:
Approximate
market value
Balance of of underlying
borrowing securities
---------- -------------
Lehman Brothers Puerto Rico, Inc. $ 40,935,950 $ 40,106,815
CS First Boston (Puerto Rico), Inc. 46,741,390 46,014,255
PaineWebber, Inc. of Puerto Rico 9,475,417 9,795,820
Central Hispano Puerto Rico 28,633,546 34,455,652
Bear Stearns Securities Corp. 13,502,000 13,997,109
Others 3,911,339 6,083,683
------------ ------------
Total $143,199,642 $150,453,334
============ ============
NOTE 13 - DEPOSITS:
At December 31, 1993, deposits and their weighted average interest rates are
summarized as follows:
Amount %
------ -
Regular savings $ 4,880,761 2.98
NOW accounts 2,146,504 3.12
Non-interest bearing deposits 14,034,261 -
Certificates of deposit 5,389,320 3.33
-----------
$26,450,846 1.59
===========
Certificates of deposit over $100,000 in the aggregate amounted to $2,825,000.
A summary of certificates of deposit by maturity follows:
Within one year $5,249,618
Three to four years 45,000
Over four years 94,702
----------
$5,389,320
==========
At December 31, 1993, Doral Federal has deposits from officers, directors,
employees and major stockholders of the Company amounting to approximately
$1,300,000.
At December 31, 1993, escrow funds include approximately $7,754,000 deposited
with Doral Federal. These funds are included in the Company's financial
statements. Escrow funds also include approximately $54,896,000
(1992-$34,500,000) deposited with other banks and which are excluded from the
Company's assets and liabilities.
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70
NOTE 14 - ADVANCES FROM THE FEDERAL HOME LOAN BANK:
Advances from the Federal Home Loan Bank ("FHLB") consist of the following:
9.05% due on August 25, 1994 $1,100,000
9.00% due on June 27, 1994 600,000
3.72% due on March 28, 1994 300,000
7.76% due on August 21, 1996 400,000
Other 31,379
----------
$2,431,379
==========
The aggregate maturities of the FHLB advances are as follows:
1994 $2,031,379
1996 400,000
----------
$2,431,379
==========
At December 31, 1993, the Company's FHLB stock and other qualified collateral
(in the form of first mortgage notes) amounting to $3,439,620 were pledged to
secure advances from the FHLB.
NOTE 15 - INCOME TAXES:
Under the provisions of Law No. 38 of May 20, 1983, the Company is exempt from
the payment of Puerto Rico income taxes on the interest earned on mortgages on
residential properties located in Puerto Rico which were executed after June
30, 1983, and are insured or guaranteed pursuant to the provisions of the
National Housing Act of June 27, 1934, as amended, and pursuant to the
Provisions of the Servicemen's Readjustment Act of 1944, as amended.
The 1987 Puerto Rico Tax Reform Act ("the Reform Act") imposed an alternative
minimum tax (AMT) of 22% on regular income after adjustment for certain items
provided for by the Reform Act. The income tax liability will be the greater
of the tax computed under the regular tax system or the AMT system.
Doral Federal as a federally chartered financial institution operating in
Puerto Rico, is subject to U.S. Federal income taxes. Doral Federal has filed
an election under Section 936 of the U.S. Internal Revenue Code, whereby a
possession tax credit is allowed for federal income taxes attributable to
income from operations in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 limits the 936 credit effective
for tax years beginning after December 31, 1993.
F-26
71
Substantially all income of the Company was from its mortgage banking business
in Puerto Rico and, therefore, the amount of the 936 credit as well as the
United States income tax was not significant.
Consolidated tax returns are not permitted under the Puerto Rico Income Tax
Law, therefore, taxable income tax returns are filed individually by each
Company.
