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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
X THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED,
- -- EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
- --
COMMISSION FILE NO. 0-17224
FIRST FINANCIAL CARIBBEAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico 66-0312162
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1159 Franklin D. Roosevelt Avenue
San Juan, Puerto Rico 00920
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (787) 749-7100.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
$188,381,573 approximately, based on the last sale price of $27 1/2 per
share on the NASDAQ National Market System on March 7, 1997. For the purposes
of the foregoing calculation only, all directors and executive officers of the
registrant and certain related parties of such persons have been deemed
affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock: 9,111,092 shares as of March 7, 1997. (continued)
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DOCUMENTS INCORPORATED BY REFERENCE
PART III
Item 10 Directors and Executive Officers of Information in response to this
the Registrant. Item is incorporated into this
Annual Report on Form 10-K by
reference to the section
entitled "Election of Directors
and Related Matters" and
"Executive Compensation" in the
Company's definitive Proxy
Statement for use in connection
with its 1997 Annual Meeting of
stockholders (the "Proxy
Statement").
Item 11 Executive Compensation. Information in response to this
Item is incorporated into this
Annual Report on Form 10-K by
reference to the section
entitled "Executive
Compensation" in the Company's
Proxy Statement.
Item 12 Security Ownership of Certain Information in response to this
Beneficial Owners and Management. Item is incorporated into this
Annual Report on Form 10-K by
reference to the section
entitled "Security Ownership of
Management and Principal
Holders" in the Company's Proxy
Statement.
Item 13 Certain Relationships and Related Information in response to this
Transactions. Item is incorporated into this
Annual Report on Form 10-K by
reference to the section
entitled "Election of Directors
and Related Matters" in the
Company's Proxy Statement.
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FIRST FINANCIAL CARIBBEAN CORPORATION
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................................................. 1
Item 2. Properties........................................................................................... 37
Item 3. Legal Proceedings.................................................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 38
Item 6. Selected Financial Data.............................................................................. 39
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 41
Item 8. Financial Statements and Supplementary Data.......................................................... 54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant................................................... 54
Item 11. Executive Compensation............................................................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 54
Item 13. Certain Relationships and Related Transactions....................................................... 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 54
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PART I
ITEM 1. BUSINESS
GENERAL.
First Financial Caribbean Corporation ("FFCC" or the "Company"), together
with its wholly-owned subsidiaries, is primarily engaged in a wide range of
mortgage banking activities, including the origination, servicing, purchase and
sale of mortgages on single-family residences, the issuance and sale of various
mortgage-backed securities, the holding and financing of mortgage loans and
mortgage-backed securities for sale or investment, the purchase and sale of
servicing rights associated with such mortgage loans and, to a lesser extent,
the origination of construction loans and loans secured by commercial real
estate (the "Mortgage Banking Business"). FFCC is the leading mortgage banking
institution in Puerto Rico in terms of the volume of origination of first
mortgage loans on single family residences. During 1996, the Company issued
$373 million of GNMA mortgage-backed securities to rank No.1 in Puerto Rico and
No. 34 in the United States in such issuances according to the "Mortgage
Marketplace". The Company's Mortgage Banking Business is principally conducted
through two operating units: Doral Mortgage Corporation ("Doral Mortgage"), a
wholly-owned subsidiary of the Company, and HF Mortgage Bankers Division ("HF
Division"), a division of the Company. The Company is also engaged in the
savings and loan business through Doral Federal Savings Bank ("Doral Federal"),
a federal savings and loan association which was acquired by FFCC in September
1993 and in the securities business through AAA Financial Services, Inc., a new
broker-dealer subsidiary that was established in September 1996. References
herein to the "Company" or "FFCC" shall be deemed to refer to the Company and
its consolidated subsidiaries, unless the context requires otherwise.
The Company is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), an approved issuer for the Government National Mortgage Association
("GNMA") and an approved servicer under the GNMA, FNMA and FHLMC
mortgage-backed securities programs. FFCC is also qualified to originate
mortgage loans insured by the Federal Housing Administration ("FHA") and
guaranteed by the Veterans Administration ("VA"). Prior to the acquisition of
Doral Federal , substantially all of the Company's revenues were derived from
its Mortgage Banking Business.
Substantially all of the Company's business is conducted in Puerto Rico.
The Mortgage Banking Business is currently is conducted in Puerto Rico through
19 branches, 15 of which are operated by Doral Mortgage, 3 by HF Division and 1
by Centro Hipotecario, Inc., a wholly-owned mortgage banking subsidiary.
Since 1992, Doral Mortgage has also maintained branch offices in Orlando and
Miami, Florida. The Florida offices are staffed by seven employees and
originated approximately $9 million and $11 million in mortgage loans during
and the years ended December 31, 1996 and 1995, respectively.
The Company's strategy is to increase its volume of loan originations and
servicing portfolio as well as to maximize net interest income. The Company
seeks to increase its volume of loan originations by emphasizing quality
customer service and maintaining the most extensive system of branch offices of
any mortgage banking institution in Puerto Rico. The Company strives to increase
its servicing portfolio by relying primarily on internal loan originations and
supplementing such originations with wholesale purchases of loans and mortgage
servicing rights from third parties. The Company has traditionally emphasized
the origination of 15-year and 30-year conventional and FHA-insured or
VA-guaranteed mortgage loans on single-family residences. The Company relies on
net interest income for a more significant portion of its earnings than mortgage
banking companies generally do. The Company seeks to maximize net interest
income by holding mortgage-backed securities,
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primarily GNMA securities, for longer periods prior to sale than most mortgage
banking companies. This strategy has the effect of reducing the Company's
overall effective tax rate because the interest on GNMA securities backed by
Puerto Rico mortgages is tax exempt under Puerto Rico law. For information
regarding a proposal to repeal such tax exemption, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Recent
Developments-Possible Changes in Favorable Puerto Rico Tax Laws" herein. The
Company also seeks to increase net interest income by funding and holding for
investment through Doral Federal mortgage loans and mortgage-backed securities.
The Company's thrift subsidiary, Doral Federal, currently operates through
two branches in the San Juan metropolitan area, which serve primarily as
deposit-taking operations. Three additional branches are scheduled to open in
the San Juan Metropolitan area during the first half of 1997. To date, most
loans have been originated pursuant to a Master Loan Production Agreement with
the Company. See "Other Lending and Investment Activities -- Lending Activities
of Doral Federal and Real Estate Owned" herein. Doral Federal has experienced
rapid growth since its acquisition by the Company, increasing from $13.1
million in assets as of September 10, 1993 to $281 million in assets as of
December 31, 1996. To date, this growth has been funded primarily through
increases in certificate of deposit accounts and non-interest bearing deposits
consisting primarily of corporate and custodial accounts. As of December 31,
1996, Doral Federal had total deposits and net worth of $187 million and $23.6
million, respectively. Custodial accounts associated with the Company's
servicing portfolio, commercial demand deposit accounts of the Company and
certificates of deposits accounts constituted approximately 16%, 15% and 53%,
respectively, of Doral Federal's total deposit accounts. The Company intends to
commit substantial management and financial resources to continue to increase
the assets, deposit base and branch network of Doral Federal.
During the third quarter of 1996, the Company's new broker-dealer
subsidiary, AAA Financial, became operational. AAA Financial operates through
a single branch in the San Juan metropolitan area and employed 16 persons as of
December 31, 1996. While AAA Financial engages in a general securities
business, it currently emphasizes the sale of Puerto Rico tax-exempt GNMA
securities and other Puerto Rican securities.
The business and profitability of FFCC depend, to a large degree, on its
ability to sell mortgage loans to investors in the secondary mortgage market at
prices that are higher than the prices at which FFCC originates or purchases
such loans. The growth of the secondary mortgage market is attributable in
large part to programs maintained by the FNMA, FHLMC and GNMA. In addition,
part of the Company's business is affected significantly by the continuation of
various programs administered by the FHA for the United States Department of
Housing and Urban Development ("HUD"), which insures mortgage loans, and the
VA, which partially guarantees mortgage loans. Any discontinuation of, or
significant reduction in, the various programs administered by FNMA, FHLMC,
GNMA, FHA or VA could have a material adverse effect on the Company's
operations. See "-- Mortgage Banking Business -- Sale of Loans; Issuance of
Mortgage Backed Securities" herein.
The Company is subject to the rules and regulations of, and supervision
by, several Federal and Puerto Rico entities, including the Office of
Thrift Supervision (the "OTS"), FNMA, FHLMC, GNMA, FHA, VA, HUD and the Office
of the Commissioner of Financial Institutions of Puerto Rico (the "Office of the
Commissioner"), with respect to, among other things, licensing requirements,
establishment of maximum interest rates, required disclosure to customers and
the origination, processing, underwriting, selling and securitizing of mortgage
loans. See "Regulation" herein. Doral Federal's operations are subject to
regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
AAA Financial's operations are subject to regulation by the Securities and
Exchange Commission (the "SEC"), the office of the Commissioner and the National
Association of Securities Dealers, Inc. (the "NASD"). FFCC's operations in the
state of Florida are subject to supervision by the Florida
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Department of Banking and Finance. In addition, the Company's operations
are affected by Federal and Puerto Rico laws and regulations designed to promote
economic development in Puerto Rico. See "--Mortgage Banking Business -- Puerto
Rico Secondary Mortgage Market and Favorable Tax Treatment" herein.
MORTGAGE BANKING BUSINESS
Loan Origination and Purchase of Mortgages. FFCC has the most extensive
system of branch offices for originating mortgage loans of any mortgage banking
institution in Puerto Rico. HF Division operates three branches in the San Juan
Metropolitan area. Doral Mortgage operates 15 branches throughout Puerto Rico
and two small branch offices in the State of Florida. Centro Hipotecario, Inc.,
a wholly-owned subsidiary of the Company, operates an additional branch in the
San Juan metropolitan area.
FFCC originates both (a) conventional mortgages on single-family
residences, which generally (i) are insured by private mortgage insurers or
(ii) do not exceed 80% of the appraised value of the mortgaged property, and
(b) mortgage loans secured by single-family residences guaranteed by the VA
("VA loans") or insured by HUD ("FHA loans"). VA loans and FHA loans qualify
for inclusion in the mortgage-backed securities program sponsored by GNMA. A
portion of the conventional loans are conforming loans which qualify for
inclusion in guarantee programs sponsored by FNMA or FHLMC. The Company also
originates construction loans for owner-occupied single-family residences and
other real estate developments and mortgage loans on commercial properties.
Construction loans and mortgage loans on commercial properties constituted
approximately 3% and 1% of the total dollar volume of loans originated and
purchased by the Company for the years ended December 31, 1996, and 1995,
respectively.
While the Company makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all the loans are fixed rate
mortgages. According to applicable VA guidelines, the maximum amount of a VA
loan originated in Puerto Rico is currently $230,000. Pursuant to applicable
FHA guidelines, the maximum amount of a FHA loan ranges from $78,660 to
$152,000, depending on the municipality where the mortgaged property is
located. The average loan size for FHA/VA mortgage loans and conventional
mortgage loans was approximately $70,300 and $46,700, respectively, for the
year ended December 31, 1996.
The Company also offers second mortgages. During 1996, second mortgages
constituted approximately 4% of the total loans originated by the Company. The
maximum loan-to-appraised value ratio on second mortgages permitted by the
Company is 80% (including the amount of any first mortgage).
Commencing in 1995, the Company made a strategic decision to increase its
offering of home equity or personal loans secured by mortgages up to $40,000.
These loans are generally made for debt consolidation, home improvements,
refinancing or other personal credit needs. These loans are generally secured
by first or second mortgages on single-family residences, are payable within
five to ten years and provide for higher interest rates than typical
conventional mortgages. During the years ended December 31, 1996 and 1995, the
Company originated approximately $74 million and $10 million of such loans,
respectively.
Loan origination activities performed by FFCC include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined for
compliance with underwriting criteria and, if all requirements are met, FFCC
issues a commitment to the
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prospective borrower specifying the amount of the loan and the loan
origination fees, discount points and closing costs to be paid by the borrower
or seller and the date on which the commitment expires.
The Company's strategy is to increase its servicing portfolio primarily
through internal originations through its branch network. FFCC, however, also
purchases FHA loans and VA loans from other mortgage bankers for resale to
institutional investors in the form of GNMA securities. The amount of loans
purchased from third parties was approximately $63 million, $77 million, $63
million, $1 million and $29 million, and for the years ended December 31, 1996,
1995, 1994, 1993, and 1992, respectively. All loans purchased consisted of FHA
and VA loans.
In addition to loan originations through its retail branch network and
purchases from third parties, the Company originates mortgage loans referred to
it by approved mortgage brokers. The mortgage broker receives a fee payable at
closing by the borrower for its services. Approximately $34 million and
$10 million of mortgage loans were originated through mortgage brokers for the
years ended December 31, 1996, and 1995, respectively. Purchases of loans from
other mortgage bankers in the wholesale loan market as well as origination of
mortgage loans through loan brokers provides the Company with a source of low
cost production that allows the Company to efficiently increase the size of its
servicing portfolio.
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The following table sets forth the number and dollar amount of the
Company's mortgage loan originations for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ----------- ----------
(Dollars in thousands, except average initial loan balance)
FHA/VA LOANS:(1)
Number of Loans..................... 4,362 4,016 7,037 8,364 3,224
Volume of Loans..................... $306,753 $267,909 $433,748 $ 532,654 $207,239
Percent of Total Volume............. 41% 48% 57% 37% 30%
CONVENTIONAL AND OTHER
LOANS:(2)
Number of Loans..................... 9,575 5,059 6,285 12,658 7,637
Volume of Loans..................... $446,957 $291,537 $326,698 $ 899,794 $486,484
Percent of Total Volume............. 59% 52% 43% 63% 70%
TOTAL LOANS:
Number of Loans(3).................. 13,937 9,075 13,322 21,022 10,861
Volume of Loans(4).................. $753,710 $559,446 $760,446 $1,432,448 $693,723
AVERAGE INITIAL LOAN
BALANCE:
FHA/VA Loans........................ $ 70,300 $ 66,700 $ 61,600 $ 63,700 $ 64,300
Conventional and other
Loans(2)............................ $ 46,700 $ 57,600 $ 52,000 $ 71,100 $ 63,700
REFINANCING(5)...................... 47% 41% 59% 80% 67%
(1) Excludes $63 million, $77 million, $63 million, $1 million and 29
million, respectively, of loans purchased from third parties, for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992.
(2) Includes second mortgage loans and non-conforming loans (conventional
loans that do not qualify for inclusion in the guarantee programs
sponsored by FNMA or FHLMC).
(3) Includes 2,044, 834, 898 and 61, of loans funded by Doral Federal
pursuant to the Master Loan Production Agreement for the years ended
December 31, 1996, 1995, 1994 and 1993, respectively. See "-- Other
Lending and Investment Activities -- Lending Activities of Doral Federal
and Real Estate Owned" herein.
(4) Includes $98.7 million $52.3 million, $26.3 million and $4.9 million,
principal amount of loans funded by Doral Federal pursuant to the Master
Loan Production Agreement for the years ended December 31, 1996, 1995,
1994 and 1993, respectively. See "-- Other Lending and Investment
Activities -- Lending Activities of Doral Federal and Real Estate Owned"
herein.
(5) As a percentage of the total dollar volume of loans originated.
A substantial proportion of the Company's total mortgage loan originations
consistently been comprised of refinancing loans. Demand for refinancing
loans has traditionally been high in Puerto Rico because this product is often
used as a vehicle for debt consolidation. For the years ended December 31, 1996,
1995 and 1994, refinancing activity represented approximately 47%, 41% and 59%,
respectively, of the Company's total dollar volume of mortgage loans originated.
The decrease in refinancing activity during 1994 compared to 1993 was due to the
rise in interest rates experienced during the second half of 1994. The continued
decrease in refinancing loans during 1995 reflected the continued weakness in
demand for this product following the unusually high refinance activity
experienced during 1993. A significant future increase in mortgage interest
rates in Puerto Rico could adversely affect the Company's business if it results
in a significant decrease in refinancing of first mortgage loans. In recent
years, the Company, primarily through its HF Division, has increased relations
with realtors and developers in order to increase home purchase loan
originations, particularly in new residential developments. Mortgage loans to
finance the acquisition of new residential units increased 63% during 1996
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from $84 million to $136 million and represented 17% total mortgage loan
originations for 1996 compared to 13% for 1995. The Company believes that by
increasing its home purchase originations it may offset, in part, the adverse
effects that increasing interest rates or lower demand for refinancing loans
could have on overall mortgage loan production.
For the years ended December 31, 1996, 1995 and 1994, non-conforming
conventional loans represented approximately 31%, 45% and 28%, respectively, of
the Company's total volume of mortgage loans originated.
All loan originations, regardless of whether originated through the retail
network, obtained through mortgage brokers or purchased from third parties,
must be underwritten in accordance with the Company's underwriting criteria,
including loan-to-value ratios, borrower income qualifications, debt ratios and
credit history, investor requirements, and insurance and property appraisal
requirements. The Company's underwriting standards also comply with the
relevant guidelines set forth by HUD, VA, FNMA, FHLMC, federal savings and loan
regulatory authorities, private mortgage investment conduits and private
mortgage insurers, as applicable. The Company's underwriting personnel, while
operating out of loan offices, make underwriting decisions independent of the
Company's mortgage loan origination personnel. Under the Company's quality
control plan, the Company reverifies a portion of the mortgage loans funded
each month, to provide reasonable assurance that the Company's underwriting
standards have been satisfied. The selection of mortgage loans for
reverification is done on a sampling basis to provide quality control coverage
for all mortgage loan programs and appraisers. In addition, the Company
reconfirms employment status, the source of down payment and other key items.
Typically, when a mortgage loan is originated through the Company's retail
branches, the borrower is required to pay an origination fee to the Company.
These fees range up to 6% of the principal amount of the mortgage loan, and are
payable at the closing of such loan. The Company may also charge discount
points depending upon market conditions and regulatory considerations as well
as the Company's objectives concerning mortgage loan origination volume and
pricing. The Company incurs certain costs in originating mortgage loans,
including overhead, out-of-pocket costs and, in some cases, where the mortgage
loans are subject to a purchase commitment from private investors, related
commitment fees. The volume and type of mortgage loans and of commitments made
by investors vary with competitive and economic conditions, resulting in
fluctuations in revenues from mortgage loan originations. Generally Accepted
Accounting Principles ("GAAP") require that general operating expenses incurred
in originating mortgage loans be charged to current expense. Direct origination
costs and origination income must be deferred and amortized using the interest
method, until the repayment or sale of the related mortgage loans.
Loan Servicing. The Company's principal source of servicing rights is
mortgage loan originations. When FFCC sells the mortgage loans it has
originated or purchased, it generally retains the rights to service such loans
and receives the related servicing fees. Loan servicing includes collecting
principal and interest and remitting the same to the holders of the mortgage
loans or mortgage-backed securities to which such mortgage loan relates, holding
escrow funds for the payment of real estate taxes and insurance premiums,
contacting delinquent borrowers, supervising foreclosures in the event of
unremedied defaults and generally administering the loans. FFCC receives annual
loan servicing fees ranging from 0.25% to 0.50% of the declining principal
amount of the loans serviced plus any late charges. During 1996, the weighted
average servicing fee for the Company's servicing portfolio was approximately
.39%. In general, FFCC's servicing agreements are terminable by the investor
for cause. With respect to all mortgage loans funded by Doral Federal after
October 1, 1995, Doral Federal may terminate the Company's servicing rights
without cause upon notice to the Company.
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Servicing rights represent a contractual right and not a beneficial
ownership interest in the underlying mortgage loans. Failure to service the
loans in accordance with contract requirements may lead to a termination of the
servicing rights and the loss of future servicing fees. There has been no
termination of servicing rights by any mortgage loan owners because of the
failure by the Company to service in accordance with its contractual
obligations.
At December 31, 1996 and 1995, approximately $256.6 million and $267.5
million, respectively, or 8% and 10%, respectively, of the Company's total
servicing portfolio consisted of mortgage loans securitized by the Company and
sold to grantor trusts or other mortgage conduits such as REMICs. The insurance
company insuring the senior certificates issued by such grantor trusts and
other conduits may terminate the Company's servicing rights if, among other
things: (i) the Company becomes ineligible or losses its rights as an approved
servicer for GNMA, FNMA or FHLMC; (ii) the number of loans included in the
trusts which are delinquent 90 days or more (including properties acquired upon
foreclosure) exceeds 8% of the aggregate outstanding principal balance of the
mortgage loans included in the trusts; (iii) realized losses with respect to
mortgage loans included in the trusts exceed certain thresholds on an annual
basis (1% of the outstanding balance of mortgage loans) and on a cumulative
basis over various periods of time (ranging from 0.45% to 4.00% of the original
principal balance of loans in the trusts).
The Company's mortgage loan servicing portfolio is subject to reduction by
reason of normal amortization, prepayments and foreclosure of outstanding
mortgage loans. Additionally, the Company may sell mortgage loan servicing
rights from time to time to other institutions if market conditions are
favorable.
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The following table sets forth certain information regarding the total
loan servicing portfolio of FFCC for the periods indicated:
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA Mortgage Loans.......... $1,305,792 $1,117,296 $1,062,108 $ 955,624 $ 851,853
Conventional and Other
Mortgage Loans(1).................. 1,762,690 1,550,964 1,581,418 1,420,031 885,571
---------- ---------- ---------- ---------- ----------
Total Servicing Portfolio......... $3,068,482 $2,668,260 $2,643,526 $2,375,655 $1,737,424
========== ========== ========== ========== ==========
BEGINNING SERVICING PORTFOLIO...... $2,668,260 $2,643,526 $2,375,655 $1,737,424 $1,413,006
ADD:
Loans Funded and Purchased(2)...... 816,566 678,330 823,834 1,433,448 722,723
LESS:
Servicing Sales Transferred........ 102,000 310,000 202,000 198,700 53,400
Run-off(3)......................... 314,344 343,596 353,963 596,517 344,905
---------- ---------- ---------- ---------- ----------
ENDING SERVICING PORTFOLIO......... $3,068,482 $2,668,260 $2,643,526 $2,375,655 $1,737,424
========== ========== ========== ========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of Loans.................... 62,199 54,993 52,515 48,272 39,562
Weighted Average Interest Rate..... 8.53% 8.43% 8.21% 8.15% 9.09%
Weighted Average Maturity (months). 221 181 192 226 204
Weighted Average Servicing Fee Rate .3933 .3831 .3945 .4195 .4040
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD
END:(4)
60-89 days past due................ 1.77% 1.78% 1.53% 1.49% 1.39%
90 days or more past due........... 2.18% 2.22% 1.48% 1.62% 1.55%
---------- ---------- ---------- ---------- ----------
Total delinquencies................ 3.91% 4.00% 3.01% 3.11% 2.94%
========== ========== ========== ========== ==========
Foreclosures Pending............... 1.12% 1.04% 1.19% 1.21% 1.44%
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(1) Includes $152.3 million, $73.7 million, $26 million and $4.7 million of
loans serviced for Doral Federal for the years ended December 31, 1996,
1995, 1994 and 1993, respectively, which represented 4.96%, 2.76%, 0.98%
and 0.20% of the total servicing portfolio as of such date.
(2) Loans funded and purchased represent that portion of loans originated or
purchased with respect to which the servicing rights were retained by the
Company. For 1995 and 1991, there is also included $42.3 million and $49.2
million, respectively, of servicing rights acquired in bulk from third
parties.
(3) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(4) Expressed as a percentage of the total number of loans serviced.
Substantially all of the mortgage loans in the Company's servicing
portfolio are secured by single (one-to-four) family residences. Substantially
all of FFCC's mortgage servicing portfolio is composed of mortgages secured by
real estate in Puerto Rico. At December 31, 1996 and 1995, less than 2% of the
Company's mortgage servicing portfolio related to mortgages secured by real
property outside Puerto Rico (all of which were secured by real property
located in the State of Florida).
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The amount of principal prepayments on mortgage loans serviced by the
Company was $201 million, $160 million and $281 million for the years ended
December 31, 1996, 1995 and 1994, respectively. This represented approximately
7%, 6% and 11% of the aggregate principal amount of mortgage loans serviced
during such periods and the average size of the loans prepaid were $35,360,
$37,800 and $41,800, respectively. Principal prepayments remained stable during
1996 as compared to 1995. Principal prepayments declined during 1995 and 1994
as a result of decreased refinancing activity following the refinance boom of
1993. The primary means used by the Company to reduce the sensitivity of its
servicing fee income to changes in interest and prepayment rates is the
maintenance of a strong internal origination capability that has allowed the
Company to continue to increase the size of its servicing portfolio even in
times of high prepayments.
Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA, and certain other investors, require FFCC to advance
funds to make scheduled payments of principal, interest, taxes and insurance,
if such payments have not been received from the borrowers. During the years
ended December 31, 1996 and 1995, the monthly average amount of funds advanced
by FFCC under such servicing agreements was approximately $6.3 million and $4.7
million, respectively. Funds advanced by FFCC pursuant to these arrangements
are generally recovered by FFCC within 30 days.
The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share credit risk with the owner of the
mortgage loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on
recourse servicing occur primarily when foreclosure sale proceeds of the
property underlying a defaulted mortgage are less than the then outstanding
principal balance and accrued interest of such mortgage loan and the cost of
holding and disposing of such underlying property. At December 31, 1996, 1995
and 1994, the Company was servicing mortgage loans with an aggregate principal
amount of $74 million, $85 million and $112 million, respectively, on a
recourse basis. During the last five years, losses incurred due to recourse
servicing have not been material.
In the ordinary course of business, the Company makes certain
representations and warranties to purchasers and insurers of mortgage loans and
to the purchasers of servicing rights. In connection with any purchases by the
Company of servicing rights, the Company is also exposed to liability as a
successor to third party originators' representations and warranties. If a loan
defaults and there has been a breach of representations and warranties, the
Company may become liable for the unpaid principal and interest on defaulted
loans. In such a case, the Company may be required to repurchase the mortgage
loan and bear any subsequent loss on the mortgage loan. During 1996, 1995, and
1994, the impact of loans repurchased as a result of borrower
misrepresentations was not material.
FFCC's servicing rights provide a significant continuing source of income
for FFCC. There is a market in Puerto Rico for servicing rights, which
are generally valued in relation to the present value of the expected income
stream generated by the servicing rights. Among the factors which influence the
value of a servicing portfolio are servicing fee rates, loan balances, loan
types, loan interest rates, expected average life of underlying loans (which may
be reduced through foreclosure or prepayment), the value of escrow balances,
delinquency and foreclosure experience, servicing costs, servicing termination
rights of permanent investors, and any recourse provisions. During the years
ended December 31, 1996, 1995 and 1994 , FFCC sold servicing rights on $102
million, $310 million and $202 million, respectively, of mortgage loans. While
the Company's general strategy is to increase the size of its servicing
portfolio by retaining the servicing rights related to the mortgage loans it
originates and
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purchases, FFCC may from time to time sell additional portions of its
servicing portfolio when market conditions are favorable.
The market value of, and earnings from, the Company's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates
decline and mortgage loan prepayments increase. In a period of declining
interest rates and accelerated prepayments, servicing income generated from the
Company's mortgage loan servicing portfolio may also decline through increased
amortization and the recognition of impairment of servicing rights. Conversely,
as mortgage interest rates increase, the market value of the Company's mortgage
loan servicing portfolio may be positively affected. Increases in the rate of
delinquencies and foreclosures on mortgage loans tend to increase the costs
associated with administering mortgage loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Interest Rate
Fluctuations" herein.
HRU, Inc. provides mailing and electronic data processing services for
FFCC's mortgage servicing and earns fees from FFCC based on the volume of
mortgage loans serviced. Such fees are determined at fair market value and
amounted to approximately $900,000, $860,000, and $726,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. FFCC owns 33% of HRU, Inc.
Foreclosure Experience and Real Estate Owned. While delinquency rates in
Puerto Rico are generally higher than in the mainland United States, these
rates are not necessarily indicative of future foreclosure rates or losses on
foreclosures. Moreover, because substantially all the mortgage loans in its
servicing portfolio are serviced on a non-recourse basis, foreclosure losses in
connection with the Company's Mortgage Banking Business are generally the
responsibility of the investors or insurer and not of the Company. Real estate
owned as a result of foreclosures ("REO") related to the Company's Mortgage
Banking Business arises primarily through foreclosure on mortgage loans
repurchased from investors either because of breach of representations or
warranties or pursuant to recourse arrangements. As of December 31, 1996, 1995
and 1994, FFCC held REO with a book value of approximately $2.2 million, $2.1
million and $2.1 million, respectively. Sales of REO resulted in net losses to
FFCC of approximately $305,000, $145,000, and $473,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. There is no liquid secondary
market for the sale of the Company's REO.
In addition to the REO held by the Company, a real estate partnership, in
which the Company owns a 15% interest and in which members of management are
investors, held REO with a book value of approximately $1.8 million as of
December 31, 1996. The REO was part of $4.7 million of REO that was sold by the
Company to the partnership in December 1990. Of the $4.7 million purchase
price, $600,000 was paid in cash and $4.1 million was paid in notes of the
partnership. The Company sold $2.8 million of such notes to a financial
institution with recourse to the Company. As of December 31, 1996, the unpaid
balance of the notes held by the Company was $1.8 million including $1.2
million of notes previously sold to financial institutions which were
repurchased during the year as a result of the recourse provision.
With respect to mortgage loans securitized through GNMA programs, the
Company is fully insured as to principal by the FHA against foreclosure
loss, while the VA guarantee is subject to a limitation which is generally equal
to 25% to 50% of the principal amount of the loan, up to a maximum ranging from
$22,500 to $50,750, depending upon the amount of the loan. As a result of these
programs, foreclosure on these loans had generated no loss of principal as of
December 31, 1996. FFCC, however, incurs about $2,200 per loan foreclosed in
interest and legal charges during the time between payment by FFCC and FHA or VA
reimbursement. For the years ended December 31, 1996, 1995 and 1994 total
expenses related to FHA or VA loans foreclosed amounted to $60,000, $75,000 and
$464,000, respectively. Although FNMA and FHLMC are obligated to reimburse the
Company for
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principal and interest payments advanced by the Company as a servicer
(except for recourse servicing), the funding of delinquent payments or the
exercise of foreclosure rights involves costs to the Company which may not be
recovered. Such nonrecovered expenses have been immaterial to date.
Any significant adverse economic developments in Puerto Rico, FFCC's
primary service area, could result in an increase in defaults or delinquencies
on mortgage loans that are serviced by FFCC or held by FFCC pending sale in the
secondary mortgage market, thereby reducing the resale value of such mortgage
loans and increasing the costs of administering loans.
Sale of Loans; Issuance of Mortgage-Backed Securities. FFCC customarily
sells most of the loans that it originates, except for those originated by
Doral Federal, which are generally held until maturity, utilizing different
sales channels described below. FFCC issues GNMA-guaranteed mortgage-backed
securities, which involve the packaging of FHA loans or VA loans into pools of
$1 million or more ($2.5 million to $5 million for serial notes) for sale
primarily to broker-dealers in Puerto Rico. During the years ended December 31,
1996 and 1995, FFCC issued approximately $373 million and $366 million,
respectively, in GNMA-guaranteed mortgage-backed securities.
Certain GNMA-guaranteed mortgage-backed securities sold by FFCC are in the
form of GNMA serial notes. GNMA serial notes are sold in pools of $2.5 million
to $5 million. Such pools are composed solely of FHA loans or VA loans
originated in Puerto Rico. GNMA securities issued under the serial note program
are structured into packages consisting of notes of different yields and
maturities, which range from 1 to 30 years and have an average maturity of 12
years, taking into account historical experience with prepayments of the
underlying mortgages. The rates on the serial notes or GNMA pools must be 1/2
of 1% less than the rates on the mortgages comprising the pool. Upon completion
of the necessary processing, the GNMA-guaranteed mortgage-backed securities are
offered to the public through securities broker-dealers. During the years ended
December 31, 1996 and 1995, FFCC issued GNMA serial notes totaling
approximately $317 million and $284 million, respectively.
Conforming conventional loans, other than those funded by Doral Federal
under the Master Loan Production Agreement, originated or purchased by FFCC are
either sold directly to FNMA, FHLMC or private investors for cash or are
grouped into pools of $1 million or more in aggregate principal balance and
exchanged for FNMA or FHLMC-issued mortgage-backed securities, which FFCC sells
to securities broker-dealers. In connection with any such exchanges, the
Company pays guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed
securities provides FFCC with flexibility in selling the mortgage loans that it
originates or purchases and also provides income by increasing the value and
marketability of such loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(so-called non-conforming loans) are sold to financial institutions or other
private investors or are securitized into "private label" mortgage-backed
securities through grantor trusts or other mortgage conduits that either are
organized by the Company or third parties and sold through broker-dealers. The
Company is generally able to originate non-conforming loans at higher interest
rates which permits the Company to earn higher revenues on the sale of such
loans through the recognition of excess servicing fees receivable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Revenues from Mortgage Loan Sales and Fees".
The securitization of non-conforming loans involves the creation of a
grantor trust or REMIC which issues mortgage-backed securities to investors.
These mortgage-backed securities normally consists of several classes of
senior, subordinate and residual certificates. The residual certificates
evidence a right to receive payments on the mortgage loans after payment of all
required amounts on the senior and subordinate certificates are made. To
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date, credit enhancement, in the form of an insurance policy and
subordination, has generally been used to increase the credit rating of the
senior certificates and thereby improve their marketability. During the years
ended December 31, 1996 and 1995, the Company securitized approximately $37
million and $75 million, respectively, aggregate principal amount of
non-conforming mortgage loans. Financial Security Assurance, Inc. ("FSA")
insured approximately $35 million and $70 million of senior certificates issued
in connection with such securitization transactions during and the years ended
December 31, 1996 and 1995, respectively. Subject to market conditions, the
Company contemplates entering into similar securitization transactions in the
future. As part of its arrangement with FSA, the Company has agreed to retain
and pledge to FSA the residual certificates issued by the respective trusts. The
Company also generally retains the subordinate certificates issued in such
transactions. As of December 31, 1996 and 1995, the Company held approximately
$14.6 million and $13.1 million, respectively, in subordinate certificates and
$7.7 million and $8.8 million, respectively, in residual certificates issued in
securitization transactions involving the Company. Currently a liquid secondary
market for subordinate or residual certificates does not exist in Puerto Rico.
The value of residual certificates represents the present value of expected
future distributions on such certificates over the life of the trusts and is
subject to substantial fluctuations as a result of changes in prevailing
interest rates.
The decision whether to sell non-conforming loans in bulk to local
financial institutions or to securitize such loans through mortgage conduits is
dependent on market conditions and the relative pricing and other terms of such
alternative sales channels. Similarly, the relative emphasis on the
origination of FHLMC and FNMA conforming loans versus FHA and VA loans and
non-conforming loans is dependent on market conditions, the relative pricing
and return on origination of the different types of mortgage loans and the
maximum loans amounts for the various types of loans.
While the Company's exchanges of mortgage loans into agency securities and
sales of mortgage loans are generally made on a non-recourse basis, the Company
also engages in the sale or exchange of mortgage loans on a recourse basis.
Recourse sales generally involve the sale of non-conforming loans to local
financial institutions. Recourse obligations have decreased in recent years, in
part due to the securitization of non-conforming loans into private label
mortgage-backed securities and increased sales channels that allow the Company
to sell non-conforming loans to investors on a non-recourse basis or a limited
recourse basis. The Company estimates the fair value of the retained recourse
obligation at the time mortgage loans are sold. The Company has not provided a
reserve or allowance for losses in the Company's financial statements for these
recourse obligations because the Company has historically been successful in
reselling repurchased loans for at least their carrying costs. Accordingly, as
of December 31, 1996, the Company did not deem it necessary to establish
reserves for possible losses related to recourse obligations. At December 31,
1996 and 1995, respectively, the Company's recourse obligations relating to its
mortgage servicing portfolio were approximately $74 million and $85 million,
respectively. Of these recourse obligations, approximately $14 million and $16
million, respectively, in principal amount consisted of loans sold to FNMA and
FHLMC or exchanged into securities of such agencies, and approximately $60
million and $69 million principal amount, respectively, consisted of
non-conforming loans sold to other private investors. At December 31, 1996,
existing commitments to sell loans to FHLMC aggregated $15 million and were on a
non-recourse basis.
In addition to the sale of the "private label" mortgage-backed securities
referred to above, the Company has, from time to time, sold mortgage-backed
securities in bulk to local broker-dealers or financial institutions. These
mortgage-backed securities are often converted into collateralized mortgage
obligations by the purchasers and sold in the local Puerto Rico market.
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From time to time, the Company may sell mortgage-backed securities subject
to put arrangements. Pursuant to these arrangements, the Company grants the
purchaser of the mortgage-backed securities a put option that grants the buyer
the right to sell, and obligates the Company to buy, the securities at a future
date at a negotiated price. Sales of securities with puts are accounted for as
sales or borrowings based on an assessment of the probability that the put
option will be exercised. If, on the transaction date, the Company determines
that it is probable that the put option will not be exercised, the transaction
is accounted for as a sale. Conversely, if it is determined that it is probable
that the put option will be exercised, the transaction will be accounted for as
a secured borrowing. As of December 31, 1996, the Company had outstanding $105
million in mortgage-backed securities sold subject to put arrangements, which
expire in varying amounts from January 1997 through April 1999, all of which
were accounted for as sales.
Market Interest Rates and Net Interest Income. A greater proportion of
the Company's net income has generally been composed of net interest income
than is typical of mortgage banking institutions in the mainland United States.
This is primarily due to the fact that the Company has traditionally held
FHA-VA mortgage loans and GNMA mortgage-backed securities for longer periods
prior to sale than mortgage banking institutions generally do, in order to
maximize the tax exempt interest income earned on such instruments. See
"Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment" herein.
For the years ended December 31, 1996 and 1995, the Company held mortgage loans
(including mortgage-backed securities) prior to sale for an average period of
259 days and 352 days, respectively. The decrease in the number of days
mortgage loans and mortgage-backed securities were held during 1996 was
primarily due to increased sales of mortgage loans and mortgage-backed
securities during the period.
Puerto Rico regulatory requirements and the operation of the GNMA serial
note program in Puerto Rico also tend to increase the period during which
mortgage loans are held prior to sale. In order to be able to fund the
origination of mortgage loans with tax-advantaged 936 Funds (see "Puerto Rico
Secondary Mortgage Market and Favorable Tax Treatment" below), mortgages
qualifying for favorable tax treatment must be segregated and separately funded
from non-qualifying mortgages. This requirement, together with the fact that
the GNMA serial note pools consist of a minimum of $2.5 million principal
amount of mortgage loans as compared to $1 million for other GNMA programs,
obligates the Company to hold mortgage loans and mortgage-backed securities for
longer periods prior to sale in order to assemble such pools.
Interest Rate Management. The Company's Mortgage Banking Business is
subject to the risk that future changes in interest rates may adversely affect
the value of the Company's portfolio of mortgage loans and mortgage-backed
securities. Interest rate fluctuations may also adversely affect the Company's
net interest income. FFCC attempts to minimize these risks through the use of
forward commitments and other hedging techniques. For a more detailed
discussion of such risks and the techniques used by the Company to attempt to
mitigate such risks see "Managements' Discussion and Analysis of Financial
Condition and Results of Operations -- Interest Rate Fluctuations," herein.
Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, the Puerto Rico secondary mortgage
market has historically benefitted from certain incentives provided by United
States and Puerto Rico tax laws. Section 936, which has historically provided
certain of these incentives, was repealed on August 20, 1996, subject to a
ten-year grandfather period discussed below.
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Under the various Puerto Rico Industrial Incentives Acts (the "Industrial
Incentives Acts"), certain investment income earned by qualified manufacturing
entities or service enterprises ("Exempt Companies") is exempt from Puerto Rico
income tax. The Industrial Incentive Acts also encourage investment in Puerto
Rico by allowing Exempt Companies to reduce the otherwise applicable 10% tax
(the "Tollgate Tax") on distributions to shareholders by investing their exempt
industrial development income ("IDI") in Puerto Rico for fixed periods of time,
generally from five years to ten years. Investment income that qualifies for
this exemption includes interest on certain mortgage loans and interest on
funds of Exempt Companies ("936 Funds") placed with eligible institutions in
Puerto Rico (primarily savings and loan associations, commercial banks and
registered broker-dealers), provided such funds are invested in certain
"eligible activities" as defined in regulations promulgated by the Office of
the Commissioner, including certain mortgage loans and mortgage-backed
securities and warehousing loans to finance the origination of mortgage loans.
Most Exempt Companies are United States corporations ("Section 936
Corporations") that meet certain requirements and have elected the benefits of
Section 936 of the Internal Revenue Code ("Section 936"). Section 936 has
historically permitted 936 Corporations to credit against their United States
corporate income tax a portion of such tax attributable to (i) income derived
from the active conduct of a trade or business within Puerto Rico or from the
sale or exchange of substantially all assets used in the active conduct of such
trade or business ("Active Business Income") and (ii) qualified possession
source investment income ("QPSII"). QPSII includes interest derived from
mortgage loans secured by real property located in Puerto Rico and
mortgage-backed securities consisting of such mortgage loans as well as
interest on deposits with financial institutions which in turn use such funds
to finance the origination of certain qualifying eligible activities that
include mortgage loans and other qualifying assets. In the past, the credit
provided by QPSII has favorably affected FFCC's net interest income by helping
create a pool of lower-cost funds that FFCC could access through financial
intermediaries such as banks and broker-dealers and use to fund mortgage loans
and mortgage-backed securities pending sale. The credit provided for QPSII also
tended to increase the demand for Puerto Rico mortgage loans and
mortgage-backed securities by providing incentives for 936 Corporations and
financial intermediaries to invest in certain mortgage loans and mortgage
backed securities originated in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 amended various provisions
of Section 936. The amendments (the "OBRA Amendments"), were generally
effective for taxable years beginning after December 31, 1993, and permitted a
taxpayer to compute the tax credit available under Section 936 (the "936
Credit") as under prior law but limited the amount of credit allowed with
respect to Active Business Income under one of two alternatives to be selected
at the option of the taxpayer. Under the first alternative, the limit was equal
to a fixed percentage of the amount of tax credit allowable under prior law (the
"Fixed Percentage Method"). This fixed percentage commenced at 60% for taxable
years beginning in 1994 and is reduced by 5% per year until 1998. For taxable
years beginning in 1998, such percentage would be 40%. Under the second
alternative (the "Economic Activity Method"), which is based on the amount of
economic activity conducted by the taxpayer in Puerto Rico, the credit could not
exceed the sum of the following three components: (i) 60% of the qualified
possession wages and the allocable fringe benefits paid by the taxpayer, (ii)
applicable percentages of certain depreciation deductions claimed for regular
tax purposes by the taxpayer with respect to qualified tangible property and
(iii) a portion of the possession income taxes paid by the taxpayer except where
the taxpayer uses the profit-split method for determining its income. The OBRA
Amendments did not limit the 100% credit available under Section 936 for QPSII.
On August 20, 1996, the Small Business Job Protection Act, which provides
for the repeal of Section 936, was signed into law. 936 Corporations that were
engaged in the active conduct of trade or business on October 13, 1995 and that
qualified for and elected the benefits of Section 936 for the corporation's
taxable year which
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includes such date will have the benefit of a ten-year grandfather rule.
Under the grandfather rule, the amount of Active Business Income eligible for
the 936 Credit is subject to certain caps similar to those introduced by the
OBRA Amendments that will vary depending upon whether the 936 Corporation
computed its 936 Credit under the Economic Activity Method (which was moved to a
new Section 30A of the Code) or under the Fixed Percentage Method. The credit
available for QPSII was not entitled to the benefit of the grandfather rule and
was eliminated with respect to amounts received or accrued for taxable years
commencing after December 31, 1995 but no earlier than July 1, 1996.
While the long-term impact of the repeal of Section 936 cannot be
determined at this time, the repeal of Section 936 could have an adverse effect
on the general economic condition of Puerto Rico, the Company's predominant
service area, by reducing incentives for investment in Puerto Rico. Any such
adverse effect on the general economy of Puerto Rico could lead to an increase
in mortgage delinquencies and a reduction in the level of residential
construction and demand for mortgage loans. The elimination of Section 936,
particularly the elimination of the credit for QPSII, could also lead to a
decrease in the amount of 936 Funds invested in Puerto Rico financial assets by
936 Corporations, including mortgage loans and mortgage-backed securities.
While the final magnitude of the impact of any such changes on the Company's
profitability or financial condition cannot be determined at this time,
management believes, based on recent experience, that the principal impact of
the loss of 936 Funds will be a moderate increase in the Company's funding
costs. The Company has taken steps to attempt to reduce the impact of any such
adverse changes by diversifying its sources of funding and identifying
additional investors for its mortgage products. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "--Funding" herein.
In addition to the foregoing incentives, interest derived from FHA loans
or VA loans secured by real property in Puerto Rico originated after June 30,
1983, and, under certain circumstances, on or before February 15, 1973, and
from GNMA certificates consisting of such mortgages, is exempt from Puerto Rico
income tax. FHA and VA mortgage loans are also exempt from Puerto Rico gift and
estate taxes. Individuals who are bona fide residents of Puerto Rico are also
not subject to United States federal income tax on income from Puerto Rico
sources, including interest income derived from mortgage loans originated in
Puerto Rico whose mortgagors are residents of Puerto Rico. The exemption for
interest earned on FHA loans, VA loans and GNMA certificates tends to increase
the demand for these products and the price the Company may obtain upon their
sale. From time to time, the government of Puerto Rico has examined whether the
existing tax exemption for FHA and VA loans and GNMA securities should be
modified or repealed. For a discussion of a pending proposal to eliminate the
tax exemption on FHA and VA loans, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments--Possible
changes in Favorable Puerto Rico Tax Laws."
Any change in Puerto Rico's political status could also result in the
elimination or modification of these tax benefits described above. See "The
Commonwealth of Puerto Rico -- Relationship of Puerto Rico with the
United States" for a description of legislation introduced into the United
States Congress regarding the holding of a referendum on the political status
of Puerto Rico.
OTHER LENDING AND INVESTMENT ACTIVITIES
Lending Activities of Doral Federal and Real Estate Owned. The Company,
through Doral Federal, originates for investment mortgage loans secured by
residential real estate, including personal loans up to $40,000 secured by
first or second mortgages. To a lesser extent, Doral Federal also originates
development and construction loans, commercial real estate loans and general
commercial loans. Prior to being acquired by the
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Company in September 1993, Doral Federal also engaged in unsecured
consumer and commercial lending and finance leases. During 1996 Doral Federal
commenced to offer unsecured consumer loans on a limited basis.
At December 31, 1996 and 1995, loans held for investment which were
originated as part of the Company's other lending activities through Doral
Federal, totaled $128.8 million and $51.4 million, respectively, and 81% and
72%, respectively, of such loans were secured by mortgages on owner-occupied
single-family residences. While Doral Federal has nationwide lending authority
as a federal savings association, substantially all of its loans are secured by
real property located in Puerto Rico. At December 31, 1996 and 1995, 98% and
99%, respectively, of the mortgage loans held for investment by Doral Federal
were secured by property located in Puerto Rico. At December 31, 1996, the
largest loan held for investment by Doral Federal was $645,000 and the maximum
aggregate amount of loans that Doral Federal could make to a single borrower
under OTS regulations was $3.5 million. The Company anticipates continued
growth in Doral Federal's portfolio of loans held for investment.
In addition to its portfolio of loans held for investment, Doral Federal
maintains a portfolio of mortgage loans held for sale consisting entirely of
first mortgage loans secured by residential properties. As of December 31,
1996 and 1995, Doral Federal held mortgage loans available for sale of $35.0
million and $31.7 million, respectively. Such mortgage loans are recorded in
the financial statements of the Company at the lower of cost or market value.
In connection with FFCC's acquisition of Doral Federal, Doral Federal
entered into a Master Loan Production Agreement with the Company whereby the
Company agreed to help the thrift meet its stated production goals by, among
other things, (1) advertising, promoting and marketing to the general public,
(2) interviewing prospective borrowers and conducting the initial processing of
loan applications, consistent with Doral Federal's underwriting guidelines, and
(3) providing personnel and facilities with respect to the execution of loan
agreements. In the future, Doral Federal may determine to engage in direct
mortgage loan originations through its branch network.
For mortgage loans originated prior to October 1, 1995, Doral Federal had
in effect a Master Purchase, Servicing and Collection Agreement (the "Master
Purchase Agreement") with the Company providing for the sale by Doral Federal
to the Company of the servicing rights to all first and second mortgage loans
secured by residential properties, all loans secured by commercial real estate,
all commercial business loans, consumer and any other loans secured by
mortgages and forming a part of Doral Federal's loan portfolio (the "Doral
Federal Loans"). The Master Purchase Agreement further provides that the
Company, exclusively, will service the Doral Federal Loans according to a fee
schedule contained in the Master Purchase Agreement. The fee schedule
provides that the purchase price of the servicing rights with respect to the
Doral Federal Loans is a percentage of the outstanding principal amount of such
Doral Federal Loans.
For Doral Federal Loans originated after October 1, 1995, the Master
Purchase Agreement was substituted with a Master Servicing and Collection
Agreement (the "Master Servicing Agreement") whereby Doral Federal will
contractually agree to service all Doral Federal Loans originated after the
date of the Master Servicing Agreement. Under the Master Servicing Agreement,
FFCC will not, however, purchase the intangible right to service such Doral
Federal Loans. The Company is entitled to receive a servicing fee ranging from
25 to 50 basis points of the outstanding principal amount of the Doral Federal
Loans being serviced. Doral Federal retains the right to terminate the
Company's servicing rights, without cause, upon notice to the Company.
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The following table sets forth certain information regarding the Company's
loans held for investment as part of its other lending activities through Doral
Federal as of the dates indicated:
DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1996 OF TOTAL 1995 OF TOTAL
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
Construction loans.......................... $ 2,793 2% $ 2,637 5%
Residential mortgage loans.................. 91,595 70 29,481 57
Commercial real estate...................... 18,462 14 9,205 18
Consumer -- Secured by mortgage............. 12,207 9 7,362 14
Consumer -- other........................... 356 (1) 324 (1)
Commercial (non-real estate)................ 2,047 2 702 1
Loans on Saving Deposits.................... 1,771 1 1,940 4
Land secured................................ 814 (1) 330 (1)
-------- --- ------- ---
Gross loans(2)(3).......................... 130,046 100% 51,980 100%
-------- -------
Less:
Unearned interest and deferred loan fees... (561) (383)
Allowance for loan losses.................. (719) (242)
-------- -------
(1,280) (625)
-------- -------
Loans receivable, Net(4)................... $128,766 $51,355
======== =======
(1) Less than one percent.
(2) Sum of the columns may not add up to the totals due to rounding.
(3) Excludes residential mortgage loans held for sale by Doral Federal of
$35.0 million and $31.7 million as of December 31, 1996 and 1995,
respectively.
(4) Net of deferred loan fees resulting from the sale of servicing rights to
affiliates which are eliminated in the preparation of the Company's
Consolidated Financial Statements.
Doral Federal originates adjustable and fixed interest rate loans.
However, given traditional consumer preferences in Puerto Rico for fixed rate
mortgage loans, Doral Federal's principal product, the Company does not
anticipate significant growth in adjustable rate mortgages. At December 31,
1996 and 1995 approximately 3% and 7%, respectively, of Doral Federal's loans
held for investment were adjustable rate loans. The adjustable rate loans have
interest rate adjustment limitations and are generally tied to the prime rate.
Future market factors may affect the correlation of the interest rate
adjustment with the rate Doral Federal pays on the short-term deposits that
have primarily funded these loans.
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The following information indicates as of December 31, 1996, with respect
to the Company's loans held for investment through Doral Federal, the time
periods during which fixed rates loans mature and adjustable rate loans
reprice:
FIXED RATE LOANS ADJUSTABLE RATE LOANS
---------------- ---------------------
BOOK BOOK
VALUE VALUE
----- TERM OF DATE OF -----
TERM TO MATURITY (IN THOUSANDS) RATE ADJUSTMENT (IN THOUSANDS)
---------------- --------------- ------------------------- --------------
(DOLLARS IN THOUSANDS)
1 month -- 1 year $ 3,349 1 month -- 1 year $3,808
1 year -- 3 years 2,011 Non-performing 188
3 years -- 5 years 6,030 ------
5 years -- 10 years 32,501 $3,996
10 years -- 20 years 44,897 ======
Over 20 years 35,722
Non-performing 1,540
--------
$126,050
========
Nonperforming Assets and Allowance for Loan Losses. Nonperforming assets
("NPAs") consist of loans on a non-accrual basis and other real estate owned.