The provision for income taxes differs from amounts computed by applying the
applicable Puerto Rico statutory tax rate to income before taxes. A
reconciliation of the difference follows:
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Income before income taxes $30,921,245 $16,415,916 $9,720,085
=========== =========== ==========
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
Tax at statutory rates $12,986,923 42.0 $6,894,684 42.0 $4,082,437 42.0
Tax effect of exempt interest
income - net (2,717,262) (8.8) (2,185,608) (13.3) (1,048,380) (10.7)
Tax effect of capital gains (471,920) (1.5) (414,269) (2.5) (129,853) (1.3)
Tax effect of dividend income (1,261,584) (7.7)
Tax effect of amortization of
goodwill, other non- deductible
expenses and other (196,060) (0.7) 337,874 2.0 83,064 .7
---------- ---- ---------- ---- ---------- ----
Provision for income taxes $9,601,681 31.0 $3,371,097 20.5 $2,987,268 30.7
========== ==== ========== ==== ========== ====
The components of the deferred tax liability are:
Deferred costs $1,095,000
Deferred book income 1,365,000
----------
$2,460,000
==========
NOTE 16 - RELATED PARTY TRANSACTIONS:
Mortgage loans held for sale include approximately $521,000 of loans to various
officers of the Company at prevailing interest rates.
The Company paid a computer service bureau, in which it holds a 25% interest,
$617,000, $410,000 and $348,000 for services rendered during the years ended
December 31, 1993, 1992 and 1991, respectively. At December 31, 1993 and 1992
company's equity on this service bureau was not significant.
F-27
72
In December 1990, the Company sold real estate properties acquired through
foreclosure valued at approximately $4,000,000 to a special partnership (the
"Partnership") formed under a private syndication. The properties were sold at
a value determined by an independent appraiser. The Company and several
members of senior management invested as limited partners. The Company
investment, amounting to approximately $135,000, is carried at cost and is
included in other assets. At December 31, 1993 and 1992, mortgage notes
receivable include approximately $400,000 and $3,142,000, respectively due from
the Partnership. In addition, at December 31, 1993 accounts receivable
includes approximately $550,000 due from the Partnership, mostly corresponding
to several repairs and improvement made to the rental properties and funded by
the Company.
NOTE 17 - FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK:
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and sell mortgage-backed
securities and loans, securities sold under agreements to repurchase and
securities purchased under agreements to resell, and options on futures
contracts. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial position.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit losses in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
securities purchased under agreements to resell is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance sheet
instruments. The Company does not require collateral or other security to
support commitments to extend credit. At December 31, 1993, commitments to
extend credit to individuals for residential mortgages amounted to
approximately $23,900,000 and commitments to sell mortgage-backed securities
and loans amounted to approximately $175,000,000. Commitments to extend
credit are agreements to lend a customer as long as the conditions established
in the contract are met. Commitments generally have fixed expiration dates or
other termination clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral if deemed necessary by the company upon
extension of credit is based on management's credit evaluation of the
counterparty. A geographic concentration exist within the Company's mortgage
loans portfolio since most of the Company's business activity is with customers
located in Puerto Rico.
The Company controls the credit risk of its future contracts through credit
approvals, limits and monitoring procedures. Options on future contracts
confer the right from sellers to buyer to take a future position at a stated
price. Risks arise from the possible inability of counterparties to meet the
terms of their contracts and from movements in securities values and interest
rates. Collateral for securities purchased under agreements to resell is kept
by the seller under custody agreements. Collateral for securities sold under
agreements to repurchase is kept by the purchaser.
NOTE 18 - PENSION AND COMPENSATION PLANS:
F-28
73
The Company has a noncontributory target benefit pension plan ("the Plan").
The Plan covers all full time Company employees that have completed one year of
service and have attained age 21.
Under the Plan, the Company contributes annually the funding amount which is
projected to be necessary to fund the target benefit. The target benefit is
based on years of service and the employees' compensation, as defined in the
Plan. The Company has the right to terminate the Plan at any time. Upon
termination, all amounts credited to the participants' accounts will become
100% vested.
Contributions to the Plan during the years ended December 31, 1993, 1992 and
1991 amounted to approximately $503,000, $120,000 and $127,000, respectively.
Plan assets consist principally of mortgage loans.