Doral Federal's policy is to place all loans 90 days or more past due on
non-accrual basis, at which point a reserve for all unpaid interest previously
accrued is established. Interest income is recognized when the borrower makes a
payment, and the loan will return to an accrual basis when it is no longer 90
or more days delinquent and collectibility is reasonably assured. Mortgage
loans held for sale as part of the Company's Mortgage Banking Business are
normally only placed on a non-accrual basis upon commencement of foreclosure
proceedings (which normally occurs within six to eight months following
default). For the years ended December 31, 1996, 1995 and 1994, the Company
would have recognized $114,000, $211,000 and $287,000, respectively, in
additional interest income had all delinquent loans owned by the Company been
accounted for on an accrual basis. See "-- Regulation -- Savings and Loan
Operations -- Doral Federal -- Classification of Assets" for additional
information regarding classified assets of Doral Federal.
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The following table sets forth information with respect to the Company's
non-accrual loans, REO and other nonperforming assets as of December 31, 1996,
1995 and 1994.
DECEMBER 31,
-----------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
Mortgage Banking Business(1):
Non-accrual loans(2).................................. $ - $1,250 $4,260
Other real estate owned............................... 2,246 2,085 2,029
Other nonperforming assets(3)......................... 1,833 893 448
Other Lending Activities through Doral Federal(4):
Non-accrual loans..................................... 1,728 949 459
Other real estate owned............................... - -- 87
Total NPAs as a percentage of loans receivable, net...
and other real estate owned.......................... 1.3% 1.8% 1.6%
Ratio of allowance for loan receivables to
nonperforming loans.................................. 41.62% 25.50% 93.25%
(1) Includes mortgage loans held for sale and real estate owned related to
the Company's Mortgage Banking Business.
(2) Of the amounts shown $1.25 million and $2.9 million represented loans
that were required to be repurchased by a non-affiliated Puerto Rico
government institution at par on a non-recourse basis as of December 31,
1995 and 1994, respectively.
(3) This amount refers to a mortgage loan to a real estate partnership to
which the Company previously sold REO. This loan is included in
"Mortgage-backed securities and investments held to maturity" in the
Company's financial statements. See "-- Mortgage Banking Business --
Foreclosure Experience and Real Estate Owned."
(4) Includes mortgage loans and REO of Doral Federal.
The Mortgage Banking Business' other real estate owned arises primarily
through foreclosure on mortgage loans repurchased from investors, either
because of breach of representations or warranties or pursuant to recourse
arrangements. The Company believes that the value of the REO reflected on its
financial statements represents a reasonable estimate of the properties' fair
value, net of cost of sales. During the past five years, the impact of loans
repurchased as the result of breach of representations or warranties or
pursuant to recourse arrangements has not been material.
The provision for loan losses relating to loans held by Doral Federal was
$719,000 as of December 31, 1996 as compared to $242,000 as of December 31,
1995. The increase in the allowance was primarily the result of the increase in
the size of the loan portfolio and an increase in the amount of home equity and
consumer loans secured by mortgages for which Doral Federal provides a higher
allowance.
The percentage of the allowance for loan losses to nonperforming loans
held for investment will not remain constant due to the nature of Doral
Federal's portfolio of mortgage loans, which are primarily collateralized by
real estate. The collateral for each nonperforming mortgage loan is analyzed by
Doral Federal to determine potential loss exposure, and in conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan losses. On an on-going basis, management
monitors the loan portfolio and evaluates the adequacy of the allowance for loan
losses. In determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, known problem loans,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio. Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense and
credited to the allowance in amounts deemed appropriate by
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management based upon its evaluation of the known and inherent risks in
the loan portfolio. While management believes that the current allowance for
loan losses is sufficient, future additions to the allowance may be necessary.
The following table summarizes certain information regarding the Company's
allowance for loan losses related to loans held for investment by Doral Federal
and losses on other real estate owned for both Doral Federal and the Company's
Mortgage Banking Business for the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
REAL ESTATE HELD FOR SALE:
Balance at beginning of period....... $ 356 $ 356 $ 525
Provision for losses................. -- -- --
Losses charged to the allowance...... -- -- (169)
Other................................ -- -- --
------ ----- -----
Balance at end of period............. $ 356 $ 356 $ 356
===== ===== =====
ALLOWANCE FOR LOAN RECEIVABLES(1):
Balance at beginning of period....... $ 242 $ 428 $ 234
Provision for loan losses............ 655 110 168
Recoveries........................... 49 7 26
Losses charged to the allowance...... (227) (303) --
----- ----- -----
Balance at end of period............. $ 719 $ 242 $ 428
===== ===== =====
(1) Relates to loans held for investment by Doral Federal.
Other Investment Activities. As a result of the Company's mortgage
securitization activities, the Company maintains a substantial portfolio of
mortgage-backed securities held for trading. At December 31, 1996, the Company
held securities held for trading with a fair value of $411.4 million,
approximately $371.6 million of which consisted of GNMA and other tax-exempt
securities. These tax-exempt securities are generally held by the Company for
longer periods prior to sale in order to maximize the tax-exempt interest
received thereon.
As of December 31, 1996, the Company also held approximately $109.1
million of securities and other investments which are classified as held to
maturity because the Company had the intent and ability to hold these
securities until maturity. Of this amount, approximately $48.4 million were
held by Doral Federal. The $58.8 million in securities classified as held to
maturity included as part of the Company's Mortgage Banking Business consist of
tax exempt GNMA-backed collateralized mortgage obligations. The holding of
these securities until maturity is consistent with the Company's strategy to
maximize tax exempt interest income. The Company does not believe that the
holding of these securities will have an adverse effect on the liquidity of the
Company because it believes that it will be able to obtain continuous financing
for these securities under its existing credit facilities or pursuant to
deposits, in the case of securities owned by Doral Federal.
For information regarding the amortized cost, fair value, maturity dates
and aggregate gross unrealized holding gains and losses with respect to the
Company's mortgage-backed securities and other investments held to maturity,
refer to Note 7 to the Company's Consolidated Financial Statements included
elsewhere herein.
As of December 31, 1996, Doral Federal also held approximately $12.0
million in FNMA, FHLMC and GNMA mortgage-backed securities that are classified
as available for sale. For additional information regarding such securities
refer to Note 8 to the Company's Consolidated Financial Statements included
elsewhere herein.
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BROKER-DEALER ACTIVITIES
In September 1996, the Company's new broker-dealer subsidiary, AAA
Financial, commenced operations. While AAA Financial intends to engage in a
general securities business, it is currently emphasizing the sale of Puerto
Rico tax exempt GNMA securities and other Puerto Rican securities. AAA also
earns revenues in the form of net interest income form the operation of a
repurchase book operation. As of December 31, 1996, AAA Financial operated
from a single branch in the San Juan metropolitan area and employed 16 persons.
FUNDING
BORROWING ARRANGEMENTS RELATING TO MORTGAGE BANKING OPERATIONS. Except as
noted below with respect to GNMA securities, historically, a period of two to
four months has normally elapsed between the origination of a mortgage loan by
FFCC and its sale to permanent investors. The Company often holds GNMA
certificates for longer periods to take advantage of tax exempt interest income
on such certificates while conforming loans that qualify for the
mortgage-backed securities programs of FNMA and FHLC are normally sold within
60 days of origination.
Prior to issuance of GNMA or other mortgage-backed certificates, FFCC's
mortgage loans are funded almost entirely by borrowings under warehousing lines
of credit or other financing agreements, such as pre-sale, gestation facilities
and repurchase agreements, with financial institutions. FFCC's principal short
term facilities include a Syndicated Credit Agreement with Bankers Trust
Company and four other lending institutions (the "Syndicated Credit
Agreement"), warehousing lines of credit with three local commercial banks and
pre-sale, gestation or repurchase facilities with three affiliates of major
U.S. brokerage houses. Pre-sale or gestation facilities generally permit the
Company to obtain more favorable financing rates once mortgage loans been
assigned to a pool but prior to securitization. These facilities also generally
allow for the financing of mortgage-backed securities upon issuance. Typically,
FFCC finances between 90% and 95% of the principal amount of its mortgage loans
and secures advances under its lines of credit by pledging such loans and the
servicing agreements relating thereto to such banks or financial institutions,
a practice commonly referred to as "warehousing." The percentage of principal
amount will range from 90% for conventional mortgages (one bank will only lend
up to 80% of the principal amount of conventional mortgages) to 95% for FHA and
VA loans. FFCC pays interest on its lines of credit at floating rates which
vary with market conditions. The interest rates on these lines of credit have
been lower than the interest rates which FFCC earns on the mortgage loans
pledged to secure such financing. Amounts borrowed under lines of credit are
payable upon demand and, except in the case of gestation facilities, are
usually repaid after FFCC packages such mortgage loans into GNMA, FNMA or FHLMC
certificates and receives the proceeds from the sale of such certificates or
the financing of such securities under repurchase agreements. FFCC's
warehousing lines of credit are generally terminable at the discretion of the
lender.
FFCC also obtains short-term financing through repurchase agreements with
financial institutions and investment banking firms. Under these agreements,
FFCC sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed securities and, to a
lesser extent, private label mortgage-backed securities, and simultaneously
agrees to repurchase them at a future date at a fixed price. FFCC uses the
proceeds of such sales to repay borrowings under its bank warehousing lines of
credit. The effective cost of funds under repurchase agreements
is typically lower than the costs of funds borrowed under FFCC's warehousing
lines of credit. FFCC's continued use of repurchase agreements will depend upon
the cost of repurchase agreements relative to the cost of borrowing under lines
of credit from banks.
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Commencing in 1993, the Company made a strategic decision to diversify its
sources of funding and to obtain funding from sources outside of Puerto Rico.
As of December 31, 1996, the Company's credit facilities included three
pre-sale or gestation facilities with affiliates of major U.S. brokerage houses
and the Syndicated Credit Facility. Obtaining credit from financial
institutions located outside Puerto Rico generally permits the Company to
obtain larger lines of credit and reduces its dependence on funding available
in the local market.
As part of its strategy to continue to diversify its sources of funding,
FFCC entered into the Syndicated Credit Agreement on June 30, 1995. The
Syndicated Credit Agreement currently provides for credit facilities totaling
up to $110 million and expiring on June 27, 1997. The facilities include: (i)
a $100 million secured one-year revolving warehousing credit facility to
finance residential mortgage loans and mortgage-backed securities; (ii) a $7
million secured one-year revolving credit facility to provide financing for
receivables and working capital needs; and (iii) an additional $3 million
working capital facility. The amounts available under the Syndicated Credit
Agreement are subject to a borrowing base which consists of mortgage loans and
mortgage-backed securities for the first facility and receivables relating to
servicing advances and real estate owned for the second facility. A $17.7
million servicing secured facility previously outstanding under the Syndicated
Credit Agreement was paid in full in October 1996 from the proceeds of the
Company's Senior Notes discussed below.
During 1995, the Company also entered into a Debenture Purchase Agreement
dated September 25, 1995, as amended and restated as of December 15, 1995 (the
"Debenture Purchase Agreement") with BanPonce Corporation ("BanPonce") a bank
holding company headquartered in San Juan, Puerto Rico, providing for the
issuance and sale to BanPonce of up to $10,000,000 of Convertible Subordinated
Debentures in a private placement transaction. Approximately $6.6 million of
Convertible Subordinated Debentures were issued on September 25, 1995 and the
remaining $3.4 million were issued on December 22, 1995. The Convertible
Subordinated Debentures are convertible into shares of common stock at a
conversion price of $17.50 per share, subject to adjustment in certain events.
In order to facilitate the receipt of all required regulatory approvals,
approximately $1.8 million of the Convertible Subordinated Debentures are not
convertible into shares of Common Stock prior to January 1, 1999. The
Convertible Subordinated Debentures are subordinated to all existing and future
senior debt (as defined in the Debenture Purchase Agreement) of the Company. If
the entire $8.2 million of the Convertible Subordinated Debentures that are
immediately convertible into shares of Common Stock were converted, they would
equal 466,262 shares, or approximately 4.9% of the Company's total outstanding
shares of Common Stock as of March 7, 1997, as adjusted for the conversion of
such Convertible Subordinated Debentures. Under the terms of the Debenture
Purchase Agreement, BanPonce also obtained the right to acquire up to 200,000
additional shares of Common Stock at a price of $17.50 per share (subject to
adjustment in certain events) to the extent that the shares of Common Stock
issued or issuable upon conversion of all the Debentures (including the
Convertible Subordinated Debentures that are not immediately convertible)
represent less than 5% of the Company's fully diluted outstanding shares of
Common Stock.
On October 10, 1996, the Company issued $75,000,000 of its 7.84% Senior
Notes due 2006 (the "Senior Notes"). The Senior Notes were issued pursuant to
an Indenture entered into between the Company and Bankers Trust Company, as
trustee. The Senior Notes were sold in a public underwritten offering through
BT Securities Corporation. The net proceeds from the sale of the Senior Notes
were used to repay $17.7 million owed by the Company under a five-year senior
servicing secured loan facility under the Syndicated Credit Agreement, and for
general corporate purposes, including capital contributions to Doral Federal,
AAA Financial and other subsidiaries.
FUNDING ARRANGEMENTS RELATING TO SAVINGS AND LOAN OPERATIONS. Deposits
and borrowings, consisting of FHLB-NY advances and term notes, are the primary
sources of Doral Federal's funds for use in its lending,
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investment and other business activities. In addition, Doral Federal
obtains funds in the form of loan repayments and income from operations as well
as capital contributions from FFCC. FFCC made capital contributions of $5
million and $8.5 million in Doral Federal during 1996 and 1995, respectively.
Loan repayments are a relatively stable source of funds while net increase in
deposits are significantly influenced by general interest rates and money market
conditions.
Deposits have been the principal source of funds for Doral Federal's
lending activities. At December 31, 1996, Doral Federal held $187 million in
deposits at a weighted average interest rate cost of 3.80%. Doral Federal
offers passbook savings accounts, checking accounts, NOW accounts and fixed
interest rate certificate accounts with varying maturities. A substantial
portion of Doral Federal's deposits consist of non-interest bearing wholesale
deposit accounts such as corporate and custodial accounts. At December 31,
1996, $64.2 million or approximately 34% of Doral Federal's total deposits
consisted of non-interest bearing accounts. Approximately 90% of such amount
related to corporate and custodial accounts of the Company and its affiliates.
This amount includes approximately $28.3 million in corporate accounts of the
Company and its affiliates which are eliminated in the preparation of the
Company's Consolidated Financial Statements. Corporate accounts of the Company
as well as escrow and custodial accounts related to the Company's Mortgage
Banking Business represent a stable low cost funding source for Doral Federal.
For additional information regarding the characteristics of Doral Federal's
deposit accounts, refer to Note 19 of the Company's Consolidated Financial
Statements included elsewhere herein.
Doral Federal may also obtain funding through collateralized borrowings
directly from the Federal Home Loan Bank of New York (the "FHLB-NY") and
through borrowings secured by FHLB-NY letters of credit, up to a maximum of 30%
of total assets. Such advances or letter of credit reimbursement obligations
must be secured by qualifying assets with a market value of at least 110% of
the outstanding obligation. At December 31, 1996, Doral Federal had $15 million
in outstanding advances from the FHLB-NY at a weighted average interest rate
cost of 6.24%. For additional information regarding funding for Doral Federal
through the issuance of term notes secured by FHLB-NY letters of credit, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
From time to time, Doral Federal may also obtain funding through the use
of repurchase agreements with brokerage firms and other financial institutions.
As of December 31, 1996, Doral Federal did not have any outstanding borrowings
under repurchase agreements.
FUNDING ARRANGEMENTS RELATING TO BROKER-DEALER OPERATIONS
Since commencing operations in September 1996, AAA Financial's primary
sources of funding have been capital contributions from FFCC, repurchase
agreements with financial institutions and other institutional investors
involving marketable securities and cash flows from operations.
PUERTO RICO INCOME TAXES
FFCC is subject to Puerto Rico income taxes. On October 31, 1994, the
Government of Puerto Rico enacted a new comprehensive internal revenue act
known as the Puerto Rico Internal Revenue Code of 1994 (the "PRIRC"). Most
changes affecting corporations are effective for taxable years commencing after
June 30, 1995. While the PRIRC incorporates many of the provisions of the prior
tax law, it also provides for various amendments and changes from prior law.
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Among the most important changes introduced by the PRIRC were (i) a
reduction in the maximum marginal statutory corporate tax rate from 42% to 39%,
(ii) the elimination of the deduction for bad debt expense arising from the use
of the reserve method for bad debt reserve and the related prorated recapture
of the outstanding balance of the reserve existing as of June 30, 1995 over a
four year period and (iii) optional use of a new method of accelerated
depreciation for capital assets purchased during taxable years beginning after
June 30, 1995.
The Company is also subject to an alternative minimum tax of 22% on its
alternative minimum tax net income. In computing the Company's alternative
minimum tax net income its interest expense deduction will be reduced in the
same proportion that its exempt obligations (including FHA loans, VA loans and
GNMA securities) bear to its total assets. Therefore, to the extent that the
Company holds FHA loans or VA loans and other exempt obligations, it may be
subject to the payment of the 22% alternative minimum tax.
Under PRIRC, corporations are not permitted to file consolidated returns
with their subsidiaries and affiliates. Effective for taxable year commencing
after June 30, 1995, FFCC is entitled to a 100% dividend received deduction on
dividends received from Doral Mortgage or any other Puerto Rico corporation
subject to tax under PRIRC. No dividends received deduction is available for
dividends received from U.S. corporations such as Doral Federal. Effective July
1, 1995, the PRIRC also provided for the elimination of the existing 29%
withholding tax applicable on interest paid to non-resident corporations and
individuals as well as a reduction of the withholding tax applicable to
dividends payable to non-resident corporations and individuals from 25% to 10%.
UNITED STATES INCOME TAXES
FFCC and its subsidiaries, other than Doral Federal, are corporations
organized under the laws of Puerto Rico. Accordingly, FFCC and its
subsidiaries, other than Doral Federal, are subject generally to United States
income tax only on their income, if any, from sources within the United States.
Prior to 1992, the Company did not earn any income that was subject to United
States income tax. Doral Mortgage operates two branches in the State of
Florida. Accordingly, Doral Mortgage is subject to both Florida income and
franchise taxes and federal income tax on income effectively connected with the
conduct of the trade or business of these branches. In addition, the United
States may impose a branch profits tax of 30% in the event that profits from
the Florida branches are repatriated to Puerto Rico. Both the federal tax as
well as the branch profit tax may be claimed as a tax credit in Puerto Rico,
subject to certain limitations.
Doral Federal, as a federal savings association, is also subject to U.S.
income taxes. It will be entitled to a foreign tax credit for a portion
of income taxes paid to the Puerto Rico Treasury Department. Doral Federal has
also elected to qualify for the benefits provided under Section 936 which allows
an income tax credit for a portion of the U.S. income taxes attributable to the
earnings derived from sources within Puerto Rico. See "Mortgage Banking Business
- -- Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment" for a
description of Section 936. On February 24, 1997, Doral Federal filed an
application with Puerto Rico banking authorities for authority to convert its
banking charter to that of a Puerto Rico chartered commercial bank. See
"Regulations--Savings and Loan Operations--Proposed Charter Conversion of Doral
Federal and Related Regulatory Consequences to the Company." Following the
conversion of Doral Federal to a Puerto Rico commercial bank, it would be
subject to taxation in substantially the same manner as FFCC and the other
subsidiaries of the Company.
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EMPLOYEES
At December 31, 1996, FFCC employed 823 persons, of whom 413 were
administrative personnel, 130 were loan originators, 119 were involved in
processing of loan applications (including quality control auditors), 17 were
loan underwriters, 137 were involved in loan servicing activities and 7 engaged
in financial consulting activities. None of FFCC's employees is represented by
a labor union and FFCC considers its employee relations to be excellent.
REGULATION -- MORTGAGE BANKING BUSINESS
The Company's Mortgage Banking Business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing of mortgage loans and the issuance and sale
of mortgage-backed securities. Those rules and regulations, among other things,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts, and with respect to VA
loans, fix maximum interest rates. Moreover, lenders such as the Company are
required annually to submit to FNMA, FHA, FHLMC, GNMA, HUD and VA audited
financial statements, and each regulatory entity has its own financial
requirements. The Company's affairs are also subject to supervision and
examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at all times to assure
compliance with their applicable regulations, policies and procedures. Mortgage
origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination and require the disclosure of certain basic
information to mortgagors concerning credit terms and settlement costs. The
Company is also subject to regulation by the Office of the Commissioner, with
respect to, among other things, licensing requirements and establishment of
maximum interest rates on certain mortgage products. Although the Company
believes that it is in compliance in all material respects with applicable
Federal and Puerto Rico laws, rules and regulations, there can be no assurance
that more restrictive laws or rules will not be adopted in the future, which
could make compliance more difficult or expensive, restrict the Company's
ability to originate or sell mortgage loans or sell mortgage-backed securities,
further limit or restrict the amount of interest and other fees earned from the
origination of loans, or otherwise adversely affect the business or prospects
of the Company.
FFCC and each of its mortgage banking subsidiaries is licensed by the
Office of the Commissioner as a mortgage banking institution in Puerto Rico.
Such authorization to act as a mortgage banking institution must be renewed as
of January 1 of each year. In the past, FFCC has not had any difficulty in
renewing its authorization to act as a mortgage banking institution, and
management is unaware of any existing practices, conditions or violations which
would result in FFCC being unable to receive such authorization in the future.
FFCC operations in the State of Florida are subject to supervision by the
Florida Department of Banking and Finance.
Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the
"Mortgage Banking Law") requires the prior approval of the Office of the
Commissioner for the acquisition of control of any mortgage banking institution
licensed under the Mortgage Banking Law. For purposes of the Mortgage Banking
Law, the term "control" means the power to direct or influence decisively,
directly or indirectly, the management or policies of a mortgage banking
institution. The Mortgage Banking Law provides that a transaction that results
in the holding of less than 10% of the outstanding voting securities of a
mortgage banking institution shall not be considered a change of control.
Pursuant to Section 5 of the Mortgage Banking Law, upon receipt of notice of a
proposed transaction that may result in change of control, the Office of the
Commissioner is obligated to make such
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inquiries as he deems necessary to review the transaction. Under the
Mortgage Banking Law, the determination of the Office of the Commissioner
whether or not to authorize a proposed change of control is final and
non-appealable.
REGULATION -- SAVINGS AND LOAN OPERATIONS
The Company
As a result of the acquisition of Doral Federal in September 1993, FFCC
became a savings and loan holding company ("SLHC"), subject to the restrictions
and requirements of the Home Owners' Loan Act, as amended (the "HOLA"). FFCC is
registered as an SLHC with the Director (the "Director") of the OTS and is
subject to the various requirements of Sections 10 and 11 of the HOLA and the
regulations thereunder, including examination, supervision and reporting
requirements. Of particular importance, is the requirement that a subsidiary
savings association give the Director at least 30 days' advance notice of the
proposed declaration by its directors of dividends on its stock. Any such
dividend declared within the 30-day notice period, or declared without giving
such notice, is invalid. Payment of cash dividends by a savings association on
shares of its capital stock is also subject to the limitations on capital
distributions imposed by the OTS. See "Regulation -- Savings and Loan
Operations -- Doral Federal -- Dividends."
Federal law and OTS regulations place certain limits on the types of
activities in which a SLHC and its subsidiaries may engage. However, in
general, these activity restrictions do not apply to a holding company that
controls only one savings and loan association, provided such association meets
the "qualified thrift lender" test, which generally requires an association to
have 65% of its portfolio assets in "qualified thrift investments" for nine
months out of the immediately preceding 12 months. For Puerto Rico-based
institutions, these investments include, among other things, home mortgages,
mortgage-backed securities, and personal loans. In the event a SLHC's
subsidiary savings association does not hold sufficient "qualified thrift
assets" to meet the "qualified thrift lender test", a SLHC may be deemed for
regulatory purposes to become a bank holding company. In such event, a SLHC
would become subject to certain activity restrictions. In addition, any savings
association subsidiary would be subject to the activity and branching
restrictions applicable to national banks, including the application of the
statutes and regulations governing the payment of dividends by a national bank
in the same manner and to the same extent as though it were a national bank.
Under the National Bank Act, national banks are only permitted to pay dividends
out of "net profits" (as defined therein) subject to the requirement that a
certain portion of net profits must be carried periodically to the bank's
surplus fund until the surplus fund shall equal its common capital. Capital may
not be used to pay dividends. Doral Federal currently is in compliance with the
"qualified thrift lender" test and expects to continue to comply with this
requirement.
With certain specific exceptions, a SLHC is prohibited from acquiring more
than 5% of the "voting shares" of a savings association that is not a
subsidiary, or of another SLHC that is not a subsidiary. An association which
is a subsidiary of a SLHC is prohibited from or subject to restrictions upon
engaging in certain transactions involving its affiliates under the provisions
of Sections 23A and 23B of the Federal Reserve Act, which are made applicable
to savings associations under the HOLA. In general, the term "affiliate" with
respect to such subsidiary savings association would include the SLHC, its
subsidiaries and companies controlled by it, and would also include a bank
subsidiary of a savings association, but not a non-bank subsidiary thereof
(unless a contrary determination were made by the OTS pursuant to Section 23A
as to such non-bank subsidiary).
Because of the Company's status as a SLHC, owners of the Common Stock are
subject to certain restrictions and disclosure obligations under various
federal laws, including the Change in Bank Control Act (the "Control
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Act") and the Savings and Loan Holding Company Act (the "SLHCA").
Regulations pursuant to the Control Act and the SLHCA generally require prior
OTS approval for an acquisition of control of an insured institution (as
defined) or holding company thereof by any person (or persons acting in
concert). Control is deemed to exist if, among other things, a person (or
persons acting in concert) acquires more than 25% of any class of voting stock
of an insured institution or holding company thereof. Control is presumed to
exist subject to rebuttal, if a person (or persons acting in concert) acquires
more than 10% of any class of voting stock or 25% of any class of nonvoting
stock and is subject to any of the "control factors" set forth in such
regulations. The control factors relate, among other matters, to the percentage
of such company's debt or equity owned by the person (or persons acting in
concert), agreements giving the person (or persons acting in concert) influence
over a material aspect of the company's management or policies, and the number
of seats on the board of directors of the company held by the person (or persons
acting in concert). One of the "control factors" is a holder's status as one of
the two largest holders of any class of voting stock. The concept of acting in
concert is very broad and also is subject to certain rebuttable presumptions,
including among others, that relatives, business partners, management officials,
affiliates and others are presumed to be acting in concert with each other and
their businesses. This regulatory requirement may have the effect of
discouraging takeover attempts against the Company and may limit the ability of
persons, other than Company directors duly authorized by the Company's board of
directors, to solicit or exercise proxies, or otherwise exercise voting rights,
in connection with matters submitted to a vote of the Company's stockholders.