The Company has unfunded deferred incentive compensation arrangements (the
"Deferred Compensation") with certain employees. The Deferred Compensation is
determined as a percentage of net income arising from the mortgage banking
activities, as defined, and is payable to participants after a five year
vesting period. The expense for the years ended December 31, 1993, 1992 and
1991, amounted to approximately $885,000, $568,000 and $275,000, respectively.
The Company also has incentive compensation arrangements with certain employees
payable currently. The incentive payments are based on the amount of mortgage
loans closed and consolidated net income in excess of established return on
stockholders' equity, as defined in the agreements. The expense under these
arrangements for the years ended December 31, 1993, 1992 and 1991 amounted to
approximately $7,866,000, $3,370,000 and $1,050,000, respectively.
NOTE 19 - COMMITMENTS AND CONTINGENCIES:
The Insurance and Indemnity Agreements (the "Agreements") with an insurance
company that has issued financial guaranty insurance policies, insuring payment
of senior certificates issued by CMO grantors trusts established by the
Company, provide, among other things, for the following:
- - The Company's consolidated debt shall not exceed 1000% (10 times) of
consolidated stockholders' equity.
- - The Company can not sell, transfer or pledge the residual certificates
issued by the trusts (amounting to approximately $9,500,000) without the
insurance company approval.
At December 31, 1993 the Company was in compliance with these requirements.
F-29
74
At December 31, 1993, the servicing portfolio includes approximately
$173,000,000 of loans sold to various grantor trusts in connection with the
issuance of CMO's. Approximately $6,000,000 of residual certificates were
pledged as collateral to the insurance company.
The Company has several noncancellable operating leases for its office
facilities expiring through 2005. Total minimum rental commitments for leases
in effect at December 31, 1993 are as follows:
Year Amount
---- ------
1994 $1,478,000
1995 1,365,000
1996 1,190,000
1997 860,000
1998 345,000
1999 and thereafter 190,000
Total rental expense for the years ended December 31, 1993, 1992 and 1991
amounted to approximately $1,445,000, $817,000 and $586,000, respectively.
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been finally adjudicated. These
actions, when finally concluded and determined, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.
NOTE 20 - CAPITAL STOCK AND PAID-IN CAPITAL:
The Company has a Restricted Stock Plan (the "Restricted Stock Plan") and a
Stock Option Plan. The Restricted Stock Plan provides for the granting of up
to 150,000 shares of common stock to selected officers at no cost. At December
31, 1993, the number of shares awarded and issued under the Restricted Stock
Plan is 177,806 shares, including 88,903 shares issued on December 10, 1993 as
result of the stock split (1992 and 1991 - 88,903 and 69,853 shares,
respectively.) The terms of the Restricted Stock Plan permit the imposition of
restrictions ranging from one to five years on the sale or disposition of the
shares issued. At December 31, 1993, 38,100 of the shares issued under the
Restricted Stock Plan were subject to such restrictions. The Stock Option Plan
provides for selected officers and key employees to purchase up to 150,000
shares of common stock at prices equal to the fair market value on date of
grant. No options have been awarded.
The Company's 10.5% Cumulative Convertible Preferred Stock Series A, has a
liquidation preference of $10 per share plus accrued dividends and is
convertible at the option of the holder into two shares of common stock at a
conversion price of $5 per share. It is redeemable in whole or part at the
option of the Company on or after January 1, 1995 and on or prior to December
31, 1996 at $11 per share, and thereafter, at redemption prices declining to a
price of $10.30 per share on January 1, 2002. Dividends are cumulative from
the date of issue and are payable quarterly.
During the year ended December 31, 1993, the number of common stock shares
authorized was increased from 5,000,000 to 10,000,000 shares.
F-30
75
Present regulations limits the amount of dividends that Doral Federal may pay.
Payment of such dividends is prohibited if, among other things, the effect of
such payment would be to cause the capital of Doral Federal to be reduced below
the regulatory capital requirements.
NOTE 21 - SUPPLEMENTAL INCOME STATEMENT
INFORMATION:
The following expenses are included in loan origination costs and general and
administrative expenses in the accompanying statement for the following
periods:
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Employee cost $35,822,728 $22,312,690 $14,802,628
Taxes, other than payroll
and income taxes 768,048 844,990 543,086
Maintenance 615,503 413,528 289,787
Advertising 4,620,177 2,706,060 1,736,684
Professional services 3,611,639 2,306,172 1,608,813
Telephone 1,719,687 1,219,857 843,421
Rent 1,444,866 816,215 585,563
Other 12,824,650 8,396,395 6,111,033
----------- ----------- -----------
61,427,298 39,015,907 26,521,015
Less - Deferrable direct
----
loan origination costs
related to FAS-91:
Off-set against loan fees (29,220,886) (14,648,012) (8,767,640)
Deferred as part of loan
inventory (2,609,537) (250,000) (346,731)
----------- ----------- -----------
(31,830,423) (14,898,012) (9,114,371)
----------- ----------- -----------
$29,596,875 $24,117,895 $17,406,644
=========== =========== ===========
F-31
76
NOTE 22 - DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS:
At December 31, the estimated fair values of the Company's financial
instruments are as follows:
1993 1992
---- ----
Carrying Carrying
amount Fair value amount Fair value
-------- ---------- -------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 37,307 $ 37,307 $ 18,687 $ 18,687
Certificates of deposit - - 2,500 2,500
Accounts receivable 22,816 22,816 19,669 19,669
Mortgage loans held for sale 272,077 272,608 128,814 130,759
Mortgage-backed securities
held for sale 131,844 134,380 124,967 126,210
Mortgage notes receivable 403 403 7,282 7,646
-------- -------- -------- --------
$464,447 $467,514 $301,919 $305,471
======== ======== ======== ========
1993 1992
---- ----
Carrying Carrying
amount Fair value amount Fair value
-------- ---------- -------- ----------
(In thousands)
Financial liabilities:
Deposits $ 26,451 $ 26,451
Loans payable 192,794 192,794 $ 98,424 $ 98,424
Securities sold under
agreements to repurchase 143,200 143,200 128,755 128,755
Advances from FHLB 2,431 2,431
Payables and accrued
liabilities 38,402 38,402 34,941 34,941
Income taxes payable 6,209 6,209 383 383
-------- -------- -------- --------
$409,487 $409,487 $262,503 $262,503
======== ======== ======== ========
Unrecognized financial
instruments:
Commitments to extend
credit $ 23,900 $ 23,900 $ 9,086 $ 9,086
Commitments to sell
mortgage-backed
securities and loans 175,000 175,000 88,879 88,879
-------- -------- -------- --------
$198,900 $198,900 $ 97,965 $ 97,965
======== ======== ======== ========
F-32
77
As part of the interest rate risk management at December 31, 1993, the Company,
as a purchaser, had unexpired options where it had the right to sell and the
right to buy securities amounting to approximately $22,200,000 and $52,650,000,
respectively. As a seller, the Company had unexpired options where it had the
obligation to sell securities amounting to approximately $25,000,000.
Generally these options expire without being exercised.
NOTE 23 - SUPPLEMENTAL DISCLOSURE OF CASH
FLOWS INFORMATION:
Income tax payments made by the Company during the year ended December 31,
1993, 1992 and 1991 were $3,780,000, $5,370,000 and $910,000, respectively.
Interest paid for the years ended December 31, 1993, 1992 and 1991 amounted to
approximately $9,561,000, $9,191,000 and $12,300,000, respectively.