Doral Federal
General. Doral Federal is a federal savings association. Accordingly, its
investments, borrowing, lending, issuance of securities, establishment of
branch offices and all other aspects of its operation are subject to the
jurisdiction of the OTS.
As a creditor and financial institution, Doral Federal is subject to
certain regulations promulgated by the Federal Reserve Board including, without
limitations, Regulation B (Equal Credit Opportunity Act), Regulation DD (The
Truth in Savings Act), Regulation E (Electronic Funds Transfer Act), Regulation
F (Limits on Exposure to Other Banks), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), Regulation X (Real Estate
Settlement Procedures Act), Regulation BB (Community Reinvestment Act) and
Regulation C (Home Mortgage Disclosure Act). As a real property lender and as
owner of real property, including real estate owned pursuant to foreclosure,
financial institutions, including Doral Federal, may also be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
As an Eligible Depository Institution licensed to receive 936 Funds
directly from 936 Corporations, Doral Federal is subject to an annual license
renewal and certain regulations promulgated by the Office of the Commissioner.
The regulations are designed to require that 936 Funds received by Doral
Federal are channeled into investments that promote employment, production and
income in Puerto Rico.
Capital Requirements. Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") established capital standards for savings
associations, including three capital requirements: a "leverage ratio" or "core
capital requirement," a "tangible capital requirement" and a "risk-based
capital requirement." FIRREA required the Director to promulgate regulations to
prescribe and maintain uniform capital standards for all savings associations.
Pursuant to FIRREA, these capital standards must be no less stringent than the
capital standards applicable to national banks. Current capital requirements
are discussed below.
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An institution is required by statute to maintain tangible capital of not
less than 1.5% of adjusted total assets. "Tangible Capital" consists of core
capital less any intangible assets, plus a limited amount of mortgage
servicing rights ("MSR") valued in accordance with OTS regulations. Any MSR
over this limit would generally be deducted in calculating tangible capital.
The leverage ratio requires savings associations to maintain "core
capital" of not less than 3% of adjusted total assets. The Director has
proposed revisions to its capital regulations to provide that only those
savings associations rated a composite of 1 under the OTS MACRO rating system
will be permitted to operate at or near the minimum statutory requirements of
3% of adjusted total assets, while all other associations are required to meet
a minimum core capital requirement of at least 100 to 200 basis points above
the 3% minimum core capital requirement. In determining the amount of
additional capital required, the OTS has indicated that it assesses both the
quality of risk management systems and the level of overall risk in each
individual association. "Core capital" generally includes common stockholders'
equity (including retained earnings), non cumulative perpetual preferred stock
and any related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries. Intangible assets (other than MSR includable as
tangible capital and purchased credit card relationship) must be deducted from
core capital. At December 31, 1996, Doral Federal had approximately $343,000 of
intangible assets that were required to be deducted from core and tangible
capital. Excess servicing fees receivable ("ESFR") are not considered
intangibles and are therefore fully includable in capital calculations. Up to
50% of core capital may consist of mortgage servicing rights (both originated
and purchased) valued at the lower of 90% of fair market value or 100% of
remaining unamortized book value. Doral Federal did not have any MSR or ESFR
in its tangible or core capital at December 31, 1996.
The risk-based capital requirement provides that the book value of an
asset will be adjusted to reflect the degree of credit risk associated with
such asset. The risk-based capital guidelines require the maintenance of
capital against off-balance sheet items, including assets sold with recourse,
as well as assets that are reported on the institution's financial statements.
After determination of an association's qualifying total capital, total
risk-weighted assets are ascertained. Under these guidelines, an association's
balance sheet assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to one
of several broad risk categories, and the aggregate dollar amount of each
category is then multiplied by the risk weight associated with that category.
The resulting weighted values from each of the categories are then added
together to determine the total risk-weighted assets that comprise the
denominator of the risk-based capital ratio. The OTS regulations assign single
family residential mortgage loans and certain "qualifying multifamily mortgage
loans" to the fifty percent (50%) risk-weight category.
The risk-based capital requirement generally requires savings associations
to maintain "total capital" equal to 8% of risk-weighted assets. For purposes
of the risk-based capital requirement, "total capital" means core capital (as
described above) plus "supplementary capital" (as described below), provided
that the amount of supplementary capital may not exceed the amount of core
capital, less certain assets. Supplementary capital, includes, among other
things, general allowances for loan losses up to a maximum of 1.25% of
risk-weighted assets. Under the risk-based capital requirements, certain assets
must be excluded from total capital. At December 31, 1996, Doral Federal had
approximately $343,000 of intangible assets that were required to be deducted
from capital.
At December 31, 1996, Doral Federal complied with each of the then
current tangible capital, core capital, and risk-based capital requirements. In
the event that Doral Federal fails to satisfy any applicable capital
requirements, Doral Federal may be subject to sanctions, and its operations may
be subject to severe regulatory
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restrictions and limitations. Set forth below is a description of Doral
Federal's actual capital levels relative to its regulatory capital requirements
as of December 31, 1996:
To be well capitalized
Minimum Capital under prompt corrective
Actual Requirements action provisions(1)
Amount Ratio(%) Amount Ratio(%) Amount Ratio(%)
------- -------- ---------- ---------- ------------ ------------
(dollars in thousands)
Tangible capital
(to adjusted
assets) $23,376 8.3 $4,206 >1.5 - -
Tier I capital (to -
risk weighted
assets) 23,376 19.3 - - 7,282 > 6.0
Core capital (to -
adjusted assets) 23,376 8.3 8,412 >3.0 14,021 > 5.0
Total capital (to - -
risk weighted
assets) 24,095 19.8 9,709 >8.0 12,137 >10.0
- -
(1) See discussion under caption "FDICIA" below for additional capital
requirements imposed by the Federal Deposit Insurance Corporation
Improvement Act of 1991.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") federal banking regulators must take prompt corrective
action in respect of depository institutions that do not meet minimum capital
requirements. The FDICIA and regulations thereunder establish five capital
tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution is deemed well capitalized if it maintains a leverage
ratio of at least 5%, a risk-based Tier I capital ratio of at least 6% and a
risk-based Total capital ratio of at least 10% and is not subject to any
written agreement or directive to meet a specific capital level. A depository
institution is deemed adequately capitalized if it is not well capitalized but
maintains a leverage ratio of at least 4% (or at least 3% if given the highest
examination rating and not experiencing or anticipating significant growth), a
risk-based Tier I capital ratio of at least 4% and a risk-based total capital
ratio of at least 8%. A depository institution is deemed undercapitalized if it
fails to meet the standards for adequately capitalized institutions (unless it
is deemed significantly or critically undercapitalized). An institution is
deemed significantly undercapitalized if it has a leverage ratio of less than
3%, a risk-based Tier I capital ratio of less than 3% or a risk-based Total
capital ratio of less than 6%. An institution is deemed critically
undercapitalized if it has tangible equity equal to 2% or less of total assets.
A depository institution may be deemed to be in a capitalized category that is
lower than is indicated by its actual capital position if it receives a less
than satisfactory examination rating in any one of four categories.
At December 31, 1996, Doral Federal was well capitalized. See table under
"--Capital Requirements" above for Doral Federal's actual capital levels in
relation to the prompt corrective action standards under FDICIA. An
institution's capital category, as determined by applying the prompt corrective
action provisions of law, may not constitute an accurate representation of the
overall financial condition or prospects of Doral Federal and should be
considered in conjunction with other available information regarding the Doral
Federal's financial condition and results of operations.
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FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. In addition, undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
Enforcement Provisions. FIRREA includes enforcement provisions that are
applicable to all depository institutions, including savings institutions.
FIRREA extended the enforcement authority of bank regulatory agencies to
"institution-affiliated parties". The term includes: (i) directors, officers,
employees, agents, and controlling stockholders; (ii) persons required to file
a change-in-control notice; (iii) certain persons who participate in the
affairs of the savings institution (which include stockholders, consultants,
and joint venture partners); and (iv) independent contractors (including
attorneys, appraisers, and accountants) who knowingly or recklessly cause or
participate in a violation, breach of duty or unsafe practice likely to cause a
loss to the savings institution. FIRREA includes significantly increased
penalties for violations of cease-and-desist orders and other regulations. At
the same time, requirements for the issuance of such orders were lessened by
the statute.
Payment of Dividends. Doral Federal's payment of dividends is subject to
the limitations of the capital distribution regulation promulgated by the OTS.
The OTS' regulation determines a savings association's ability to pay
dividends, make stock repurchases, or make other types of capital
distributions, according to the institution's capital position. The rule
establishes "safe-harbor" amounts of capital distributions that institutions
can make after providing notice to the OTS, without constituting an unsafe or
unsound practice. Associations that do not meet their capital requirements can
make distributions with the prior approval of the OTS.
For associations such as Doral Federal, that meet all applicable capital
requirements, the safe-harbor amount is the greater of (a) 75% of net
income for the prior four quarters, or (b) the sum of (i) the current year's net
income and (ii) the amount that causes the excess of any component of the
association's total capital to be less than only one-half of such excess at the
beginning of the year; provided, however, that the association must continue to
satisfy applicable capital requirements after the distribution.
Deposit Insurance. Doral Federal's deposits are insured to the fullest
extent of the law by the Savings Association Insurance Fund ("SAIF"), which is
managed by the FDIC. As a result, the FDIC has certain regulatory and
enforcement authority over Doral Federal. The FDICIA required the FDIC to
implement a risk-based assessment system, under which an institution's
assessment will be based on the probability that the deposit insurance fund
will incur a loss with respect to the institution, the likely amount of any
such loss, and the revenue needs of the deposit insurance fund. Under this
system, the FDIC established premium rates for SAIF insured institutions which
until 1995 ranged from 0.23% to 0.31% based upon their capital ratios and
supervisory evaluation. Doral Federal's insurance premium assessment was set at
0.23% effective January 1, 1994.
The FDIC revised the premium schedule for Bank Insurance Fund ("BIF")
insured banks, effective in the third quarter of 1995, to provide a range of
.04% to .31% of deposits (as compared to the former range of .23% to .31% of
deposits for both BIF and SAIF insured institutions) in anticipation of the BIF
achieving its statutory reserve ratio. Effective January 1, 1996, the schedule
was further revised to provide a range of 0% to .27% with
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a minimum annual premium of $2,000. The lower premiums did not apply to
SAIF members. At the time of such action, the FDIC noted that the SAIF would
likely not be adequately recapitalized until 2002, absent a substantial increase
in premium rates or the imposition of special assessments or other significant
developments such as a merger of the SAIF and the BIF. As a result of this
disparity, SAIF members were placed at a significant competitive disadvantage to
BIF members due to higher costs for deposits insurance.
In order to help eliminate this disparity and any competitive disadvantage
due to disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted on September 30, 1996. The legislation
provided for a one-time assessment to be imposed on all deposits assessed at
the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF. It
also provided for the merger of the BIF and the SAIF on January 1, 1999
provided no savings associations then exists. The special assessment paid by
Doral Federal was $588,000. In connection with the recapitalization of the
SAIF, Doral Federal's deposit insurance premiums were decreased to .06%. While
SAIF rates were reduced by this legislation they were not equalized with BIF
rates as a result of the continuing assessment payable by SAIF members to repay
obligations issued by a federally chartered corporation to provide financing for
resolving the thrift crisis in the 1980s.
Classification of Assets. Savings associations are required to review
their assets on a regular basis and, if warranted, classify them as
"substandard," "doubtful," or "loss." Adequate valuation allowances, consistent
with GAAP, are required to be established for classified assets. If any assets
are classified as substandard or doubtful, the association must establish a
prudent general allowance for possible future loan losses with respect thereto.
If an asset, or a portion thereof, is classified as a loss, the association
must either establish a specific valuation allowance equal to the amount
classified as loss or charge off such amount. In addition, a savings
association is required to set aside adequate valuation allowances to the
extent that any affiliate possesses assets which pose a risk to the savings and
loan association. The association's OTS Regional Director has the authority to
approve, disapprove or modify the classification and amount established as an
allowance pursuant to such classification. In addition, a savings association
is required to record as liabilities off balance sheet items, such as letters
of credit, when the loss becomes probable and estimable.
The following table sets forth information with respect to Doral Federal's
classified assets as of December 31, 1996:
AT DECEMBER 31, 1996
--------------------
SUBSTANDARD DOUBTFUL LOSS TOTAL
----------- -------- ------ ------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One to four family.................. $1,258 $0 $0 $1,258
Commercial.......................... 596 0 0 596
Consumer -- secured by mortgage..... 71 0 0 71
REO.................................. 125 0 0 125
Consumer loans -- unsecured.......... 96 0 0 96
Other................................ 22 0 0 22
------ -- -- ------
Total classified assets........... $2,168 $0 $0 $2,168
====== == == ======
Proposed Banking Legislation. Various legislation, including proposals to
overhaul the bank regulatory system, expand bank and bank holding company
powers and limit the investments that a depository institution may make with
insured funds, is from time to time introduced in Congress. The Company cannot
determine the ultimate effect that such potential legislation, if enacted, or
implementing regulations, would have upon its financial condition or results of
operations.
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Proposed Charter Conversion of Doral Federal and Related Regulatory Consequence
to the Company
As a result of the reduction in the 936 Credit introduced by the OBRA
Amendments as well as the repeal of Section 936 as part of the Small Business
Job Protection Act, the income earned by Doral Federal is no longer fully
covered by the 936 Credit and, Doral Federal is subject to double taxation on
its income earned in Puerto Rico because it is generally not entitled to a
credit under Puerto Rico tax law for federal income taxes paid with respect to
income earned in Puerto Rico. In addition, dividends payable by a United States
corporation, such as Doral Federal, to a Puerto Rico corporation, such as the
Company, are not entitled to any dividends received deduction and are subject
to taxation as ordinary income at the normal statutory tax rates. Conversion to
a Puerto Rico chartered commercial bank would address both issues since
dividends received by a Puerto Rico corporation from a Puerto Rico chartered
commercial bank are subject to a 100% dividends received deduction. In
addition, a Puerto Rico chartered commercial bank is only subject to U.S.
federal income taxes on its income, if any, from sources within the United
States.
Because of the above adverse tax consequences and in light of the fact
that all of Doral Federal's operations are conducted in Puerto Rico, on
February 24, 1997, Doral Federal filed an application with the Office of the
Commissioner to convert its charter to that of a Puerto Rico commercial bank.
The consummation of the conversion requires the approval of the Office of the
Commissioner under the Puerto Rico Banking Act and of the Federal Reserve Board
(the "Federal Reserve") under the Bank Holding Company Act of 1956 (the
"BHCA"). While the Company does not anticipate any major difficulties in
obtaining the required regulatory approvals, no assurance can be given as to
when or whether all such approvals will be obtained. The conversion would
result in certain changes in the regulatory treatment of the Company and Doral
Federal. The principal regulatory consequences of such a conversion are
discussed below.
Bank Holding Company Considerations. The conversion of Doral Federal into
commercial bank would cause the Company to become bank holding company subject
to supervision and examination by the Federal Reserve under the BHCA . The BHCA
and Federal Reserve regulations promulgated thereunder generally place
limitations on the types of activities in which a bank holding company and its
subsidiaries may engage. In general, such activities must be banking services or
activities so closely related to the business of banking as to be a proper
incident thereto. Regulation K promulgated by the Federal Reserve, generally
grants bank holding companies and their subsidiaries somewhat broader powers
with respect to activities conducted "outside the United States" than with
respect to activities conducted within the United States. For purposes of
Regulation K, Puerto Rico is considered to be outside the United States.
In addition to the activity restrictions discussed above, the BHCA also
imposes various other restrictions on bank holding companies and their
subsidiaries. Many of these restrictions are similar to those currently imposed
on the Company under the SLHCA. For example, the BHCA contains provisions
restricting the acquisition of capital stock and other securities of the
Company similar to those contained in the SLHCA. See "Regulation -- Savings and
Loan Operations -- The Company." Sections 23A and 23B of the Federal Reserve
Act also apply in the same manner to bank holding companies and their
subsidiaries as to savings and loan holding companies.
As a bank holding company, the Company would, however, be subject to
certain additional regulatory restrictions that are not otherwise applicable to
savings and loan holding companies. For example, unlike savings and loan
holding companies, bank holding companies are subject to certain regulatory
capital requirements. Under the Federal Reserve's risk-based capital
guidelines, a bank holding company must maintain a ratio of total capital
("Total Capital") to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of
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credit) equal to 8%. At least half of the Total Capital is to be
comprised of common equity, retained earnings, minority interests in
unconsolidated subsidiaries, noncumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less goodwill and less
certain intangible assets discussed below ("Tier 1 capital"). The remainder may
consist of a limited amount of subordinated debt, other preferred stock, certain
other instruments, and a limited amount of loan and lease loss reserves ("Tier 2
capital").
The Federal Reserve has adopted regulations that require most intangibles,
including core deposit intangibles, to be deducted from Tier 1 capital. The
regulations, however, permit the inclusion of a limited amount of intangibles
related to MSR and purchased credit card receivables in a manner similar to the
capital requirements applicable to savings associations. The Federal Reserve has
also decided to exclude from regulatory capital the amount of net unrealized
gains and losses on securities available-for-sale, except the net unrealized
losses of equity securities with readily determinable fair values.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 capital to average quarterly assets of 3% for bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets. Furthermore, the
guidelines indicate that the Federal Reserve will continue to consider a
"tangible Tier 1 leverage ratio" (deducting all intangibles) and other indicia
of capital strength in evaluating proposals for expansion or new activities.
The tangible Tier 1 leverage ratio is the ratio of a banking organization's
Tier 1 capital, less all intangibles, to total assets, less all intangibles.
The Federal Reserve has issued a policy statement that provides that
insured banks and bank holding companies should generally pay dividends only
out of current operating earnings. In addition, under Federal Reserve policy, a
bank holding company is expected to act as a source of financial strength to
each of its subsidiary banks and to commit resources to support each subsidiary
bank. This support may be required at times, when absent such policy, the bank
holding company might not otherwise provide such support.
The Company believes that if it were to become subject to the provisions
of the BHCA it would be in compliance with all of the above regulatory and
capital requirements and would be able to continue to conduct its Mortgage
Banking Business as presently conducted.
Banking Law Considerations Applicable to Doral Federal. The conversion of
Doral Federal into a Puerto Rico chartered bank would subject Doral Federal to
supervision and examination by the Office of the Commissioner and to the
provisions of the Puerto Rico Banking Act and the regulations promulgated
thereunder. Certain of the principal regulatory requirements that would be
imposed on Doral Federal under the Puerto Rico Banking Law are discussed below.
Section 27 of the Puerto Rico Banking Act requires that at least ten
percent (10%) of the yearly net income of a bank be credited annually to a
reserve fund. This apportionment shall be done every year until the reserve
fund shall be equal to ten percent (10%) of the total deposits or the total
paid-in capital of the bank, whichever is greater.
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Section 27 of the Puerto Rico Banking Act also provides that when the
expenditures of a bank are greater than the receipts, the excess of the former
over the latter shall be charged against the undistributed profits of the bank,
and the balance, if any, shall be charged against the reserve fund, as a
reduction thereof. If there is no reserve fund sufficient to cover such
balance in whole or in part, the outstanding amount shall be charged against
the capital account and no dividend shall be declared until said capital has
been restored to its original amount and the reserve fund to 20% of the
original capital of the bank.
Section 16 of the Puerto Rico Banking Act requires every bank to maintain
a legal reserve which shall not be less than 20% of its demand liabilities,
except government deposits (federal, state and municipal) which are secured by
actual collateral.
Section 17 of the Puerto Rico Banking Act permits banks to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. If
such loans are secured by collateral worth at least twenty-five percent (25%)
more than the amount of the loan, the aggregate maximum amount may reach one
third of the paid-in capital the Bank, plus its reserve fund. There are no
restrictions under Section 17 on the amount of loans that are wholly secured by
bonds, securities and other evidences of indebtedness of the Government of the
United States or Puerto Rico, or by current debt bonds, not in default, of
municipalities or instrumentalities of Puerto Rico. The Office of the
Commissioner has issued a circular letter permitting well-capitalized
institutions to take into account 50% of their retained earnings in computing
their applicable lending limits.
Section 14 of the Puerto Rico Banking Act authorizes banks to conduct
certain financial and related activities directly or through subsidiaries,
including finance leasing of personal property, making and servicing mortgage
loans and operating a small-loan company. These provisions are somewhat more
restrictive than those applicable to federal savings associations.
The Finance Board, which is a part of the Office of the Commissioner, but
also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico,
has the authority to regulate the maximum interest rates and finance charges
that may be charged on loans to individuals and unincorporated businesses in
Puerto Rico. The current regulations of the Finance Board provide that the
applicable interest rate on loans to individuals and unincorporated businesses
(including real estate development loans but excluding FHA and VA loans secured
by mortgages on real estate properties) is to be determined by free
competition. The Finance Board also has authority to regulate the maximum
finance charges on retail installment sales contracts, which are currently set
at 21%, and for credit card purchases, which are currently set at 26%. There
is no maximum rate set for installment sales contracts involving motor
vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
Additional Restrictions on Investments in Capital Stock of the Company.
Sections 12 of the Puerto Rico Banking Act requires the prior approval of the
Office of the Commissioner with respect to a transfer of capital stock of a
bank that results in a change of control of the bank. Under Section 12, a
change of control is presumed to occur if a person or group of persons acting
in concert, directly or indirectly, acquire more than 5% of the outstanding
voting capital stock of the bank. In the past, the Office of the Commissioner
has interpreted the restrictions of Section 12 to apply to acquisitions of
voting securities of entities controlling a bank, such as a bank holding
company. The provisions of the Mortgage Banking Law and the SLHCA currently
applicable to acquisition of the Company's capital stock only require
regulatory approval for the acquisition of more than 10% of the Company's
outstanding voting securities. Accordingly, the conversion of Doral Federal
into a Puerto Rico
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commercial bank would result in additional restrictions to be placed on
the acquisition of the Company's common stock.
FDIC Capital Requirements. Following conversion, Doral Federal would also
be subject to regulation by the FDIC, including the capital requirements of the
FDIC. The capital requirements of the FDIC are substantially similar to those
currently imposed on Doral Federal by the OTS.
REGULATION -BROKER-DEALER OPERATIONS
AAA Financial is registered as a broker-dealer with the SEC and the Office
of the Commissioner. AAA Financial is also a member of the NASD. As a
registered broker-dealer, it is subject to regulation by the SEC, the NASD and
the Office of the Commissioner in matters relating to the conduct of its
securities business, including record keeping and reporting requirements,
supervision and licensing of employees and obligations to customers. In
particular, AAA Financial is subject to the SEC's net capital rules, which
specify minimum net capital requirements for registered broker-dealers and are
designed to ensure that broker-dealers maintain adequate regulatory capital in
relation to their liabilities and the size of their customer business.
MARKET AREA AND COMPETITION
Prior to March 1992, Puerto Rico was FFCC's exclusive service area.
Although Doral Mortgage has since opened branch offices in Orlando and
Miami, Florida, Puerto Rico remains the Company's predominant service area
accounting for 98% of the Company's loan originations for the years ended
December 31, 1996 and 1995. Within Puerto Rico, FFCC's primary market area is
the metropolitan San Juan area, which accounted for approximately 55% and 45% of
FFCC loan originations in 1996 and 1995, respectively. The competition in Puerto
Rico for the origination of mortgages is substantial. Competition comes not only
from other mortgage bankers, but also from major banks and savings and loan
associations. There are approximately 37 mortgage banks, two savings
institutions and 20 commercial banks operating in Puerto Rico, including
affiliates of banks headquartered in the United States, Canada and Spain. The
Company competes principally by offering loans with competitive features, by
emphasizing the quality of its service and pricing its range of products at
competitive rates. Management believes that Doral Federal's most direct
competition for deposits comes from local commercial banks and credit unions.
During certain interest rate environments, increased competition for deposits
may be expected from mutual funds and money market mutual funds.
THE COMMONWEALTH OF PUERTO RICO
General. Puerto Rico, the fourth largest of the Caribbean islands, is
located approximately 1,600 miles southeast of New York, New York and 1,000
miles southeast of Miami, Florida. It is approximately 100 miles long and 35
miles wide. The population of Puerto Rico for 1990, as determined by the United
States Census Bureau, was approximately 3.5 million as compared to 3.2 million
in 1980. According to estimates of the Puerto Rico Planning Board, the
population of Puerto Rico increased to 3.7 million in fiscal 1996. The Puerto
Rico Planning Board estimates that the San Juan metropolitan area has a
population in excess of 1.0 million.
Relationship of Puerto Rico with the United States. The Constitution of
Puerto Rico was drafted by a popularly elected constitutional convention,
overwhelmingly approved in a special referendum and approved "as a compact" by
the United States Congress and the President, becoming effective upon
proclamation of the Governor of Puerto Rico on July 25, 1952. Puerto Rico's
relationship to the United States under the compact is referred to herein as
"commonwealth status." The United States and Puerto Rico share a common
defense, market
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and currency. Puerto Rico exercises virtually the same control over its
internal affairs as a state government does. The people of Puerto Rico are
citizens of the United States, but do not vote in national elections and are
represented in Congress by a Resident Commissioner who has a voice in the House
of Representatives but only limited voting rights. Most federal taxes, except
those such as social security taxes which are imposed by mutual consent, are not
levied in Puerto Rico. No federal income tax is collected from Puerto Rico
residents on ordinary income earned from sources within Puerto Rico, except for
Federal employees who are subject to taxes on their salaries. Corporations
organized under the laws of Puerto Rico are treated as foreign corporations for
federal income tax purposes. For many years there have been two major views in
Puerto Rico with respect to the island's relationship to the United States, one
essentially favoring the existing commonwealth status and the other favoring
statehood.
On November 14, 1993, a plebiscite was held in Puerto Rico to allow
eligible voters an opportunity to express their preference between statehood,
Commonwealth (with certain changes) and independence for Puerto Rico. The
Commonwealth status obtained the most votes, receiving 48.6% of the votes cast,
and statehood and independence received 46.3% and 4.4% of the votes casts,
respectively.
On February 26, 1997 legislation (the "Young Bill") was introduced in the
U.S. House of Representatives proposing a mechanism to settle permanently the
political relationship between Puerto Rico and the United States, either
through full self government (e.g., statehood or independence, including, as an
alternative, free association via a bilateral treaty) or continued
Commonwealth. Under the legislation, failure to settle on full self government
after completion of the referendum process provided therein would result in
retention of the current Commonwealth status. A similar bill (the "Senate
Status Bill") was introduced into the Senate on March 19, 1997. The Young Bill
and the Senate Status Bill would have to be approved by both houses of the
Congress and signed by the President (or his veto overridden) before becoming
law. It is not possible at this time to determine the ultimate outcome of this
legislation.