In conjunction with the acquisition of Doral Federal, liabilities were assumed
as follows:
Fair value of assets acquired $13,073,000
Cash paid (1,200,000)
-----------
Liabilities assumed $11,873,000
===========
NOTE 24 - QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED):
Financial data showing results of the 1993 and 1992 quarters is presented
below. These results are unaudited. Net income per share was retroactively
adjusted to reflect the two-for-one split effected on December 10, 1993. In
the opinion of management all adjustments necessary for a fair presentation
have been included:
Quarters
----------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
(in thousands, except per share data)
1993
----
Revenue $15,378 $18,986 $18,775 $17,089
Net income 4,241 6,957 5,630 4,492
Net income per share:
Primary .63 1.04 .83 .65
Fully diluted .56 .92 .74 .59
1992
----
Revenue $10,659 $13,122 $12,009 $14,014
Net income 2,921 4,615 2,699 2,810
Net income per share:
Primary .55 .88 .50 .46
Fully diluted .48 .75 .44 .41
F-33
78
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- -------------
3.1 Certificate of Incorporation of FFCC, as currently in effect.(1)
3.2 By-laws of FFCC, as amended as of January 31, 1992.(1)
3.3 Amendment to Certificate of Incorporation of FFCC filed with
the Department of State of the Commonwealth of Puerto Rico on
May 23, 1991.(1)
3.4 Certificate of Designation creating the Series A Preferred
Stock.(1)
3.5 Amendment to Certificate of Incorporation of FFCC filed with
the Department of State of the Commonwealth of Puerto Rico on
April 28, 1993.(2)
4.1 Common Stock Certificate.(1)
4.2 Series A Preferred Stock Certificate.(1)
10.12(b) Deferred Compensation Agreement dated as of November 14, 1988,
between FFCC and Alfredo Zamora.(3)
10.12(f) Deferred Compensation Agreement dated as of November 14, 1988,
between FFCC and Nancy Hernandez.(3)
10.13 1988 FFCC Stock Option Plan.(3)
10.14 FFCC Restricted Stock Plan.(3)
10.15 Purchase Agreement dated as of September 21, 1988, between FFCC
and Culbro Corporation covering the purchase of RSC Corp. and
Doral Mortgage Corporation.(3)
10.16 Loan Agreement between Banco Commercial de Mayaguez and FFCC,
dated November 20, 1990.(4)
10.18 Form of Contract of Pledge used by FFCC in connection with the
Warehousing Loan Agreement dated November 25, 1987, as amended,
with Scotiabank de Puerto Rico.(5)
79
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- -------------
10.21 Tax Indemnification Agreement between Culbro Corporation and
FFCC.(3)
10.22 Purchase Agreement dated as of November 30, 1976, between CMB,
Inc. and David Levis, Salomon Levis, Aida Levis and Carmen
Levis covering the purchase of FFCC together with amendments or
supplements dated August 25, 1977, November 1, 1977, January 1,
1982, February 9, 1982, January 1, 1986 and January 1, 1987.(3)
10.23 Purchase Agreement dated as of October 15, 1986,
between CMI Inc. and Salomon Levis and Carmen Maria Serracante
covering the purchase of RSC Corp.(3)
10.24 Purchase Agreement dated as of October 15, 1986,
between DRL, Inc. and Jesus M. Rodriguez and Marta Melendez
covering the purchase of Doral Mortgage Corporation.(3)
10.28 Agreement among Doral Mortgage Corporation, Banco de
Ponce, as trustee, and the Puerto Rico Housing Finance
Corporation dated September 25, 1990.(4)
10.30 Loan Agreement between FFCC and Puerto Rico Island
Rental Limited Dividend Partnership S.E., dated December 27,
1990.(4)
10.32 Warehousing Loan Agreement dated January 29, 1990
between FFCC and Banco Santander Puerto Rico.(4)
10.33 Loan Agreement dated November 25, 1987 between FFCC
and Scotiabank de Puerto Rico.(4)
10.34(b) Master Repurchase Agreement between FFCC and Dean Witter Puerto
Rico, Inc., dated as of October 28, 1987.(4)
(c) Master Repurchase Agreement between FFCC and First Boston
(Puerto Rico), Inc., dated March 30, 1989.(4)
(d) Repurchase Agreement between FFCC and First Boston (Puerto
Rico), Inc., dated October 26, 1989.(4)
(e) Repurchase Agreement between FFCC and First Boston (Puerto
Rico), Inc., dated November 28, 1989.(4)
80
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
(f) Repurchase Agreement between FFCC and First Boston (Puerto
Rico), Inc., dated December 6, 1989.(4)
(g) Repurchase Agreement between FFCC and First Boston (Puerto
Rico), Inc., dated September 11, 1990.(4)
(h) Master Repurchase Agreement between FFCC and Shearson
Lehman Hutton Puerto Rico, Inc., dated June 21, 1990.(4)
(i) Repurchase Agreement between FFCC and Banco Central Corp.,
dated October 11, 1991.(1)
(j) Repurchase Agreement between FFCC and Banco Central Corp.,
dated December 3, 1991.(1)
(k) Master Repurchase Agreement between FFCC and PaineWebber,
Inc., dated as of March 24, 1992.(5)
10.35 Employment Agreement dated January 1, 1992 between
FFCC and Salomon Levis.(1)
10.36 Employment Agreement dated January 1, 1992 between
FFCC and Zoila Levis.(1)
10.37 Third Amendment to Loan Agreement dated June 5, 1991
between FFCC and Scotiabank de Puerto Rico.(1)
10.39 Mark-to-Market Agreement between FFCC and PaineWebber
Incorporated, dated as of March 24, 1992.(5)
10.40 Insurance and Indemnity Agreement dated as of May 28,
1992, between FFCC and Financial Security Assurance Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between
Scotiabank de Puerto Rico and FFCC confirming the renewal of the
Loan Agreement dated November 25, 1987.(5)
10.42 Financing Agreement dated May 14, 1992, between FFCC
and Banco Popular de Puerto Rico.(5)
10.43 Consulting Agreement dated June 1, 1992, between FFCC
and Richard F. Bonini.(5)
10.44 Addendum to Warehousing Loan Agreement dated August
1, 1991, between FFCC and Banco Santander Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29,
1992, between FFCC and Banco Santander Puerto Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the
Loan Agreement between FFCC and Scotiabank de Puerto Rico dated
November 25, 1987.(5)
10.47 Amendment dated June 29, 1989 to the Loan Agreement
between FFCC and Scotiabank de Puerto Rico dated November 25,
1987.(5)
10.48 Letter Agreement dated September 21, 1992, between
FFCC and Banco Bilbao Vizcaya confirming the extension and
renewal of the Loan Agreement between Banco Commercial de
Mayaguez and FFCC dated November 20, 1990.(5)
10.49 Employment Agreement dated as of April 1, 1993
between FFCC and Luis Alvarado.
10.50 Customer Agreement, dated March 9, 1993, between FFCC
and Meridian Capital Markets Inc. relating to the execution of
Forward Contracts.(6)
81
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
10.51 Master Repurchase Agreement, dated March 24, 1993, between FFCC
and Bear Sterns Mortgage Capital Corporation.(7)
10.52 Master Production Agreement, dated as of September 15, 1993,
between FFCC and Doral Federal.(8)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of
September 15, 1993, between FFCC and Doral Federal.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as
of November 29, 1993 between FFCC and Nomura Asset Capital
Corporation.
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993,
between FFCC and Meridian Capital markets, a Division of
Meridian Bank.
21 List of FFCC's subsidiaries.
28.1 Agreement and Plan of Reorganization dated as of December 11,
1992 between FFCC and Catano Federal Savings Bank.(10)
____________________
(1) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993
(File No. 0-17224).
(2) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on From 10-Q for the quarter ended March 31, 1993
(File No. 0-17224)
(3) Incorporated herein by reference to the same exhibit number as filed
pursuant to Item 15(b) of the Company's Form 10 filed with the Commission on
October 7, 1988, as amended by Form 8 amendments thereto.
(4) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-1 (No. 33-39651) filed with the
Commission on March 29, 1991.
(5) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.
(6) Incorporated by reference to exhibit number 19.1 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1993 (File No.
0-17224).
(7) Incorporated by reference to exhibit number 19.2 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1993 (File No.
0-17224).
(8) Incorporated by reference to exhibit number 19.3 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1993 (File
No. 0-17224).
(9) Incorporated by reference to exhibit number 19.4 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1993 (File
No. 0-17224).
(10) Incorporated herein by reference to exhibit number 1 of the Company's
Current Report on Form 8-K filed with the Commission on December 16, 1992.
(b) Reports on Form 8-K.
Not applicable