The Economy. Puerto Rico has established policies and programs directed
at the development of manufacturing and the expansion and modernization of the
island's infrastructure. The investment of funds by mainland United States,
foreign and local entities in new factories has been stimulated by selective
tax exemption, development loans, and other financial and tax incentives.
Infrastructure expansion and modernization have been to a large extent financed
by bonds and notes issued by the Commonwealth, its public corporations and
municipalities. Economic progress has been aided by significant increases in
the levels of education and occupational skills of the island's population. The
percentage of the college-age population enrolled in institutions of higher
learning has increased from 16.8% in 1970 to 36.9% in 1995.
The economy of Puerto Rico is closely integrated with that of the mainland
United States. During the fiscal year ended June 30, 1996, approximately 88% of
Puerto Rico's exports went to the United States mainland, which was also the
source of approximately 62% of Puerto Rico's imports. For the fiscal year ended
June 30, 1996, Puerto Rico experienced a positive adjusted merchandise trade
balance of $3.2 billion.
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals and electronics. The service sector also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth.
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Gross product increased from $23.7 billion for fiscal 1992 to $30.2
billion ($26.7 billion in 1992 prices) for fiscal 1996, an increase of 27.7%
(12.9% in 1992 prices). Since fiscal 1985, personal income, both aggregate and
per capita, has increased consistently each fiscal year. In fiscal 1996,
aggregate personal income was $29.4 billion ($27.8 billion in 1992 prices) and
personal income per capita was $7,882 ($7,459 in 1992 prices). Average
employment increased from 977,000 in fiscal 1992 to 1,092,300 in fiscal 1996.
Average unemployment decreased from 16.5% in fiscal 1992 to 13.8% in fiscal
1996.
Future growth in the Puerto Rico economy will depend on several factors
including the condition of the United States economy, the relative stability in
the price of oil imports, the exchange value of the U.S. dollars and the level
of interest rates and changes to existing tax incentive legislation as
discussed below.
The Small Business Job Protection Act, which was signed into law on August
20, 1996, provides for the repeal of Section 936. The elimination of the
benefits of Section 936, without the substitution of another fiscal incentive
to attract investment to Puerto Rico, could have an adverse effect on the
future growth of the Puerto Rico economy. At this point, the Company cannot
predict the long-term impact of the repeal of Section 936 on the economy of
Puerto Rico. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
1159 Franklin D. Roosevelt Avenue, Puerto Nuevo, San Juan, Puerto Rico
and consist of approximately 11,136 square feet of office space. Doral's
executive and administrative offices are located at 650 Munoz Rivera Avenue, San
Juan, Puerto Rico and consist of approximately 33,000 square feet of office
space. Both of these facilities are leased. The Company also leases additional
office space of approximately 31,000 square feet throughout Puerto Rico. These
offices are leased for various terms expiring through 2005. Annual aggregate
rental payments made in the years 1996, 1995 and 1994 were $2,083,538,
$2,096,979 and $2,004,023, respectively. Except for its interest in real estate
held in the ordinary course of business (including REO as a result of
foreclosures), the Company does not own any real property except for a 2,000
square foot building and underlying real property where Doral Federal's branch
in Catano, Puerto Rico is located and a 2 acre parcel of undeveloped land, which
the Company purchased for $2,956,895 in December 1996, for future development of
office facilities for the Company.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
FFCC's Common Stock, $1.00 par value (the "Common Stock"), is traded on
the over-the-counter market and is quoted on the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ NMS")
under the symbol "FRCC." The Company's Common Stock began trading on the
NASDAQ NMS on December 19, 1988.
FFCC's 10-1/2% Cumulative Convertible Preferred Stock, Series A, $1.00 par
value (the "Series A Preferred Stock") was traded on the over-the-counter
market and was quoted on the NASDAQ system under the symbol FRCCP until it was
redeemed in whole on May 10, 1996.
The table below sets forth, for the calendar quarters indicated, the high
and low sales prices on the NASDAQ NMS and the high and low bid quotes on the
NASDAQ system, for the Common Stock and Series A Preferred Stock, respectively,
and the dividends declared on the Common Stock and Series A Preferred Stock
during such periods. The quotations for the Series A Preferred Stock represent
inter-dealer prices, without retail mark-up, mark-down or commissions and do
not necessarily represent actual transactions.
MARKET PRICE DIVIDENDS DECLARED*
CALENDAR COMMON SERIES A PREFERRED SERIES A
------ ------------------
YEAR QUARTER HIGH LOW HIGH LOW COMMON PREFERRED
- ---- ------- ---- --- ---- --- ------ ---------
1995 1st $13 1/2 $10 1/2 $24 1/4 $ 22 $0.13 $0.2625
2nd 15 1/2 12 29 1/2 24 1/4 0.15 0.2625
3rd 17 3/4 14 33 1/2 28 0.15 0.2625
4th 20 15 3/4 37 1/4 32 0.15 0.2625
1996 1st $22 3/4 $17 3/4 $40 $ 34 0.15 $0.2625
2nd 23 1/2 18 3/4 40 40 0.17 .12
3rd 25 18 3/4 N/A N/A 0.17 N/A
4th 28 3/4 20 3/4 N/A N/A 0.17 N/A
As of March 7 1997, the approximate number of record holders of the
Company's Common Stock was 839, which does not include beneficial owners whose
shares are held in record names of brokers and nominees. The last sales price
for the Common Stock as quoted on the NASDAQ NMS on such date was $27.50 per
share.
The payment of cash dividends in the future is dependent upon the
earnings, cash position and capital needs of the Company, general business
conditions and other matters deemed relevant by the Company's Board of
Directors.
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The ability of the Company to pay dividends in the future is limited by
various restrictive covenants contained in the debt agreements of the Company,
the earnings, cash position and capital needs of the Company, general, business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Debenture Purchase Agreement
and under the Indenture for the Senior Notes (the "Senior Note Indenture") from
paying dividends on any capital stock (other than dividends payable in capital
stock or in stock rights), if an event of default exists under any such
agreement at such time, or if the amount of dividends payable by the Company
together with the aggregate amount of dividends paid and other capital
distributions made since June 1, 1995, in the case of the Debenture Purchase
Agreement, or October 1, 1996, in the case of the Senior Note Indenture (each
such date, a "Measure Date") exceed the sum of:(i) 50% of the Company's
Consolidated Net Income (as defined in such Agreements), accrued from the
respective Measure Dates to the end of the quarter ending not less than 45 days
prior to the dividend payment date; (ii) $20 million, in the case of the
Debenture Purchase Agreement and $15 million in the case of the Senior Note
Indenture; and (iii) the net proceeds of any sale of capital stock subsequent
to the applicable Measure Dates. In addition, under the Debenture Purchase
Agreement, the Syndicated Credit Agreement and other debt agreements of the
Company, the Company may be prohibited from paying dividends if it fails to
maintain specified minimum levels of net worth, net earnings to debt service
and dividends ratios, and certain other financial ratios.
The Puerto Rico Internal Revenue Code generally imposes a 10% withholding
tax on the amount of any dividends paid by FFCC to individuals, whether
residents of Puerto Rico or not, trusts, estates, special partnerships and
non-resident foreign corporations and partnerships at a special 10% withholding
tax.
Prior to the first dividend distribution for the taxable year, individuals
who are residents of Puerto Rico may elect to be taxed on the dividends at the
regular graduated rates, in which case the special 10% tax will not be withheld
from such year's distributions.
United States citizens who are non-residents of Puerto Rico may also make
such an election, and will not be subject to Puerto Rico tax on dividends if
said individual's gross income from sources within Puerto Rico during the
taxable year does not exceed $1,300 if single, or $3,000 if married.
United States income tax law permits a credit against United States income
tax liability, subject to certain limitations, for certain foreign income taxes
paid or deemed paid with respect to such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for the Company on a historical basis for each of the five years ended
December 31, 1996. This information should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis" contained herein.
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Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except for per share data)
INCOME STATEMENT DATA:
Revenues..........................$ 107,833 $ 91,837 $ 72,043 $ 70,228 $ 49,804
Interest expense.................. 46,443 43,380 23,252 9,710 9,270
Loan origination costs and
administrative and general expenses 30,111 26,396 30,046 29,597 24,118
Income before income taxes........ 31,279 22,061 18,745 30,921 16,416
Income taxes...................... 4,238 2,500 2,530 9,601 3,371
Income before cumulative
effect............................ 27,041 19,560 16,215 21,320 13,045
Cumulative effect................. -- -- 1,215 - -
Net income........................ 27,041 19,560 17,430 21,320 13,045
Cash dividends paid............... 6,008 4,374 3,943 3,142 2,182
BALANCE SHEET DATA:
Mortgage loans held for sale
mortgage-backed securities held
for trading, securities available
for sale and mortgage notes
receivable, net..................$ 685,062 $ 666,653 $ 582,977 $ 388,231 $ 261,063
Loans receivable, net and
securities held to maturity...... 237,820 129,300 101,613 16,091 None
Total assets...................... 1,101,955 916,118 768,019 486,431 320,972
Loans payable and securities sold
under agreements to repurchase... 584,048 597,983 569,436 335,994 227,179
Deposits.......................... 158,902 95,740 66,471 26,451 -
Stockholders' Equity.............. 150,531 129,017 90,496 76,945 58,467
PER SHARE DATA:(1)
Net Income- Primary............... 2.98 2.65 2.46 $ 3.15 2.35
- Fully diluted(2).......... 2.84 2.53 2.30 2.81 2.06
Cash dividends
Common Stock................ 0.66 0.58 .52 0.40 0.30
Series A Preferred Stock(3). 0.3825 1.05 1.05 1.05 1.05
Weighted average shares
outstanding:(2)
Primary........................... 9,066,561 7,307,945 6,942,734 6,614,854 5,321,600
Fully diluted..................... 9,681,268 7,760,135 7,576,964 7,516,964 6,347,392
OPERATING DATA:
Mortgage loans originated and
purchased........................ 816,566 $ 636,000 $ 823,834 $1,433,448 $ 722,723
Loan Servicing Portfolio.......... 3,068,000 $2,668,000 $2,644,000 $2,375,000 $1,700,000
____________________
(1) Adjusted to reflect two-for-one stock split effective December 10, 1993.
(2) On a fully diluted basis, both net earnings and shares outstanding are
adjusted to assume the conversion of the Company's 10 1/2% Cumulative
Convertible Preferred Stock, Series A (which was redeemed in whole on May 10,
1996) and the 8.25% Convertible Subordinated Debentures. Shares of Common
Stock outstanding during the period reflect the issuance of 1,510,000 shares of
Common Stock on December 11, 1995.
(3) The Series A preferred Stock was redeemed in whole on May 10, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
FFCC is the leading originator of mortgage loans in Puerto Rico, in terms
of the volume of originations of first mortgages on single family residences.
The volume of loans originated and purchased by FFCC was approximately $819
million, $636 million, $824 million, $1.44 billion, and $724 million for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The
Company issued $373 million of GNMA mortgage-backed securities to rank No. 1 in
Puerto Rico and No. 34 in the United States in such issuances according to the
"Mortgage Marketplace."
The increase in 1993 was primarily due to declines in mortgage interest
rates which declined to their lowest levels in decades during 1993, thereby
stimulating demand for both refinancing loans and loans to finance the
acquisition of new and existing residential units. The decrease in 1994 as
compared to 1993 is attributable to rising interest rates causing a lower level
of loan originations, decreased refinancing activity and increased competition.
The decrease in 1995 as compared to 1994 was the result of continued reduced
demand for mortgage loans, especially refinancing loans. The increase in 1996
is due to an increase in refinancing activity as well as increased originations
relating to loans to finance the acquisition of new residential units.
Refinancing loans comprised 47% of loan originations in 1996 compared to 41%
and 59% in 1995 and 1994, respectively. Mortgage loans to finance the
acquisition of new residential units for 1996 increased 63% during 1996
increasing from $84 million for 1995 to $136 million for 1996. Such loans
comprised 17% of total originations for 1996 compared to 13% for 1995 and 8%
for 1994.
During 1992 and 1993, the Company's strategy was to increase its servicing
portfolio through internal originations. As a result of the high volume of
loans originated in those years, the Company was not active in the wholesale
loan purchase market during 1992 and 1993. The Company reentered the Puerto
Rico wholesale mortgage loan purchase market during the second quarter of 1994
in order to diversify its sources of loan production and compensate for the
decrease in volume caused by higher interest rates and increased competition.
The amount of loans purchased from third parties was approximately $ 63
million, $77 million, $63 million, $1 million, and $29 million for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The Company
believes that the purchase of mortgage loans is a low cost method of increasing
mortgage loan production that complements retail loan originations. Purchases
of loans from third parties are generally limited to FHA and VA loans.
The Company entered the savings and loan industry in September 1993
through the acquisition of Doral Federal, which operates through two
branches in Puerto Rico. During the year ended December 31, 1994, Doral Federal
contributed $205,000 to the consolidated net income of the Company as a result
of the incurrence of expenses associated with creating the infrastructure
necessary to support bank growth. For the years ended December 31, 1995 and
1996, Doral Federal's net income increased to $1.5 million and $2.3 million,
respectively, reflecting a substantial increase in interest earning assets.
Doral Federal increased its assets from $86.4 million as of December 31, 1994
to $160.4 million and $280.7 million as of December 31, 1995 and 1996,
respectively. This growth was funded largely through increases in certificate
of deposit accounts, non-interest bearing deposits from affiliated companies,
advances from the Federal Home Loan Bank of New York ("FHLB-NY") and the
private placement of five year notes secured by FHLB-NY letters of credit with
U.S. Corporations electing the benefits of Section 936.
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45
FFCC's results of operations are primarily influenced by: (i) the
direction of interest rates; (ii) the level of demand for mortgage credit,
which is affected by such external factors as the level of interest rates and
the strength of the economy in Puerto Rico; and (iii) the relationship between
mortgage interest rates and the costs of funds.
The principal components of FFCC's revenues are: (i) mortgage loan sales
and fees; (ii) net interest income; (iii) servicing income; (iv) gain on sale
of servicing rights; and (v) other income.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
Mortgage loan sales and fees.............. $26,610 $13,529 $10,573
Interest income........................... 66,987 61,907 46,508
Interest expense.......................... 46,443 43,380 23,252
Net interest income....................... 20,544 18,527 23,256
Servicing income.......................... 11,659 10,577 11,448
Gain on sale of servicing rights.......... 1,813 5,205 3,003
Other income.............................. 764 620 511
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994.
Net Income. The Company's net income for the year ended December 31, 1996
increased to $27 million compared to $19.6 million for 1995. Consolidated
results include the operations of Doral Federal, which contributed
approximately $2.3 million to the Company's consolidated net earnings in 1996,
compared to $1.5 million for 1995 and $205,000 in 1994. Consolidated results
for 1995 reflect the adoption by the Company as of April 1, 1995 of Statement
of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights." Additional net income of approximately $1.5 million was
realized for the year ended December 31, 1995 as a result of the adoption of
SFAS No. 122. Since SFAS No. 122 does not permit retroactive application, the
results for 1995 are not directly comparable to prior years. See Note 2 to the
Company's Consolidated Financial Statements included elsewhere herein. Results
for 1994 include a one time benefit of $1.2 million from the cumulative effect
of the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" as of January 1, 1994.
Revenues from Mortgage Loan Sales and Fees. As part of its mortgage
banking business, FFCC sells substantially all of the loans that it originates,
except for certain mortgage loans originated by Doral Federal, which are
generally held until maturity. When FFCC sells mortgage loans and
mortgage-backed securities, it realizes a gain or loss which is equal to the
difference between FFCC's carrying cost and the selling price of the loans
sold, net of commitment fees paid. Net gain or loss on sale of loans is
affected by interest rate fluctuations on fixed-rate loans and securities, as
well as by the tax status of interest on mortgage loans under Puerto Rico
income tax statutes. See "Interest Rate Fluctuations" and "Recent
Developments-- Possible Changes in Favorable Puerto Rico Tax Laws."
Substantially, all the mortgage loans originated by FFCC are fixed interest
rate loans.
Revenues from mortgage loan sales and fees increased by 97% during 1996,
compared to 28% in 1995 and to a decrease of 70% in 1994. The increase for
1996 was the result of increased volume of loan originations and higher excess
servicing fees receivable ("ESRs") related to sale of non-conforming and low
balance loans as discussed below. The increase for 1995 was primarily due to
the adoption SFAS No. 122 during the second quarter of 1995 which
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has the effect of increasing the gain on the sale of mortgage loans by requiring
that the carrying costs of mortgage loans be reduced by a portion of the fair
value of the related mortgage servicing rights ("MRSs"). The amount allocated
to MSRs is included as a component of mortgage loan sales and fees in the
Company's Consolidated Statement of Income. The decrease in 1994 was due to
interest rate increases resulting in a lower level of loan originations, lower
gains on the sale of mortgage loans and pressures on pricing as a result of
increased competition.
During the years ended December 31, 1996 and 1995, the Company capitalized
$10.8 million and $8.2 million, respectively, in MSRs which are included in the
Company's revenues as part of "Mortgage Loan Sales and Fees." The Company
amortizes MSRs over their expected life. See "Amortization of Excess Servicing
Fees Receivable and Mortgage Servicing Rights."
Sales of mortgage loans made during 1996 resulted in the recording of
approximately $15.9 million of ESRs compared to $2.6 million and $5.8 million
in 1995 and 1994, respectively. FFCC capitalizes as an asset any ESRs on loans
sold with servicing rights retained whenever the stated servicing fee rate is
materially higher than the servicing fee normally permitted by FNMA or FHLMC.
The ESR represents the discounted present value of the excess (the "excess
spread") of the interest rate on the loan over a normal servicing fee and the
interest required to be paid to investors. The ESR is recognized at the time of
sale of the related loan as an adjustment to the resulting gain or loss on sale
of the loan and is recorded in the accompanying Consolidated Statement of
Income under "Mortgage loan sales and fees." Most of the Company's ESR is
related to the sale in bulk to financial institutions of non-conforming and low
balance mortgage loans which the Company is generally able to originate at
higher interest rates and thereby retain a larger excess spread on such loans.
See "Recent Developments--Product Diversification." ESRs are amortized over
their expected life and such amortization is recorded as a reduction of
servicing income. See "Amortization of Excess Servicing Fees Receivable and
Mortgage Servicing Rights."
For the year ended December 31, 1995, the increase in mortgage loan sales
and fees was net of losses on options on futures contracts used for hedging
purposes in the amount of $5.4 million, while in 1996 and 1994 such hedging
activities produced gains in the amount of $3.1 million and $2.2 million,
respectively, thereby increasing mortgage loan sales and fees by the same
amount.
Net Interest Income. Net interest income is the difference between the
interest income earned on interest earning assets and the interest paid by FFCC
on its interest bearing liabilities. The conditions that affect net interest
income from period to period include the relationship between prevailing
mortgage rates and the prime rate, the London Interbank Bid Rate for deposits
of U.S. dollars ("LIBID"), the cost of 936 Funds, interest on retail deposits,
interest rates on fixed-rate loans and the Company's average holding period
before mortgage loans are sold.
In each year since FFCC's inception, interest income earned by FFCC on its
interest earning assets has exceeded interest expense on FFCC's
short-term borrowings and other financing arrangements. Net interest income
increased by 11% from 1995 to 1996 after having decreased by approximately 20%
from 1994 to 1995, and increased by approximately 65% from 1993 to 1994. The
increase in net interest income during 1996 reflects an increase in average
interest earning assets, particularly at Doral Federal. Average interest
earnings assets at Doral Federal increased from $106.1 million as of December
31, 1995 to $199.6 million as of December 31, 1996. The decline in net
interest income during 1995 as compared to 1994 was the result of decreased
interest spreads, primarily from mortgage banking operations, as mortgage
interest rates declined more rapidly than short-term interest rates payable on
warehousing and repurchase agreement lines of credit
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and the other funding vehicles used to finance such assets. The Company's
weighted average interest rate spread was approximately 218 basis points during
1996 as compared with approximately 250 basis points and 385 basis points
during 1995 and 1994, respectively. The decrease in interest spread during 1996
and 1995 compared to 1994 also reflects additional interest costs incurred in
connection with borrowings not directly related to interest earning assets,
including a servicing secured bank term loan, unsecured senior notes, and
ten-year convertible subordinated debentures. See "Liquidity and Capital
Resources." The decrease in the interest rate spread from 1993 to 1994 was due
to higher short-term borrowing costs. The Company has been able to continue to
maintain a positive interest spread due to, among other things, the origination
of higher yielding mortgages and the funding of mortgage loans held by Doral
Federal through lower costing deposits and the availability of low cost 936
Funds. As of December 31, 1996, approximately $64.2 million ($28.3 million of
such deposits are not reflected in the Consolidated Financial Statements of the
Company because of inter-company eliminations) or 34% of total deposits held at
Doral Federal consisted of non-interest bearing accounts, comprised primarily
of servicing accounts and corporate demand accounts maintained by the Company
and its affiliates.
Doral Federal contributed approximately $6.9 million or 34% of the
consolidated net interest income of the Company for the year ended December 31,
1996 compared to $4.3 million or 23% for the year ended December 31, 1995. This
increase reflects an increase in average interest earning assets from $106.1
million for the year ended December 31, 1995 to $199.6 million for the year
ended December 31, 1996 that was partially offset by a decrease in the average
interest rate spread from 336 basis points for 1996 compared to 407 basis
points for 1995.
Net interest income has generally represented a greater proportion of the
Company's total net income than that of typical mortgage banking institutions.
This results primarily from the fact that the Company is able to finance a
substantial portion of the mortgage loans that it originates with lower cost
funds and holds mortgage-backed securities, mainly GNMA certificates, for
longer periods of time prior to sale than is customary for mortgage bankers in
the United States, in order to maximize the interest income produced by these
securities. During the year ended December 31, 1996, the Company held mortgage
loans and mortgage-backed securities for an average period of 259 days prior to
sale as compared to 352 days for the year ended December 31, 1995. This
decrease in the amount of days mortgage loans and mortgage-backed securities
were held prior to sale was due principally to increased sales of loans and
mortgage backed securities.
Servicing Income. Servicing income represents revenues earned by FFCC for
administering mortgage loans. FFCC's loan servicing fees depend on the type of
mortgage loan being serviced and range from 0.25% to 0.50% of the declining
outstanding principal amount of such loan. The size of FFCC's loan servicing
portfolio and the amount of its servicing fees have increased substantially
since FFCC's inception as a result of increases in loan originations and the
size of its servicing portfolio. Servicing fees increased 10% from 1995 to 1996
and 33% from 1993 to 1994. Loan servicing fees, however, decreased 8% from 1994
to 1995. The decrease in loan servicing income during 1995 was due primarily to
sales made during 1995 and the last quarter of 1994 of mortgage servicing rights
aggregating approximately $512 million. Increases in the amount of loan
servicing fees for 1996 and 1994 were primarily due to increases in the
principal amount of loans serviced as compared to prior years. The mortgage
servicing portfolio was approximately $3.1 billion at December 31, 1996,
compared to $2.7 billion as of December 31, 1995. At December 31, 1996, less
than 2% of the Company's servicing portfolio was related to mortgages originated
outside Puerto Rico (all of which were originated in Florida).
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The amount of principal prepayments on mortgage loans serviced by the
Company was $201 million, $160 million, and $281 million for the years ended
December 31, 1996, 1995 and 1994, respectively. This represented approximately
7%, 6%, and 11% of the aggregate principal amount of mortgage loans serviced
during such periods and the average size of the loans prepaid was $35,360,
$37,800, and $41,800, respectively. The primary means used by the Company to
reduce the sensitivity of its servicing income to increases in prepayment rates
is the maintenance of a strong retail origination network that has allowed it
to increase or maintain the size of its servicing portfolio even during periods
of high prepayments.
Amortization of Excess Servicing Fees Receivable and Mortgage Servicing
Rights. ESRs are amortized over the expected life of the asset and such
amortization is recorded as a reduction of servicing income. The amortization
of ESRs is based on the amount and timing of estimated future cash flows. See
Note 2 to the Company's Consolidated Financial Statements for additional
information regarding the accounting treatment of ESRs. Amortization of such
ESRs for each of the years ended December 31, 1996, 1995, and 1994 was
approximately $1,628,000, $988,000, and $570,000, respectively.
MSRs are amortized in proportion to, and over the period of estimated
servicing income. Amortization of MSRs is included as a component of "Other
Expenses" in the Company's Consolidated Financial Statements. During 1996,
total amortization of MSRs amounted to $998,789 versus $562,054 for 1995.
Increases in prepayment rates over anticipated levels can adversely affect
a mortgage company's revenues and liquidity by increasing the amortization
rates for MSRs and ESRs as well as requiring the Company to recognize an
impairment against income over and above scheduled amortization. See "Interest
Rate Fluctuations." The portion of the Company's mortgage servicing portfolio
consisting of MSRs that were originated by the Company prior to the adoption of
SFAS No. 122 is not reflected as an asset on the Company's Consolidated
Financial Statements, and is not subject to amortization or impairment.
Gain on Sale of Servicing Rights. During the years ended December 31,
1996, 1995 and 1994, the Company sold servicing rights of $102 million, $310
million, and $202 million, respectively, realizing pretax gains of
approximately $1.8 million, $5.2 million, and $3.0 million, respectively. While
the Company's strategy is to continue to increase the size of its servicing
portfolio by retaining the servicing rights to the mortgage loans it
originates, the Company may continue to sell servicing rights in the future
when market conditions are favorable.
Other Income and Expenses. Other income increased 23% in 1996 as compared
to 1995, and 21% from 1994 to 1995. The increases during 1996 and 1995 were due
primarily to increased fees earned by Doral Federal.
Total expenses in 1996 increased by $6.8 million compared to the same
period for 1995, as a result of higher interest expense associated with the
financing of the Company's mortgage loans and mortgage-backed securities
portfolios. Employee costs and advertising expense increased 39% and 41%,
respectively, over 1995 levels reflecting additional costs associated with
expanding the Company's customer base and loan origination capacity.
For 1995 compared to 1994 aggregate expenses increased by approximately
31% as a result of higher interest expense associated with the financing of the
Company's mortgage loan and mortgage-backed securities portfolio. Telephone
and advertising expenses decreased 19% and 41%, respectively, compared to 1994
levels as a result of cost reduction measures implemented by management
commencing during 1994. Employee costs
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in 1994 reflected approximately $1.75 million in voluntary reductions
taken by the Chief Executive Officer in salary.
Puerto Rico Income Taxes. The Puerto Rico maximum statutory corporate
income tax rate is 39%. For 1996, the effective income tax rate of FFCC was
13.5% as compared to 11.3% for 1995 and 16.3% for 1994. The decrease in
effective tax rates for 1996 and 1995 compared to 1994 was mainly due to the
increase in holdings of tax exempt GNMA mortgage-backed securities. The
decrease for 1995 also reflects deductions for the value of shares previously
granted under employment agreements.
The lower effective tax rates (as compared to the maximum statutory rate)
experienced by FFCC, reflect the fact that the portion of the net interest
income derived from certain FHA and VA mortgage loans secured by property
located in Puerto Rico and on GNMA securities backed by such mortgage loans is
exempt from income tax under Puerto Rico law. Net income tax savings to FFCC
attributable to this exemption amounted to approximately $8.5 million, $4.6
million and $5.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. See Note 21 to the Company's Consolidated Financial Statements
for a reconciliation of the provision for income taxes to the amount computed
by applying the applicable Puerto Rico statutory tax rates to income before
taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise from loan originations and
purchases, repayments of debt upon maturity, payments of operating and interest
expenses and servicing advances. The Company's primary sources of liquidity are
sales in the secondary mortgage market of the loans it originates and
purchases, short term borrowings under warehouse, gestation and repurchase
agreement lines of credit secured by pledges of its loans and mortgage-backed
securities (in most cases until such loans are sold and the lenders repaid) and
revenues from operations. In the past, the Company has also relied on
privately-placed and publicly offered debt financings and public offerings of
preferred and common stock. Doral Federal, the Company's thrift subsidiary,
also relies on deposits, borrowings from the FHLB-NY as well as term notes
backed by letters of credit of the FHLB-NY.
Total liabilities were approximately 6.32 and 6.10 times stockholders'
equity at December 31, 1996 and 1995, respectively. The Company's leverage
reflects a net increase in stockholders' equity of $21.5 million and an
increase in liabilities of $164.3 million, primarily as a result of increases
in deposit accounts held by Doral Federal and additional long term financing
obtained by the Company.
The Consolidated Statement of Cash Flows reflects the working capital
needs of the Company. Operating activities used approximately $26.1
million of net cash during the year 1996, compared to approximately $25.3
million in the comparable period of 1995. Mortgage loan originations for 1996
increased by 23% compared to 1995. Increased originations resulted in
increased sales of mortgage-backed securities and loans held for sale during
the period. FFCC held mortgage loans (including mortgage loans converted into
mortgage-backed securities) prior to sale for an average period of
approximately 259 days for the year ended December 31, 1996 and 352 days during
the year ended December 31, 1995. The decrease in days was due to increased
sales of mortgage-backed securities held for trading and mortgage loans held
for sale. The Company capitalized $10.8 million of mortgage servicing rights
during 1996 related to the adoption of SFAS No. 122 and mortgage loan purchases
from third parties. The Company also recorded $15.9 million in increases in
ESRs during 1996 compared to $2.6 million during 1995.
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Investing activities used cash of approximately $111 million during the
year ended December 31, 1996, due primarily to origination of loans receivable
and purchases of securities held to maturity of approximately $98.7 million and
$54.5 million, respectively.
During 1996, financing activities provided approximately $158.4 million of
net cash, primarily due to additional deposits amounting to approximately $63.2
million received by Doral Federal, the Company's thrift subsidiary, and a net
increase of approximately $96.2 million in notes payable, of which
approximately $35 million represent term notes issued by Doral Federal and $75
million are related to the Company's 7.84% unsecured Senior Notes due 2006 that
were sold in a public underwritten offering in October 1996.
FFCC borrows money under warehousing lines of credit to fund its mortgage
loan commitments and repays the borrowings as the mortgages are sold. The
warehousing lines of credit then become available for additional borrowings.
Included among FFCC's warehousing line of credit facilities are gestation or
presale facilities that permit the Company to obtain more favorable rates once
mortgage loans are in the process of securitization but prior to actual
issuance of the mortgage-backed securities as well as to finance such
mortgage-backed securities upon their issuance. FFCC's warehousing lines of
credit are generally subject to termination at the discretion of the lender.
See Note 15 to the Company's Consolidated Financial Statements included
elsewhere herein for more information on the Company's warehousing lines of
credit.
FFCC also obtains short-term financing through repurchase agreement lines
of credit with financial institutions and investment banking firms. Under
these agreements, FFCC sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed
securities or collateralized mortgage obligations and simultaneously agrees to
repurchase them at a future date at a fixed price. FFCC uses the proceeds of
such sales to repay borrowings under its warehousing lines of credit. The
effective costs of funds under repurchase agreements is typically lower than
the cost of funds borrowed under FFCC's warehousing lines of credit. FFCC's
continued use of repurchase agreements will depend on the cost of repurchase
agreements relative to the cost of borrowing under its warehousing lines of
credit with banks and other financial institutions. See Note 16 to the
Company's Consolidated Financial Statements included elsewhere herein for more
information on the Company's repurchase agreements.
Doral Federal obtains funding for its lending activities through the
receipt of deposits, FHLB-NY advances and from other borrowings, such
as term notes backed by FHLB-NY letters of credit. For information regarding
Doral Federal's deposit accounts see Note 19 to the Company's Consolidated
Financial Statements included elsewhere herein. Doral Federal, as a member of
FHLB-NY, has access to collateralized borrowings from the FHLB-NY up to a
maximum of 30% of its total assets. Advances and reimbursement obligations
with respect to letters of credit must be secured by qualifying assets with a
market value of 110% of the advances or reimbursement obligations. At December
31, 1996, Doral Federal had $15 million in outstanding advances from the
FHLB-NY at a weighted average interest rate cost of 6.24%. In addition, as of
December 31, 1996, Doral Federal had $53.1 million outstanding in term notes
secured by FHLB-NY letters of credit at an average interest rate cost of 6.29%.
Approximately $5.0 million principal amount of such term notes bear interest at
a fluctuating rate based on the London Interbank Bid Rate for dollar deposits
("LIBID"). The interest rate on such floating rate notes has effectively been
fixed pursuant to an interest rate swap agreement with a major brokerage house.
The interest rates on all term notes are subject to one-time a upward
adjustment to a rate equal to 100% of LIBID for a term equal to the remaining
term of the note as a result of the recent changes to Section 936 of the
Internal Revenue Code. See "Recent Developments--Repeal of Section 936"
herein. Because Doral Federal has the right to prepay the notes upon an upward
adjustment of the rate, in all but one of the three cases
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in which the investor has requested an upward adjustment, Doral Federal
has been successful in negotiating a rate adjustment below 100% of LIBID.
As of December 31, 1996, Doral Federal met all its minimum regulatory
capital requirements (i.e., tangible and core capital of at least 1.5% and
3.0%, respectively, of adjusted assets and risk-based capital of at least 8% of
risk weighted assets). As of December 31, 1996, Doral Federal had tangible
capital and core capital of $23.4 million or approximately 8.3% of adjusted
assets. As of such date, Doral Federal had risk-based capital of $24 million
or 19.8% of risk weighted assets. See Note 4 to the Company's Consolidated
Financial Statements included elsewhere herein for more information regarding
Doral Federal's regulatory capital requirements.
Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA and certain other investors and mortgage loans sold to
certain other purchasers, require FFCC to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not
been received from the borrowers. FFCC generally recovers funds advanced
pursuant to these arrangements within 30 days. During the year ended December
31, 1996, the monthly average amount of funds advanced by the Company under
such servicing agreements was approximately $6.4 million.
On October 10, 1996, the Company issued $75,000,000 of its 7.84% Senior
Notes due 2006 (the "Senior Notes") pursuant to an Indenture entered into
between the Company and Bankers Trust Company, as trustee. The Senior Notes
were sold in a public underwritten offering through BT Securities Corporation.
The net proceeds from the sale of the notes were used to repay $17.7 million on
indebtedness owed by the Company under a five-year senior servicing secured
loan facility with a syndicate of banks managed by Bankers Trust Company, and
for general corporate purposes, including capital contributions to Doral
Federal, AAA Financial Services Corporation ("AAA Financial") and other
subsidiaries.
The Indenture for the Senior Notes as well as certain of the other debt
agreements of the Company contain various provisions that could affect the
ability of the Company to pay dividends and remain in compliance with such
obligations. These provisions include limitations on the amounts of dividends
and other distributions that may be paid as a percentage of the Company's net
revenues as well as requirements as to net worth, tangible net worth and other
financial covenants. These provisions have not had, and are not expected to
have, an adverse impact on the ability of the Company to pay dividends.
FFCC expects that it will continue to have adequate liquidity and
financing arrangements to finance its operations. The Company will continue to
explore alternative and supplementary methods of financing its operations,
including both debt and equity financing. There can be no assurance, however,
that the Company will be successful in consummating any such transactions.
ASSETS AND LIABILITIES
At December 31, 1996, total assets were $1.1 billion compared to $916
million at December 31, 1995. This increase was due primarily to a net
increase of $31.1 million and $77.4 million in securities held to maturity and
loans receivable, respectively. Total liabilities were $951 million at
December 31, 1996, compared to $787 million at December 31, 1995. This increase
was largely the result of an increase in deposit accounts at Doral Federal and
long term notes payable. At December 31, 1996, deposit accounts totaled $159
million, compared to $96 million at December 31, 1995. Deposit accounts include
$30.3 million in non-interest bearing demand deposits representing escrow funds
and other servicing accounts from First Financial's servicing operations. The
increase in deposits is primarily due to the offering of competitive interest
rates and increased market
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recognition achieved by Doral Federal. As of December 31, 1996, Doral
Federal had $280.7 million in assets, compared to $160 million at December 31,
1995.
INTEREST RATE FLUCTUATIONS
Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates affect the volume of
mortgage loan originations and acquisitions, the interest rate spread on the
Company's portfolio of loans and mortgage-backed securities, the amount of gain
on sale of loans and the value of the Company's loan servicing portfolio and
mortgage-backed securities holdings.
Lower interest rates tend to increase demand for mortgage loans for home
purchases, as well as the demand for refinancing of existing mortgages. Higher
interest rates make it more difficult for potential borrowers to purchase
residential properties and to qualify for mortgage loans and reduce demand for
refinance loans. As a result, higher interest rates may adversely affect the
volume of loan originations and income related to mortgage production.
Although the Company has increased home purchase originations, a significant
future increase in mortgage interest rates in Puerto Rico would adversely
affect the Company's business if it results in a significant decrease in
refinancing of mortgage loans.
Changes in prevailing long-term market interest rates between the time the
Company commits to or establishes an interest rate on a mortgage loan and the
time commitments to purchase the mortgage loan are obtained or the loan is sold
affect FFCC's gain or loss on the sale of such mortgage loan. The Company uses
forward commitments and other hedging techniques in an attempt to reduce its
exposure to changes in interest rates pending the sale of such mortgage loans.
The Company does not generally hedge conventional loans in the pipeline or
in the process of origination because the Company does not generally permit
customers to lock-in an interest rate prior to closing. Instead, the interest
rates on loans are generally fixed at closing based on a certain spread over a
prevailing rate that adjusts weekly. For FNMA and FHLMC conforming loans and
FNMA and FHLMC mortgage-backed securities, the Company seeks to sell or obtain
commitments for the sale of such loans or mortgage-backed securities following
the funding of such loans. These loans are normally sold to institutional
investors or to FNMA and FHLMC. To the extent the Company does engage in
offerings of mortgage products which lock-in the interest rate until the
closing date, it attempts to obtain forward commitments at the time it fixes
the rates for the loans. Non-conforming conventional loans are normally sold in
bulk to local financial institutions or packaged into collateralized mortgage
obligations. The sale of non-conforming conventional loans normally takes
longer than the sale of conforming mortgage loans. Accordingly, the Company
attempts to manage this interest rate risk through the purchase of listed
options on U.S. Treasury Securities, as well as through the purchase of option
contracts in the over-the-counter market on other interest rate sensitive
instruments.
In the case of GNMA securities, the Company normally holds such securities
for longer periods prior to sale to maximize its net interest income
and to take advantage of the tax exempt status of the interest on such
securities under Puerto Rico law. Prices for GNMA certificates in Puerto Rico
tend to be more stable than on the mainland U.S. because the tax exempt status
of interest paid on these securities under Puerto Rico law makes them more
attractive to retail investors. This relative stability of prices for Puerto
Rico GNMA securities allows the Company to carry out a less aggressive hedging
strategy to attempt to protect the value of these assets than what might
otherwise be required. The Company seeks to protect itself from interest rate
risk associated with its inventory of GNMA securities by purchasing listed
options on treasury bond futures contracts and other interest rate sensitive
instruments, as well as purchasing options on U.S. GNMA securities in the
over-the-
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counter market. The Company has in place long-term repurchase
agreements secured by collateralized mortgage obligations backed by GNMA
certificates with a principal amount of approximately $65 million. The Company
does not obtain forward commitments or otherwise hedge such securities because
they are financed pursuant to long-term repurchase agreements. The Company has
the right to substitute similar securities under the repurchase agreements.
The cost of unexpired options, net of premiums collected on written
options, is capitalized as part of the carrying cost of the mortgage loans and
charged to income when they expire. Unrealized net gains or losses on
unexpired options positions are considered as part of the lower cost or market
evaluation made for mortgage loans.
Declines in interest rates can adversely affect the Company's revenues by
increasing prepayment rates and causing an increase of the amortization of
MSRs and ESRs or causing an impairment to be recognized with respect to such
assets. Moreover, increased prepayment rates can reduce the Company's
servicing income by decreasing the size of the Company's servicing portfolio.
To date, the Company has not used synthetic hedge devices to protect the value
of its MSRs and ESRs from future interest rate fluctuations. The primary means
used by the Company to reduce the sensitivity of the Company's servicing income
to possible reduction of its servicing portfolio has been the development of a
strong retail origination network that has allowed the Company to increase or
maintain the size of its servicing portfolio even during periods of high
prepayments.
The net interest income of the Company is also subject to interest rate
risk because its interest earning assets and interest-bearing liabilities
reprice at different times and varying amounts. Most of the Company's interest
earning assets, including its mortgage-backed securities held for trading, are
fixed rate interest-earning assets that are not subject to repricing (except
for replacement of assets through repayments, sales and new originations) while
the short-term borrowings used to finance these positions normally reprice on a
periodic basis (e.g., daily, monthly or quarterly). To protect against major
fluctuations in short-term interest rates, the Company purchases listed put and
call options and sells call options on financial instruments, including
Eurodollar contracts. This policy attempts to ensure a relatively stable
short-term cost of funds. With respect to the loans receivable and securities
held to maturity of Doral Federal, Doral Federal attempts to obtain long-term
deposits and other long-term debt financing, including advances from the
FHLB-NY and term notes backed by FHLB-NY letters of credit.
In the future, FFCC may use alternative hedging techniques including
futures, options or other hedge vehicles to help mitigate interest rate and
market risk. However, there can be no assurance that any of the above hedging
techniques will be successful. To the extent they are not successful, the
Company's profitability may be adversely affected.
INFLATION
FFCC is affected by inflation in the areas of loan production and
servicing fees. General and administrative expenses increase with
inflation. However, the increase in real estate values in Puerto Rico in recent
years has been a positive factor for the Company's mortgage banking business.
The average size of loans originated tends to increase as home values
appreciate, which serves to increase loan origination fees and servicing income
faster than the cost of providing such services. Interest rates normally
increase during periods of high inflation and decrease during periods of low
inflation. See "Interest Rate Fluctuations" for a discussion of the effects of
changes of interest rates on the Company's operations.
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CHANGES IN ACCOUNTING PRINCIPLES
In January 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." This Statement requires that impaired
loans that are within the scope of the statement be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependant.
Loans that are measured at fair value or at the lower of cost or fair value,
are excluded.
In January 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets,
to be held and used. Under SFAS No. 121, long-lived assets and certain
identifiable intangibles to be held and used must be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review of
recoverability, an estimate of the future cash flows expected to result from
the use of the asset and its eventual disposition must be made. If the sum of
the future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the asset, an impairment loss is recognized.
In January 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-based Compensation." This Statement defines a fair value based method of
accounting for employee stock options and encourages all entities to adopt that
method of accounting for all of their stock-based employee compensation plans.
As allowed by SFAS No. 123, the Company elected to continue to measure
compensation cost for its stock compensation plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25. No transactions
of the nature covered by SFAS No. 123 have been made.
The adoption of these Statements have had no material effect on the
Company's result of operations or financial position.
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on the application of a financial-components approach that
focuses on control. That approach requires the recognition of financial
assets and servicing assets that are controlled by the reporting entity, the
derecognition of financial assets when control is surrendered, and the
derecognition of liabilities when they are extinguished. Specific criteria are
established for determining when control has been surrendered in the transfer
of financial assets.
This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interest, if any, based on their relative fair values at the
date of the transfer. Servicing assets and liabilities must be subsequently
measured by (a) amortization in proportion to and over the period of estimated
net servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values.
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The provisions of this Statement, except as indicated below, are effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and must be applied
prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued a statement that defers for one year the
effective date applicable to the provisions of SFAS No. 125 that deal with
secured borrowings and collateral. Additionally, the deferment provision would
apply to transfers of financial assets only for repurchase agreements, dollar
rolls and securities lending.
Management believes that the adoption of these standards will not have a
material adverse effect on the Company's results of operations or financial
position.
RECENT DEVELOPMENTS
Product Diversification. Commencing in 1995, the Company began to offer
home equity and personal loans secured by mortgages in order to diversify its
loan products. These loans, which are secured by first or second mortgage
liens, generally have lower balances (between $10,000 and $40,000), shorter
maturities (between five to ten years) and bear higher interest rates. The
Company sells these loans, other than such loans funded and retained by Doral
Federal, to local financial institutions, or packages them into collateralized
mortgage obligations. When the Company sells these loans, it normally retains
the right to receive, as a servicing fee, interest payable on the loan above a
specified rate. The present value of the servicing fee income to be received
over the life of the loan over and above the typical servicing fee payable on
conforming conventional loans is recognized on the Company's income statement
as a component of Mortgage Loan Sales and Fees and is reflected as an asset on
the Company's balance sheet as ESRs. As the volume of originations of this
type of loan product increases, the amount of the Company's revenues consisting
of increases in ESRs and the amount of ESRs reflected on the balance sheet of
the Company will increase.
Deregulation of Interest Rates. Mortgage interest rates on non-government
guaranteed mortgage loans in Puerto Rico were deregulated effective April 1996.
Management believes that this deregulation may result in an increase in loan
originations by expanding the market of potential borrowers. The deregulation
of interest rates in Puerto Rico may also have a positive impact on the
Company's net interest income by allowing the Company to originate higher
yielding mortgage loans.
New Broker-Dealer Subsidiary. During the second quarter of 1996, the
Company organized a new securities broker-dealer subsidiary, AAA Financial,
which commenced operations on September 12, 1996. The new broker-dealer
subsidiary commenced operations from a single branch in the San Juan
metropolitan area and employed 16 persons by the end of 1996. While the new
subsidiary is engaged in a general securities business, its efforts are
concentrated on the sale of Puerto Rico tax exempt GNMA securities and other
Puerto Rico securities. The operations of AAA Financial did not have a material
impact on the Company's results of operations for 1996.
Repeal of Section 936. Section 936 of the U.S. Internal Revenue Code
("Section 936"), has historically provided incentives for U.S.
corporations to invest in Puerto Rico by granting a credit to qualifying
corporations ("936 Corporations") against a portion of the U.S. income tax
payable from the active conduct of a trade or business in Puerto Rico and 100%
of certain qualifying investment income derived in Puerto Rico. Section 936
together with complementary Puerto Rico laws has provided incentives for 936
Corporations and financial intermediaries receiving funds from 936 Corporations
to invest in mortgage loans and mortgage-backed securities. On August 20,
1996, the Small Business Job Protection Act of 1996 (the "Small Business Job
Protection Act") was signed into law. The Small Business Job Protection Act
provides for the elimination of
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the special U.S. federal income tax benefits available under Section
936 to U.S. corporations operating and investing in Puerto Rico. The Act
repealed Section 936, subject to a ten-year grandfather rule for 936
Corporations that were engaged in the active conduct of a trade or business on
October 13, 1995 and that qualified for and elected the benefits of Section 936
for the corporation's taxable year which includes such date. During the
grandfather period, the amount of income that will benefit from the credit
available under Section 936 derived from the active conduct of a trade or
business will be subject to varying caps. The credit available for investment
income is not be subject to the grandfather rule and was eliminated effective
for taxable years beginning after December 31, 1995 but in no event prior to
July 1, 1996.
While the final impact of a repeal of Section 936 cannot be determined at
this time, the repeal of Section 936 could have an adverse effect on the
general economic condition of Puerto Rico, the Company's predominant service
area, by reducing incentives for investment in Puerto Rico. Any such adverse
effect on the general economy of Puerto Rico could lead to an increase in
mortgage delinquencies and a reduction in the level of residential construction
and demand for mortgage loans. The elimination of Section 936, particularly
the elimination of the credit for investment income, could also lead to a
decrease in the amount of funds invested in the Puerto Rico financial market by
936 Corporations ("936 Funds"), thereby increasing funding costs and decreasing
liquidity for Puerto Rico mortgage products. While the final magnitude of the
impact of any such changes on the Company's profitability or financial
condition cannot be determined at this time, management believes, based on
recent experience, that the principal impact of the loss of 936 Funds will be a
moderate increase in the Company's funding costs. The Company, however, has
taken steps to attempt to reduce the impact of any such adverse changes by
diversifying its sources of funding and identifying additional investors for
its mortgage products.
Possible Changes in Favorable Puerto Rico Tax Laws. The Company currently
benefits from Puerto Rico tax laws that exempt from Puerto Rico income taxes the
interest received on FHA and VA loans and on GNMA mortgage-backed securities
backed by FHA and VA loans. This favorable tax treatment has permitted the
Company to sell tax-exempt Puerto Rico GNMA mortgage-backed securities to local
investors at higher prices than those at which comparable instruments trade in
the mainland United States and to reduce its effective tax rate through the
receipt of tax exempt interest. On February 28, 1997, the Government of Puerto
Rico announced its intention to seek legislation to repeal the exemption for
interest received on FHA and VA loans. Under the Government's proposal,
interest on FHA and VA loans originated after June 30, 1997, with the exception
of certain loans made to finance the purchase of homes in low and moderate
income housing projects sponsored by local housing authorities, would cease to
be exempt. Individuals receiving interest on FHA and VA loans originated after
such date, however, would be taxed at a preferential 17% rate that would also
apply to Puerto Rico corporate debt obligations. The Government's proposal
would not alter the tax exempt status of FHA and VA loans and securities backed
by such loans originated prior to July 1, 1997.
The Government's proposal is part of a broader initiative to reform the
capital markets in Puerto Rico. The repeal of the tax exemption for interest on
FHA and VA loans must be approved by the Puerto Rico legislature before becoming
effective. To date, implementing legislation has not been introduced into the
Puerto Rico legislature. In the opinion of management, while the final impact
of the proposal cannot be fully measured until management has had the
opportunity to review the implementing legislation as finally approved,
management believes that the adoption of the proposal, in its current form,
would not have a material adverse effect on the Company's financial condition or
results of operation.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information call for by this Item 8 is hereby incorporated by
reference from the Company's Consolidated Financial Statements and Auditor's
Report beginning on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters" and
"Executive Compensation - Section 16(a) Beneficial Ownership Reporting
Compliance" contained in Company's definitive Proxy Statement for its 1997
Annual Meeting of stockholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
to the section entitled "Executive Compensation" of the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference
to the section entitled "Security Ownership of Management and Principal
Holders" of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters -- Certain
Relationships and Related Transactions" of the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The information called for by this subsection of Item 14 is set forth
in the Financial Statements and Auditors' Report beginning on page F-1 of
this Form 10-K. The index to Financial Statements is set forth on page
F-2 of this Form 10-K.
54
58
(2) Financial Statement Schedules.
All financial schedules have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) Exhibits.
55
59
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Amended and Restated Certificate of Incorporation of FFCC, as currently in effect.(22)
3.2 By-laws of FFCC, as amended as of January 30, 1996.(18)
4.1 Common Stock Certificate.(22)
10.13 1988 FFCC Stock Option Plan.(3)
10.14 FFCC Restricted Stock Plan.(3)
10.15 Purchase Agreement dated as of September 21, 1988, between FFCC and Culbro Corporation
covering the purchase of RSC Corp. and Doral Mortgage Corporation.(3)
10.18 Form of Contract of Pledge used by FFCC in connection with the Warehousing Loan Agreement
dated November 25, 1987, as amended, with Scotiabank de Puerto Rico.(5)
10.21 Tax Indemnification Agreement between Culbro Corporation and FFCC.(3)
10.22 Purchase Agreement dated as of November 30, 1976, between CMB, Inc. and David Levis,
Salomon Levis, Aida Levis and Carmen Levis covering the purchase of FFCC together with
amendments or supplements dated August 25, 1977, November 1, 1977, January 1, 1982,
February 9, 1982, January 1, 1986 and January 1, 1987.(3)
10.23 Purchase Agreement dated as of October 15, 1986, between CMI Inc. and Salomon Levis and
Carmen Maria Serracante covering the purchase of RSC Corp.(3)
10.24 Purchase Agreement dated as of October 15, 1986, between DRL, Inc. and Jesus M. Rodriguez
and Marta Melendez covering the purchase of Doral Mortgage Corporation.(3)
10.28 Agreement among Doral Mortgage Corporation, Banco de Ponce, as trustee, and the Puerto Rico
Housing Finance Corporation dated September 25, 1990.(4)
10.30 Loan Agreement between FFCC and Puerto Rico Island Rental Limited Dividend Partnership
S.E., dated December 27, 1990.(4)
10.32 Warehousing Loan Agreement dated September 8, 1995 between FFCC and Banco Santander Puerto
Rico.(14)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto Rico.(4)
10.34 (a) Repurchase Agreement, between FFCC and BP Capital Markets, Inc., dated November 10,
1995. (18)
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated November
28, 1989.(4)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc., dated as of March 24,
1992.(5)
10.35 Employment Agreement dated August 29, 1995 between FFCC and Salomon Levis.(16)
10.36 Employment Agreement dated August 29, 1995 between FFCC and Zoila Levis.(16)
10.37 Third Amendment to Loan Agreement dated June 5, 1991 between FFCC and Scotiabank de Puerto
Rico.(2)
10.39 Mark-to-Market Agreement between FFCC and PaineWebber Incorporated, dated as of March 24,
1992.(5)
10.40 Insurance and Indemnity Agreement dated as of May 28, 1992, between FFCC and Financial
Security Assurance Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de Puerto Rico and FFCC
confirming the renewal of the Loan Agreement dated November 25, 1987.(5)
10.42 Financing Agreement dated May 14, 1992, between FFCC and Banco Popular de Puerto Rico.(5)
10.43 Employment Agreement dated August 29, 1995, between FFCC and Richard F. Bonini.(16)
56
60
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991, between FFCC and Banco
Santander Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992, between FFCC and Banco Santander
Puerto Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the Loan Agreement between FFCC and
Scotiabank de Puerto Rico dated November 25, 1987.(5)
10.47 Amendment dated June 29, 1989 to the Loan Agreement between FFCC and Scotiabank de Puerto
Rico dated November 25, 1987.(5)
10.49 Employment Agreement dated as of December 1, 1996 between FFCC and Luis Alvarado.(22)
10.50 Customer Agreement, dated March 9, 1993, between FFCC and Meridian Capital Markets Inc.
relating to the execution of Forward Contracts.(6)
10.51 Master Repurchase Agreement, dated March 24, 1993, between FFCC and Bear Sterns Mortgage
Capital Corporation.(7)
10.52 Amended and Restated Master Production Agreement, dated as of October 1, 1995, between
FFCC, Doral Mortgage and Doral Federal, Master Production Agreement, dated as of October 1,
1995, between FFCC, Doral Mortgage and Doral Federal.(8)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of September 15, 1993,
between FFCC and Doral Federal.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as of November 29, 1993
between FFCC and Nomura Asset Capital Corporation.(13)
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993, between FFCC and Meridian
Capital markets, a Division of Meridian Bank.(13)
10.56 Financing Facility Agreement dated March 21, 1994, between Nomura Asset Capital
Corporation, FFCC and Doral.(12)
10.57 Master Repurchase Agreement among Merrill Lynch Mortgage Capital, Inc., FFCC and Doral
together with Supplemental Terms to Master Repurchase Agreement, each dated as of January
12, 1995.(14)
10.58 Swap Agreement dated December 7, 1994, between FFCC and David Levis.(14)
10.59 Demand Note dated December 9, 1994.(14)
10.60 Form of Medium Term Note, 1994 Series Puerto Rico-A.(14)
10.61 Credit Agreement, dated as of June 30, 1995, between FFCC, Doral Mortgage, the lenders
party thereto and Bankers Trust Company, as Agent.(17)
10.62 Debenture Purchase Agreement dated as of September 25, 1995, and amended restated as of
December 15, 1995, between the Company and BanPonce Corporation (including the forms of
Series A and Series Debentures.(15)
10.63 Financing Agreement dated October 10, 1995, between FFCC and Banco Santander together with
related Assignment and Pledge Agreements.(16)
10.64 Master Servicing and Collection Agreement dated October 1, 1995, between FFCC and Doral
Federal Savings Bank.(18)
10.65 Employment Agreement, dated as of February 20, 1996, between FFCC and Frederick C. Teed.(18)
10.66 First Amendment to Master Servicing and Collection Agreement, dated as of March 1, 1996,
between FFCC and Doral Federal Savings Bank.(19)
57
61
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.67 First Amendment to Amended and Restated Master Production Agreement, dated as of March 1,
1996, between FFCC, Doral Mortgage Corporation and Doral Federal Savings Bank,
respectively.(19)
10.68 First Amended and Restated Credit Agreement, dated as of September 25, 1996, between FFCC,
Doral Mortgage, the lenders party thereto and Bankers Trust Company, as Agent, as amended
by First Amendment dated January 7, 1997.(22)
10.69 Indenture, dated as of October 10, 1996, between the Company and Bankers Trust Company, as
trustee, including form of Senior Note. (20)
10.70 Employment Agreement, dated as of July 1, 1996, between FFCC and Mario S. Levis.(21)
10.71 Employment Agreement, dated as of December 31, 1996, between Doral Mortgage and Edison
Velez.(22)
21 List of FFCC's subsidiaries.(22)
27 Financial Data Schedule (Edgar version only).(22)
- -----------------------
(1) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993
(File No. 0-17224).
(2) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on From 10-K for the year ended December 31, 1991 (File
No. 0-17224).
(3) Incorporated herein by reference to the same exhibit number as filed
pursuant to Item 15(b) of the Company's Form 10 filed with the Commission on
October 7, 1988, as amended by Form 8 amendments thereto.
(4) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-1 (No. 33-39651) filed with the
Commission on March 29, 1991.
(5) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.
(6) Incorporated by reference to exhibit number 19.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(7) Incorporated by reference to exhibit number 19.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(8) Incorporated by reference to exhibit number 19.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File
No. 0-17224).
(9) Incorporated by reference to exhibit number 19.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File
No. 0-17224).
(10) Incorporated herein by reference to exhibit number 1 of the Company's
Current Report on Form 8-K filed with the Commission on December 16, 1992.
(11) Incorporated herein by reference to Exhibit Number 10.26 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
58
62
(12) Incorporated herein by reference to same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(13) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(14) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(15) Incorporated herein by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated December 22, 1995.
(16) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(17) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(18) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(19) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(20) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report For 8-K, dated October 10, 1996.
(21) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(22) Filed herewith.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K ("Form 8-K"), dated October 10, 1996,
reporting under Item 5 - "Other Items" the closing of the issuance and sale of
the Company's Senior Notes.
59
63
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, First Financial Caribbean Corporation has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST FINANCIAL CARIBBEAN CORPORATION
By: /s/ Salomon Levis
----------------------------------
Salomon Levis
Chairman of the Board and
Chief Executive Officer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Chairman of the Board and
/s/ Salomon Levis Chief Executive Officer March 27, 1997
- --------------------------
(Salomon Levis)
/s/ Richard F. Bonini
- -------------------------- Director and March 27, 1997
(Richard F. Bonini) Chief Financial Officer
/s/ Edgar M. Cullman, Jr
- -------------------------- Director March 27, 1997
(Edgar M. Cullman, Jr.)
/s/ Frederick M. Danziger
- -------------------------- Director March 27, 1997
(Frederick M. Danziger)
/s/ John L. Ernst
- -------------------------- Director March 27, 1997
(John L. Ernst)
/s/ Zoila Levis
- -------------------------- Director March 27, 1997
(Zoila Levis)
/s/ A. Brean Murray
- -------------------------- Director March 27, 1997
(A. Brean Murray)
/s/ Victor M. Pons, Jr.
- -------------------------- Director March 27, 1997
(Victor M. Pons, Jr.)
/s/ Ricardo Melendez
- -------------------------- Vice President and March 27, 1997
(Ricardo Melendez) Controller, Principal
Accounting Officer
60
64
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR INCLUSION IN FORM 10-K
ANNUAL REPORT FILED WITH
SECURITIES AND EXCHANGE COMMISSION
F-1
65
FIRST FINANCIAL CARIBBEAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
JANUARY 31, 1997
PAGE
----
Report of Independent Accountants...................................................... F-3
Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 1996 and 1995........................ F-4
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994.................................................. F-5
Consolidated Statement of Changes in Stockholder's Equity for the years ended
December 31, 1996, 1995 and 1995 .................................................. F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1996,
1995 and 1994...................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-9
All financial schedules have been omitted because they are not applicable,
or because the information required is included in the consolidated financial
statements or notes thereto.
F-2
66
[PRICE WATERHOUSE LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
First Caribbean Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
First Financial Caribbean Corporation and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65", effective April 1, 1995.
/s/ Price Waterhouse
PRICE WATERHOUSE
San Juan, Puerto Rico
January 31, 1997
Stamp 1392092 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
F-3
67
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
December 31,
------------
1996 1995
---- ----
Cash and cash equivalents $ 81,213,266 $ 59,871,646
Mortgage loans held for sale, net 261,607,809 244,132,116
Securities held for trading 411,447,299 407,941,495
Securities held to maturity 109,054,782 77,945,425
Securities available for sale 12,006,540 14,578,997
Loans receivable, net 128,765,669 51,355,258
Accounts receivable and mortgage servicing
advances, net 15,882,059 9,591,627
Accrued interest receivable 10,090,549 8,155,028
Mortgage servicing rights, net 20,968,937 11,164,065
Excess servicing fees receivable, net 24,678,425 10,407,297
Property, leasehold improvements and equipment, net 9,359,550 6,504,725
Cost in excess of fair value of net assets acquired, net 6,561,918 6,526,131
Real estate held for sale, net 2,246,449 2,084,541
Prepaid and other assets 8,071,477 5,859,593
-------------- --------------
Total assets $1,101,954,729 $ 916,117,944
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loans payable $196,396,627 $234,367,019
Securities sold under agreements to repurchase 387,651,266 363,615,500
Deposit accounts 158,901,811 95,740,441
Notes payable 147,892,823 51,682,156
Advances from Federal Home Loan Bank of N.Y 15,000,000 10,407,111
Convertible Subordinated Debentures 10,000,000 10,000,000
Accounts payable and other liabilities 26,992,355 16,024,065
Income tax payable 216,873 388,041
Deferred tax liability 8,372,005 4,877,068
-------------- --------------
Total liabilities 951,423,760 787,101,401
============== ==============
Commitments and contingencies (Note 25)
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; no shares outstanding (1995 - 108,397
shares of 10.5% Cumulative Convertible Preferred
Stock, Series A,
outstanding) -- 108,397
Common stock, $1 par value, 20,000,000 shares authorized;
9,125,092 shares issued (1995 - 8,884,170); 9,111,092 shares
outstanding (1995 - 8,870,170) 9,125,092 8,884,170
Paid-in capital 38,672,523 38,329,800
Retained earnings 102,925,252 81,892,300
-------------- --------------
150,722,867 129,214,667
Unrealized (loss) gain on securities available for sale,
net of deferred tax (81,358) 8,856
Treasury stock at par value, 14,000 shares (14,000) (14,000)
Unearned compensation under employment contracts (96,540) (192,980)
-------------- --------------
Total stockholders' equity 150,530,969 129,016,543
-------------- --------------
Total liabilities and stockholders' equity $1,101,954,729 $916,117,944
============== ==============
The accompanying notes are an integral part of these statements.
F-4
68
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues:
Interest income $ 66,986,946 $ 61,907,114 $ 46,507,972
Mortgage loan sales and fees 26,610,264 13,528,534 10,572,734
Servicing income 11,658,588 10,576,826 11,447,772
Gain on sale of mortgage servicing rights 1,813,108 5,204,933 3,003,459
Other income 764,082 619,923 510,705
------------ ------------ ------------
107,832,988 91,837,330 72,042,642
------------ ------------ ------------
Expenses:
Interest 46,443,095 43,380,148 23,251,898
Employee cost 8,981,538 6,471,059 6,000,632
Taxes, other than payroll and income taxes 1,086,556 1,150,416 847,856
Maintenance 694,000 654,354 712,627
Advertising 3,500,444 2,474,638 4,205,312
Professional services 2,670,920 2,867,316 3,658,557
Telephone 1,813,094 1,682,412 2,076,049
Rent 2,083,538 2,096,979 2,004,023
Other 9,281,164 8,999,491 10,540,576
------------ ------------ ------------
76,554,349 69,776,813 53,297,530
------------ ------------ ------------
Income before income taxes and cumulative
effect of change in accounting principle 31,278,639 22,060,517 18,745,112
------------ ------------ ------------
Income taxes:
Current 961,124 1,400,044 2,092,696
Deferred 3,277,000 1,100,169 436,899
------------ ------------ ------------
4,238,124 2,500,213 2,529,595
------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 27,040,515 19,560,304 16,215,517
Cumulative effect of change in accounting
principle - adoption of SFAS 115, net of
deferred income taxes of $880,000 -- -- 1,215,000
------------ ------------ ------------
Net income $ 27,040,515 $ 19,560,304 $ 17,430,517
============ ============ ============
Earnings per share:
Primary:
Income before cumulative effect of change
in accounting principle $ 2.98 $ 2.65 $ 2.29
Cumulative effect of change in accounting
principle -- -- .17
------------ ------------ ------------
Net income $ 2.98 $ 2.65 $ 2.46
============ ============ ============
Fully diluted:
Income before cumulative effect of change in
accounting principle $ 2.84 $ 2.53 $ 2.14
Cumulative effect of change in accounting
principle -- -- .16
------------ ------------ ------------
Net income $ 2.84 $ 2.53 $ 2.30
============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
69
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Unrealized
(loss) gain
on securities
Preferred Common Paid-in Retained available
stock stock capital Earnings for sale
------------ ------------- ----------- ------------ ---------------
Balance at December 31, 1993 $ 414,413 $ 6,762,138 $16,884,486 $ 53,219,178
Shares converted (210,084) 420,168 (210,084)
Cash dividends:
Convertible preferred stock,
$1.05 per share (325,045)
Common stock - $.52 per share (3,618,215)
Net income 17,430,517
Amortization of unearned compensation ------------- ------------- ----------- ------------
Balance at December 31, 1994 204,329 7,182,306 16,674,402 66,706,435
shares issued on December 11, 1995 1,510,000 21,751,330
Shares converted (95,932) 191,864 (95,932)
Cash dividends:
Convertible preferred stock,
$1.05 per share (187,639)
Common stock - $.58 per share (4,186,800)
Net income 19,560,304
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net
of deferred taxes 8,856
-------- --------- ----------- ---------- -----
Balance at December 31, 1995 108,397 8,884,170 38,329,800 81,892,300 8,856
Shares issued on January 31, 1996 25,000 455,000
Shares converted (107,961) 215,922 (107,961)
Shares redeemed (436) (4,316)
Cash dividends:
Convertible preferred stock,
$.3825 per share (13,998)
Common stock - $.66 per share (5,993,565)
Net income 27,040,515
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net of
deferred taxes
(90,214)
------------- ------------- ----------- ------------ -------------
Balance at December 31, 1996 $ 9,125,092 $38,672,523 $102,925,252 $ (81,358)
============= ============= =========== ============ =============
Unearned
compensation
under
Treasury employment
stock contracts Total
------------ -------------- ------------
Balance at December 31, 1993 ($14,000) ($321,568) $ 76,944,647
Shares converted
Cash dividends:
Convertible preferred stock,
$1.05 per share (325,045)
Common stock - $.52 per share (3,618,215)
Net income 17,430,517
Amortization of unearned compensation 64,294 64,294
------- -------- ----------
Balance at December 31, 1994 (14,000) (257,274) 90,496,198
shares issued on December 11, 1995 23,261,330
Shares converted
Cash dividends:
Convertible preferred stock,
$1.05 per share (187,639)
Common stock - $.58 per share (4,186,800)
Net income 19,560,304
Amortization of unearned compensation 64,294 64,294
Net change in fair value of securities
available for sale, net
of deferred taxes 8,856
------- -------- ----------
Balance at December 31, 1995 (14,000) (192,980) 129,016,543
Shares issued on January 31, 1996 480,000
Shares converted
Shares redeemed (4,752)
Cash dividends:
Convertible preferred stock,
$.3825 per share (13,998)
Common stock - $.66 per share (5,993,565)
Net income 27,040,515
Amortization of unearned compensation 96,440 96,440
Net change in fair value of securities
available for sale, net of
deferred taxes (90,214)
--------- ------------ ------------
Balance at December 31, 1996 ($14,000) ($96,540) $150,530,969
========= ============ ============
The accompanying notes are an integral part of these statements.
F-6
70
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 27,040,515 $ 19,560,304 $ 17,430,517
------------ ------------ ------------
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Depreciation and amortization 1,796,043 1,764,500 1,533,750
Amortization of excess servicing
fees receivable 1,628,427 988,082 566,668
Amortization of cost in excess of fair
value of net assets acquired 374,530 376,158 358,097
Amortization of mortgage servicing rights 998,789 562,054 730,059
Deferred tax provision 3,277,000 1,100,169 436,899
Gain on sale of mortgage servicing rights (1,813,108) (5,204,933) (3,003,459)
Cumulative effect of change in accounting
principle -- -- (1,215,000)
Allowances for losses 797,000 352,000 299,523
Origination and purchases of mortgage
loans held for sale (719,886,000) (583,659,000) (797,582,000)
Principal repayments and sales of mortgage
loans held for sale 368,572,642 283,829,870 216,918,548
Purchases of mortgage-backed securities
held for trading (156,935,000) ( 72,124,000) (265,025,000)
Principal repayments and sales of
mortgage-backed securities held for trading 488,619,000 357,461,000 653,479,000
Increase in mortgage servicing rights (10,803,661) (8,207,139) (581,130)
Additions to excess servicing fees
receivable (15,899,555) (2,638,790) (5,859,312)
(Increase) decrease in accounts receivable
and mortgage servicing advances (7,087,432) (2,857,582) 8,112,720
Increase in accrued interest receivable (1,935,521) (280,477) (3,853,140)
(Decrease) increase in loans payable (26,203,023) (94,428,485) 72,911,782
(Decrease) increase in payable related to
short sales (12,106,847) 22,089,547 --
Increase in interest payable 2,388,123 382,912 788,079
Increase in securities sold under
agreements to repurchase 23,923,266 59,885,483 160,530,375
Increase (decrease) in accounts payable and
other liabilities 7,228,028 (2,151,491) (21,838,018)
Decrease in income tax payable (171,168) (2,183,732) (1,177,206)
Amortization of unearned compensation
under employment contracts 96,440 64,294 64,294
------------ ------------ ------------
Total adjustments (53,142,027) (44,879,560) 16,595,529
------------ ------------ ------------
Net cash (used) provided by
operating activities (26,101,512) (25,319,256) 34,026,046
------------ ------------ ------------
Cash flows used for investing activities:
Purchases of securities held to maturity (54,480,000) (10,789,000) (61,789,000)
Principal repayments of securities
held to maturity 23,370,643 3,207,857 799,896
Origination of loans receivable (98,680,000) (52,341,000) (26,252,000)
Principal repayments of loans receivable 21,269,589 4,060,159 836,792
Purchases of securities available for sale (4,639,000) -- --
Principal repayments and maturities of
securities available for sale 7,121,243 -- --
Purchase of property, leasehold improvements
and equipment (4,650,868) (802,245) (3,229,537)
Payments of contingent purchase price
of subsidiary (410,317) (292,887) (430,929)
Proceeds from sale of real estate held for sale 1,182,627 1,616,911 3,163,069
Acquisition of real estate held for sale (1,344,535) (1,585,541) (2,350,675)
Proceeds from sale of mortgage servicing rights 1,813,108 5,228,985 3,306,286
Increase in prepaid and other assets (1,541,969) (1,799,225) (591,019)
------------ ------------ ------------
Net cash used by investing activities (110,989,479) (53,495,986) (86,537,117)
------------ ------------ ------------
(Continued)
The accompanying notes are an integral part of these statements.
F-7
71
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Year ended December 31,
1996 1995 1994
---- ---- ----
Cash flows provided by financing activities:
Increase in deposits $ 63,161,370 $ 29,269,330 $ 40,020,265
Proceeds from convertible
subordinated debentures -- 10,000,000 --
Proceeds from issuance of common stock, net 475,248 23,261,330 --
Proceeds (repayment) of advances
from Federal Home Loan Bank 4,592,889 9,987,866 (2,012,134)
Increase in notes payable 96,210,667 34,626,676 17,055,480
Dividends declared and paid (6,007,563) (4,374,439) (3,943,260)
------------- ------------- -------------
Net cash provided by financing activities 158,432,611 102,770,763 51,120,351
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents 21,341,620 23,955,521 (1,390,720)
Cash and cash equivalents at beginning of year 59,871,646 35,916,125 37,306,845
------------- ------------- -------------
Cash and cash equivalents at the end of year $ 81,213,266 $ 59,871,646 $ 35,916,125
============= ============= =============
Supplemental Schedule of Noncash
Investing and Financing
Activities:
Noncash financing activities-conversion
of preferred stock $ 1,083,970 $ 959,320 $ 2,100,840
============= ============= =============
Supplemental Cash Flow Information:
Cash used to pay interest $ 44,055,000 $ 43,000,000 $ 22,460,000
============= ============= =============
Cash used to pay income taxes $ 1,132,000 $ 3,360,000 $ 3,260,000
============= ============= =============
The accompanying notes are an integral part of these statements.
F-8
72
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REPORTING ENTITY:
The consolidated financial statements include the accounts of First Financial
Caribbean Corporation and its wholly-owned subsidiaries ("FFCC" or the
"Company"), Doral Mortgage Corporation ("Doral"), RSC Corp. ("RSC"), Centro
Hipotecario de Puerto Rico, Inc., Doral Federal Savings Bank ("Doral Federal")
and AAA Financial Services Corporation ("AAA Financial"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
AAA Financial, a securities broker dealer, commenced operations in September
1996. Its operations for the year ended December 31, 1996 were not significant.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is primarily engaged in the origination, purchase and sale of FHA,
VA and conventional first and second mortgage loans and in providing and/or
arranging for interim financing for the construction of residences and other
types of real estate developments in Puerto Rico and selected markets in
Florida. The Company, in combination with its subsidiaries, services FHA
insured, VA guaranteed and conventional mortgage loans pooled for issuance of
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") backed
securities and collateralized mortgage obligations certificates issued by
grantor trusts established by the Company ("CMO Certificates"). It also services
loans for private investors. The Company also originates loans for investment
and provides banking services through a federal savings bank that operates two
branches located in Puerto Rico. It also provides brokerage services through AAA
Financial.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The following summarizes the more significant accounting policies followed in
the preparation of the accompanying consolidated financial statements.
Securities held for trading
Securities held for trading are recorded at fair value. Changes in fair value
are recorded currently in income.
F-9
73
Securities held to maturity
Securities held to maturity are recorded at amortized cost.
Securities available-for-sale
Securities available-for-sale are recorded at fair value, with unrealized gains
and losses excluded from earnings and reported, net of taxes, in a separate
component of stockholders' equity.
Mortgage loans held for sale
Mortgage loans held for sale are recorded at the lower of cost or market
computed on an aggregate portfolio basis.
Loans receivable
Loans receivable are held by Doral Federal principally for investment purposes.
These consist of residential first and second mortgages, commercial and consumer
loans.
Loans receivable are presented at the unpaid balance, less unearned interest,
net deferred loan fees and allowance for loan losses. Unearned interest on
commercial and consumer loans is amortized using a method which results in a
uniform level rate of return on the principal amounts outstanding.
Allowances for losses
Allowances for losses provide for estimated losses on loans receivable, accounts
receivable and real estate held for sale. The allowance is established based
upon a review of the loan portfolio, loss experience, economic conditions and
other pertinent factors.
The Company estimates the fair value of the retained recourse obligation of
loans sold with recourse at the time of sale. Ordinarily the amounts involved
are minimal insofar as the recourse obligations are met by substituting loans.
The Company has generally been able to rehabilitate and resell the reacquired
loans for at least their carrying amount. Accordingly, a reserve for possible
losses arising from recourse obligations has not historically been deemed
necessary.
Excess servicing fees receivable
The Company sells substantially all of the mortgage loans it produces (other
than those originated by Doral Federal) and retains the related servicing
rights. These servicing rights entitle the Company to a future stream of cash
flows based on the outstanding principal balance of the mortgage loans and the
contractual servicing fee. Gains and losses on sales of such loans are adjusted
to reflect as income or loss servicing fees that vary from normal servicing fee
rates set by federally sponsored secondary market makers. Accordingly, the
Company has recorded, as excess servicing fees receivable, amounts equal to the
present value of servicing fees to be
F-10
74
received in future years in excess of normal rates based upon the estimated
lives of the loans and using long-term interest rates that reflect the risks of
the assets. The receivable is realized through receipt of the excess service
fees over time. The Company periodically evaluates the net realizable value of
its excess servicing fees receivable based on the present value of the estimated
remaining future excess servicing fees revenue, using the same discount rate
used to calculate the original excess servicing fees receivable asset. Any
impairment in the value of the excess servicing fees receivable due to actual
and anticipated prepayment experience, is recognized currently as a reduction of
excess servicing fees receivable. Excess servicing fees receivable is
amortized over their estimated life using a method approximating the level-yield
method. The amortization is recorded as a reduction of servicing income.
Mortgage servicing rights
In April 1995, the Company adopted Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB No.
65," ("SFAS 122"). This Statement changed the accounting for servicing rights
related to loans originated by an entity. Previously, the Company followed the
guidance provided by SFAS 65 which, among other things, prohibited the
recognition of servicing rights related to loans originated by an entity. SFAS
122 requires that under certain conditions a portion of the cost of originating
a mortgage loan be allocated to the mortgage servicing right. The allocation is
based on the aggregate independent fair values of the loan and the related
servicing right. To determine the fair value of the servicing rights, the
Company uses the market prices of comparable servicing sale contracts.
SFAS 122 also requires that all mortgage servicing rights be evaluated for
impairment. In determining impairment, mortgage servicing rights are
disaggregated into pools based on their predominant risk characteristic. The
Company has determined that risk characteristic to be interest rates. Impairment
is recognized whenever the prepayment pattern of a particular mortgage pool
indicates that the fair value of the related mortgage servicing rights is less
than its carrying amount. Impairment is recognized by charging such excess to
income. The Company determined that no reserve for impairment is required.
The adoption of this standard had the effect of increasing net income and
mortgage loan sales and fees by approximately $1,500,000 and $2,600,000,
respectively, for the year ended December 31, 1995, and increasing capitalized
servicing rights at December 31, 1995 by approximately $4,150,000. If the
Company had not adopted SFAS 122, earnings per share would have been
approximately $2.44 and $2.33, on a primary and fully diluted basis,
respectively, for the year ended December 31, 1995. SFAS 122 prohibits
retroactive application, therefore, mortgage servicing rights related to loans
originated prior to April 1, 1995 continue to be unrecognized in the Company's
financial statements.
F-11
75
Purchased mortgage servicing rights are initially recorded at the lower of cost
or present value of estimated future net servicing income stream. The amount
capitalized is amortized in proportion to, and over the period of, estimated net
servicing income. Amortization is adjusted prospectively to reflect changes in
prepayment experience. Any unamortized balance related to rights sold is charged
to income at time of sale.
Cost in excess of fair value of net assets acquired
The cost in excess of fair value of net assets acquired is amortized on the
straight-line basis over their estimated useful lives (30-year period for
acquisitions made before Doral Federal and a 10-year period for the acquisition
of Doral Federal).
Real estate held for sale
The Company acquires real estate through foreclosures. These properties are held
for sale and are stated at the lower of fair value, minus estimated costs to
sell, or cost.
Property, leasehold improvements and equipment
Property, leasehold improvements and equipment are carried at cost. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the assets or the terms of the leases, if shorter, for leasehold
improvements. These range from five to ten years.
Securities purchased under agreements to resell
Resale agreements are treated as short-term investments. These are carried at
the amounts at which the transaction will be settled. The securities underlying
the agreements are not recorded in the asset accounts of the Company.
Securities sold under agreements to repurchase
From time to time the Company enters into sales of securities under agreements
to repurchase the same or similar securities. Amounts received under these
agreements represent short-term borrowings and the securities underlying the
agreements remain in the asset accounts.
Income and expense recognition
Loan origination fees and related direct loan origination costs are deferred and
amortized to income as an adjustment of the yield throughout the life of the
related mortgage loan. Such fees and costs related to mortgage loans held for
sale are deferred and recognized in income as a component of gain on sale of
mortgage loans when the related loans are sold or securitized.
F-12
76
Sale of securities with put arrangements
From time to time the Company may sell mortgage-backed securities with put
arrangements. Pursuant to these arrangements the Company grants the buyer a put
option that allows the buyer to sell the securities back to the Company at a
negotiated price. The accounting treatment for these transactions (as a
borrowing or a sale) is based on an assessment of the probability that the put
option will be exercised. If on the transaction date, management determines that
it is probable that the put option will be exercised, the transaction is
accounted for as a borrowing. If it is not judged probable that the put option
will be exercised, the transaction is accounted for as a sale.
The premium collected on such put and any gain on the securities sold are
deferred until the negotiated net option period expires. When a transaction is
initially recorded as a sale but exercise of the put option later becomes
probable, the Company accrues any losses expected upon the exercise of the put
option and periodically adjusts the estimated loss accrual.
Amortization of debt issuance costs
Costs related to the issuance of debt are amortized under a method which
approximates the interest method and shown as part of the related debt.
Interest rate risk management
The Company has various mechanisms to reduce its exposure to interest rate
fluctuations, as these affect the value of its portfolio and the prices of newly
generated loans, loans to be originated and sales with put options.
The Company may enter into financial derivatives such as futures contracts,
options and interest rate swaps.
The cost of unexpired options, net of premiums collected on written options, is
capitalized as part of the carrying cost of the mortgage loans and charged to
income when these expire. Unrealized net gains or losses on unexpired options
positions are considered as part of the lower cost or market evaluation made for
mortgage loans.
F-13
77
Loan servicing
The Company pools FHA insured and VA guaranteed mortgages for issuance of GNMA
mortgage-backed securities. Conventional loans are pooled and issued as FNMA or
FHLMC mortgage-backed securities and CMO certificates as well as sold in bulk to
investors with servicing retained. Under the servicing agreement, the Company is
required to advance funds to make scheduled payments to investors, if payments
due have not been received from the mortgagors. At December 31, 1996, accounts
receivable include advances to investors of approximately $8,195,000 (1995 -
$5,340,000).
The Company is also required to foreclose on loans in the event of default by
the mortgagor. Mortgage loan servicing fees, which are based on a percentage of
the principal balances of the mortgages serviced, are credited to income as
mortgage payments are collected.
Sales of mortgage servicing rights
The Company recognizes gain or loss on the sale of mortgage servicing rights
after the sales contract is executed, all regulatory related approvals are
obtained and the title and all risks and rewards of ownership have been
irrevocably transferred to the buyer.
Income taxes
The Company follows an asset and liability approach that requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. A valuation allowance is recognized for
any deferred tax asset which, based on management's evaluation, is more likely
than not (a likelihood of more than 50%) that some portion or all of the
deferred tax asset will not be realized.
Statement of cash flows
Cash and cash equivalents include cash in banks, overnight deposits and
certificates of deposit (1996 - $49,400,000 and 1995 - $25,099,000) and other
highly liquid securities with an original maturity of three months or less.
At December 31, 1996, other highly liquid securities include $21,373,791 of
securities purchased under agreements to resell maturing between January 8 and
February 20, 1997.
F-14
78
At December 31, 1996, collateral for securities purchased under agreements to
resell are summarized as follows:
Estimated
Carrying value market value
-------------- ------------
Mortgage-backed securities $12,317,534 $12,699,334
US Treasury Notes 10,000,000 10,018,750
----------- ------------
$22,317,534 $22,718,084
=========== ===========
These securities were held by the dealers that arranged the transactions.
Earnings per share
Primary net income per share is determined by dividing net income, after
deducting preferred stock dividends, by the weighted average number of common
stock outstanding during the period considering the dilutive effect of
restricted stock awards.
Fully diluted net income per share has been computed based on the assumption
that all of the shares of convertible preferred stock and convertible
subordinated debentures are converted into common stock, and after giving
retroactive effect to the elimination of interest expense, net of income taxes,
applicable to the convertible subordinated debentures.
The number of shares of common stock used for computing the primary and fully
diluted earnings per share was as follows:
1996 1995 1994
---- ---- ----
Primary 9,066,561 7,307,945 6,942,734
Fully diluted 9,681,268 7,760,135 7,576,964
Fair value of financial instruments
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that may be realized in the future.
F-15
79
Changes in accounting principles
In January 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement requires that impaired loans that are
within the scope of the statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Loans that are
measured at fair value or at the lower of cost or fair value, are excluded.
In January 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets,
to be held and used. Under SFAS No. 121, long-lived assets and certain
identifiable intangibles to be held and used must be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability, an
estimate of the future cash flows expected to result from the use of the asset
and its eventual disposition must be made. If the sum of the future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized.
In January 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-based Compensation." This Statement defines a fair value based method of
accounting for employee stock options and encourages all entities to adopt that
method of accounting for all of their stockbased employee compensation plans. As
allowed by SFAS No. 123, the Company elected to continue to measure compensation
cost for its stock compensation plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25. No transactions of the nature
covered by SFAS No. 123 have been made.
The adoption of these Statements had no effect on the Company's results of
operations or financial position.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued a new
Statement of Financial Accounting Standards "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125"). This Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
the application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.
F-16
80
This Statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained interest,
if any, based on their relative fair values at the date of the transfer.
Servicing assets and liabilities must be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values.
The provisions of this Statement, except as indicated below, are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and must be applied prospectively. Earlier or
retroactive application is not permitted. In December 1996, the FASB issued a
statement that defers for one year the effective date applicable to the
provisions of SFAS No. 125 that deal with secured borrowings and collateral.
Additionally, the deferment provision would apply to transfers of financial
assets only for repurchase agreements, dollar rolls and securities lending.
Management believes that the adoption of these standards will not have a
material adverse effect on the Company's financial statements.
Other
Certain amounts reflected in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the presentation for 1996.
NOTE 3 - COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Doral and RSC were acquired in December 1986. These transactions were accounted
for by the purchase method resulting in $1,620,000 of cost in excess of the fair
value of net assets acquired. The terms of the purchase agreement required
additional pay-outs to the former stockholder over a ten-year period that ended
in 1996. The additional pay-outs are contingent payments under the purchase
agreements, and are accounted for as additional cost over the fair value of
assets acquired. The amount of such pay-outs was determined based on a
percentage ranging from 1/16% to 1/4% of the aggregate principal amount of
mortgage loans closed.
F-17
81
The changes in cost in excess of fair value of net assets acquired are shown
below:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period $6,526,131 $6,609,402 $6,536,570
Contingent payments under Doral
purchase agreement 410,317 292,887 430,929
Amortization expense (374,530) (376,158) (358,097)
------------ ------------ ------------
Balance at the end of period $6,561,918 $6,526,131 $6,609,402
========== ========== ==========
Total accumulated amortization relating to cost in excess of fair value of net
assets acquired amounted to $3,726,190, $3,351,660 and $2,975,502 at December
31, 1996, 1995 and 1994, respectively.
NOTE 4 - REGULATORY REQUIREMENTS:
Holding Company Requirements
As a result of the acquisition of Doral Federal, the Company became a savings
and loan holding company ("SLHC") subject to the restrictions and requirements
of the Home Owners' Loan Act of 1933, as amended (the "HOLA"). As SLHC, the
Company was registered with the Director of the Office of Thrift Supervision
(the "OTS") and is subject to various requirements of the HOLA, including
examination, supervision and reporting requirements. Federal law and OTS
regulations place certain limits on the types of activities in which an SLHC and
its subsidiaries may engage. However, in general, these restrictions do not
apply to a holding company that controls only one savings and loan association,
provided such association meets the "qualified thrift lender" test which
generally requires the association to have 65% of its portfolio assets in
"qualified thrift investments." For Puerto Rico based savings institutions,
these investments include, among other things, home mortgages, mortgage-backed
securities, and personal loans.
Thrift Regulatory Capital Requirements
Doral Federal is also subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Doral Federal's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Doral
Federal must meet specific capital guidelines that involve quantitative measures
of Doral Federal's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Doral Federal's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
F-18
82
Quantitative measures established by regulation to ensure capital adequacy
require Doral Federal to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital to adjusted assets, core capital to adjusted
assets, and total risk-based capital to risk weighted assets, all as defined in
the regulation. Management believes, as of December 31, 1996, that Doral Federal
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS categorized
Doral Federal as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized Doral Federal must
maintain minimum total risk-based, core and Tier I risk-based capital ratios as
set forth in the table. There are no conditions or events since the notification
that management believes have changed the institution's category.
Doral Federal's actual capital amounts and ratios are also presented in the
table. Totals of $343,339 and $394,626 were deducted from tangible, core and
total risk-based capital for certain non-allowable assets in 1996 and 1995,
respectively.
To be well capitalized
For Capital Under prompt corrective
Actual Adequacy Purposes action provisions
--------------------- ------------------ -------------------------
Amount Ratio (%) Amount Ratio(%) Amount Ratio (%)
As of December 31, 1996:
Tangible capital (to adjusted
assets) $23,376,244 8.3 $4,206,239 >= 1.5 - -
Tier I risk-based capital (to risk
weighted assets) $23,376,244 19.3 - - $ 7,282,044 >= 6.0
Core capital (to adjusted assets) $23,376,244 8.3 $8,412,479 >= 3.0 $14,020,798 >= 5.0
Total risk-based capital (to risk
weighted assets) $24,095,420 19.8 $9,709,392 >= 8.0 $12,136,740 >= 10.0
As of December 31, 1995:
Tangible capital (to adjusted
assets) $16,010,824 10.0 $2,400,180 >= 1.5 - -
Tier I risk-based capital (to risk
weighted assets) $16,010,824 25.4 - - $ 3,778,961 >= 6.0
Core capital (to adjusted assets) $16,010,824 10.0 $4,800,360 >= 3.0 $ 8,000,600 >= 5.0
Total risk-based capital (to risk
weighted assets) $16,249,331 25.8 $5,038,615 >= 8.0 $ 6,298,269 >= 10.0
F-19
83
Housing and Urban Development Requirements
The Company is a U.S. Department of Housing and Urban Development approved, non
supervised mortgagee and is required to maintain an excess of current assets
over current liabilities and minimum net worth, as defined by the various
regulatory agencies. The Company is also required to maintain fidelity bonds and
errors and omission's insurance coverages based on the balance of its servicing
portfolio.
SAIF Assessment
During the third quarter of 1996, the Company recorded a nonrecurring expense of
$588,000 related to the payment of a special assessment to the Federal Deposit
Insurance Corporation due to the enactment of legislation to recapitalize the
Savings Association Insurance Fund.
Registered Broker-Dealer Requirements
AAA Financial is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and the Puerto Rico Office of the Commissioner of Financial
Institutions (the "CFI"). AAA Financial is also a member of the National
Association of Securities Dealers (the "NASD"). As a registered broker-dealer,
it is subject to regulation by the SEC, the NASD and the CFI in matters relating
to the conduct of its securities business, including record keeping and
reporting requirements, supervision and licensing of employees and obligations
to customers. In particular, AAA Financial is subject to the SEC's net capital
rules, which specify minimum net capital requirements for registered
broker-dealers and are designed to ensure that broker-dealers maintain adequate
regulatory capital in relation to their liabilities and the size of their
customer business.
The Company is in compliance with these regulatory requirements.
NOTE 5 - MORTGAGE LOANS HELD FOR SALE:
Mortgage loans held for sale consist of:
December 31,
------------
1996 1995
---- ----
Mortgage Loans:
Conventional loans $193,644,969 $160,723,158
FHA/VA loans 62,548,030 79,338,335
Construction and commercial loans 5,414,810 4,070,623
------------ ------------
$261,607,809 $244,132,116
============ ============
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At December 31, 1996, the aggregate amortized cost and approximate market value
of these loans are as follows:
Gross unrealized Gross unrealized Approximate
Amortized cost holding gains holding losses market value
-------------- ------------- -------------- ------------
$261,607,809 $11,207,655 ($7,625,151) $265,190,313
============ =========== ========== ============
Proceeds from sales of mortgage loans held for sale and mortgage-backed
securities held for trading during 1996 was approximately $765,195,000 (1995 -
$725,236,000, 1994 - $774,313,000). Gross gains of $33,580,000 (1995 -
$42,472,000, 1994 - $56,010,000) and gross losses of $19,014,000 (1995 -
$27,362,000, 1994 - $41,452,000) were realized on those sales.
NOTE 6 - SECURITIES HELD FOR TRADING:
Securities held for trading consist of:
December 31,
------------
1996 1995
---- ----
Mortgage-backed securities:
GNMA $219,324,613 $242,327,525
CMO certificates 158,109,657 157,535,436
FHLMC 6,369,721 7,091,819
FNMA 929,498 986,715
US Treasury Bonds 10,218,750 --
US Treasury Notes 9,450,000 --
US Treasury Bills 5,095,060 --
Other 1,950,000 --
------------ ------------
$411,447,299 $407,941,495
============ ============
CMO certificates include the following:
December 31,
------------
1996 1995
---- ----
Certificates of other issuers $135,815,885 $135,572,829
Subordinated certificates, CMO's established
by the Company 14,597,551 13,136,055
Residual certificates, CMO's established by
the Company 7,696,221 8,826,552
------------ ------------
$158,109,657 $157,535,436
============ ============
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At December 31, 1996, CMO certificates include approximately $14,894,000 of
interest only certificates.
Net unrealized holding gains on trading securities included in earnings for the
year ended December 31, 1996 amounted to approximately $2,796,000 (1995 -
$4,864,000, 1994 - net unrealized holding losses of $1,485,000).
NOTE 7 - SECURITIES HELD TO MATURITY:
Securities held to maturity consist of:
December 31,
------------
1996 1995
---- ----
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
Mortgage backed securities:
CMO certificates of other issuers $ 58,828,043 $ 59,803,233 $ 59,248,183 $ 59,520,647
GNMA 37,879,031 38,483,168 10,744,705 10,918,536
Debt securities:
Federal Home Loan Bank Notes 3,492,882 3,487,300 4,999,354 4,995,300
U.S. Treasury Notes 6,956,248 6,976,250 1,997,436 2,001,880
U.S. Treasury Bills 65,871 69,000 63,075 63,360
Other investments:
Mortgage notes receivables 1,832,707 1,832,707 892,672 892,672
------------ ------------ ------------ ------------
$109,054,782 $110,651,658 $ 77,945,425 $ 78,392,395
============ ============ ============ ============
Management has the intent to hold these securities and believes it has the
ability to hold them to maturity by obtaining continuing financing under its
existing credit facilities. In addition, part of the above securities are held
by Doral Federal which has the ability to finance these securities with
deposits, advances from Federal Home Loan Bank of N.Y. and other long-term
funding sources.
At December 31, 1996, CMO certificates include approximately $4,550,000 of
interest only certificates.
At December 31, 1996, securities held to maturity include approximately
$16,220,000 pledged to secure public funds deposited in Doral Federal.
F-22
86
Contractual maturities of securities held to maturity at December 31, 1996 are
as follows:
MBS Debt securities Other
--- --------------- -----
Within one year $ -- $ 65,871 $ 1,832,707
After 1 year through five years 12,487,500 8,956,248 --
After 5 years through 10 years 12,483,350 1,492,882 --
After 10 years 71,736,224 -- --
----------- ----------- -----------
$96,707,074 $10,515,001 $ 1,832,707
=========== =========== ===========
Expected maturities on mortgage-backed securities and loans will differ from
contractual maturities because borrowers have the right to prepay obligations
with or without prepayment penalties.
Aggregate gross unrealized holding gains and losses are as follows:
December 31,
1996 1995 1996 1995
---- ---- ---- ----
MBS Debt securities
Gross unrealized holding gains $1,613,352 $ 480,645 $ 23,131 $ 4,730
========== ========== ========== ==========
Gross unrealized holding losses $ 34,025 $ 34,350 $ 5,582 $ 4,055
========== ========== ========== ==========
NOTE 8 - SECURITIES AVAILABLE FOR SALE:
Securities available for sale consist of the following certificates:
December 31,
------------
1996 1995
---- ----
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------
FNMA $ 2,241,007 $ 2,133,870 $ 7,164,471 $ 7,132,358
FHLMC 2,364,808 2,277,139 4,413,676 4,381,228
GNMA 7,534,100 7,595,531 2,991,994 3,065,411
----------- ----------- ----------- -----------
$12,139,915 $12,006,540 $14,570,141 $14,578,997
=========== =========== =========== ===========
F-23
87
Aggregate gross unrealized holding gains and losses are as follows:
1996 1995
---- ----
Gross unrealized holding gains $ 61,430 $ 95,406
======== ========
Gross unrealized holding losses $194,805 $ 86,550
======== ========
The contractual maturity of the securities available for sale at December 31,
1996 is over ten years.
Proceeds from sales of securities available for sale during 1996 were
approximately $6,548,000. Gross gains of $33,478 were realized on those sales.
There were no sales during 1995 and 1994.
NOTE 9 - LOANS RECEIVABLE:
Loans receivable consist of:
1996 1995
---- ----
Residential mortgage loans $ 91,595,388 $ 29,480,931
Commercial real estate 18,461,975 9,204,612
Consumer - secured by mortgage 12,207,143 7,361,606
Construction loans 2,793,026 2,637,523
Loans on savings deposits 1,771,242 1,939,912
Commercial 2,047,174 701,650
Consumer - other 356,237 323,744
Land secured 813,975 330,345
------------- -------------
Gross loans 130,046,160 51,980,323
Less:
Unearned interest and deferred loan fees (561,315) (382,894)
Reserve for loan losses (719,176) (242,171)
------------- -------------
(1,280,491) (625,065)
------------- -------------
Total loans $ 128,765,669 $ 51,355,258
============= =============
As of December 31, 1996, the Company had loans amounting to approximately
$1,728,000 (1995 - $949,000) on which the accrual of interest income had been
discontinued. If these loans had been accruing interest, the additional interest
income realized would have been approximately $114,000 (1995 - $86,000).
F-24
88
Doral Federal originates adjustable and fixed interest rate loans. The
adjustable rate loans have interest rate adjustment limitations and are
generally tied to various market indexes. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral Federal pays on
the short-term deposits that have primarily funded these loans.
At December 31, 1996, the composition of loans receivable was as follows:
Fixed rate Adjustable rate
---------- ---------------
Term to date of
Term to maturity Book value rate adjustment Book value
---------------- ---------- --------------- ----------
1 month - 1 year $ 3,348,611 1 month - 1 year $3,808,206
1 year - 3 years 2,010,815 Non performing 188,200
3 years - 5 years 6,030,170 ----------
5 years - 10 years 32,501,114 $3,996,406
10 years - 20 years 44,896,737 ==========
More than 20 years 35,722,130
Non - performing 1,540,177
-----------
$126,049,754
============
NOTE 10 - ALLOWANCES FOR LOSSES:
The changes in the allowances for losses were as follows:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Accounts receivable and mortgage servicing advances:
Balance at beginning of period $1,805,701 $1,563,701 $1,446,563
Provision for losses 142,000 242,000 132,000
Losses charged to the allowance (514,927) - (14,862)
---------- ---------- ----------
Balance at the end of period $1,432,774 $1,805,701 $1,563,701
========== ========== ==========
Real estate held for sale:
Balance at beginning of period $ 356,035 $ 356,035 $ 525,000
Provision for losses - - -
Losses charged to the allowance - - (168,965)
---------- ---------- ----------
Balance at the end of period $ 356,035 $ 356,035 $ 356,035
========== ========== ==========
Reserve for bank loan losses:
Balance at beginning of period $ 242,171 $ 428,046 $ 234,200
Provision for loan losses 655,000 110,000 167,523
Recoveries 48,540 6,810 26,323
Losses charged to the allowance (226,535) (302,685) -
---------- ---------- ---------
Balance at the end of period $ 719,176 $ 242,171 $ 428,046
========== ========== =========
F-25
89
NOTE 11 - EXCESS SERVICING FEES RECEIVABLE:
The changes in excess servicing fees receivable are shown below:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period $10,407,297 $ 8,756,589 $3,463,945
Additions 15,899,555 2,638,790 5,859,312
Amortization
Scheduled (1,628,427) (988,082) (566,668)
Unscheduled - - -
----------- ----------- ----
Balance at the end of period $24,678,425 $10,407,297 $8,756,589
=========== =========== ==========
There was no impairment of excess servicing fees receivable during any of the
above periods.
NOTE 12 - PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Property, leasehold improvements and equipment consist of:
December 31,
------------
1996 1995
---- ----
Office furniture and equipment $ 6,763,942 $ 6,076,902
Leasehold improvements 5,383,776 4,634,187
Automobiles 334,880 262,428
Office building 361,794 335,982
Real estate under rental agreements 73,660 73,660
----------- -----------
12,918,052 11,383,159
Less - Accumulated depreciation and amortization (6,515,397) (4,956,434)
----------- -----------
6,402,655 6,426,725
Land 2,956,895 78,000
----------- -----------
$ 9,359,550 $ 6,504,725
=========== ===========
F-26
90
NOTE 13 - MORTGAGE SERVICING RIGHTS:
The changes in mortgage servicing rights are shown below:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period $11,164,065 $ 3,543,032 $3,994,788
Capitalization of rights 10,803,661 7,901,308 581,130
Rights sold - (24,052) (302,827)
Rights purchased - 305,831 -
Impairments - - -
Amortization:
Scheduled (998,789) (562,054) (730,059)
Unscheduled - - -
----------- ----------- ----------
Balance at the end of period $20,968,937 $11,164,065 $3,543,032
=========== =========== ==========
The Company's servicing portfolio amounted to approximately $3,100,000,000 and
$2,668,000,000 at December 31, 1996 and 1995, respectively, including
$74,390,000 and $85,170,000 respectively, of loans sold with recourse which are
not government guaranteed or insured.
During the years ended December 31, 1996, 1995 and 1994, the Company sold rights
to service loans amounting to approximately $102,000,000, $310,000,000 and
$202,000,000, respectively. Mostly all sales were from pre-SFAS No. 122. During
the years ended December 31, 1996 and 1994, the Company did not purchase rights
to service loans (1995 - $40,000,000). The carrying amount of those mortgage
servicing rights recorded post-SFAS No. 122 approximates its fair value.
NOTE 14 - ACCOUNTS PAYABLE AND OTHER LIABILITIES:
Accounts payable and other liabilities consist of the following:
December 31,
------------
1996 1995
---- ----
Amounts retained on mortgage loans,
generally paid within 5 days $ 3,427,154 $ 2,164,834
Customer mortgages and closing expenses payable 2,360,763 1,756,931
Deferred compensation plan 2,605,658 1,982,142
Incentive compensation payable 5,900,768 2,162,867
Accrued expenses and other payables 12,698,012 7,957,291
----------- -----------
$26,992,355 $16,024,065
=========== ===========
F-27
91
NOTE 15 - LOANS PAYABLE:
At December 31, 1996 and 1995, the Company had several mortgage warehousing
lines of credit and gestation or presale facilities totaling $595,000,000 and
$525,000,000, respectively. Advances under these facilities are secured by loans
held for inclusion in GNMA, FNMA and FHLMC pools or for sale to financial
investors.
Loans payable consist of the following:
December 31,
------------
1996 1995
---- ----
Loans payable resulting from use of
warehousing lines of credit and gestation or
presale facilities, due in 1997. At various
variable rates averaging - 6.69% and
6.77% at December 31, 1996 and 1995,
respectively, and other financing arrangements $186,413,927 $171,277,562
Securities sold short at 7.5% due on January 1997
(1995 - due December 31, 1996) 9,982,700 22,089,547
Amount payable in connection with securities
returned under put arrangement on January 1996, at
7.50 % -- 41,000,000
------------ ------------
$196,396,627 $234,367,109
============ ============
Maximum borrowings outstanding at any month-end during 1996 and 1995 were
$223,000,000 and $280,000,000, respectively. The approximate average outstanding
borrowings during the periods were $203,000,000 and $223,000,000, respectively.
The weighted average interest rate of such borrowings, computed on a monthly
basis, was 6.71% in 1996 and 7.15% in 1995.
F-28
92
In 1995, FFCC entered into a Syndicated Credit Agreement (the "Syndicated Credit
Agreement") with five banks providing for three credit facilities totaling up to
$125 million. The credit facilities were structured by Bankers Trust Company, as
administrative and syndicate agent. The three facilities include: (i) a $100
million secured one-year revolving warehousing credit facility to finance
residential mortgage loans and mortgage-backed securities; (ii) a $7 million
secured one-year revolving credit facility to provide financing for receivables
and working capital needs; and (iii) a $18 million five-year senior secured term
loan, secured with a portion of the Company's servicing portfolio, to finance
the acquisition of additional servicing rights and general working capital
purposes. On September 25, 1996, the Syndicated Credit Agreement was amended and
restated to extend the maturity date until June 27, 1997, and add an additional
$3 million to the working capital line. In addition, the third facility was
repaid and eliminated from the amended Syndicated Agreement. The amounts
available under the Syndicate Credit Agreement are subject to a borrowing base
which consists of mortgage loans and mortgage-backed securities for the first
facility and receivables relating to servicing advances and real estate owned
for the second facility. Loans payable include advances from the warehousing
credit facility. Advances from the other facility is included in notes payable.
The existing warehousing credit facilities, the Syndicated Credit Agreement and
other financing arrangements require the Company to maintain certain capital
ratios and to comply with other requirements. At December 31, 1996, the Company
was in compliance with these requirements.
NOTE 16 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Company sells mortgage-backed securities and mortgage loans under agreements
to repurchase. At December 31, 1996 and 1995, the Company had several repurchase
agreement lines of credit, totaling $692,000,000 and $617,000,000, respectively.
At December 31, 1996 and 1995, the Company had a liability of $387,651,266 and
$363,615,500, respectively, relating to such agreements at interest rates
ranging from 5.32% to 6.50% in 1996 and 5.09% to 6.95% in 1995.
F-29
93
These agreements mature at various dates as follows:
December 31, 1996:
Approximate market
Repurchase and book value of
Type of security liability underlying securities
- ---------------- --------- ---------------------
GNMA (1) $116,459,015 $122,827,388
FHLMC (1) 6,030,638 6,176,947
FNMA (1) 763,266 929,498
CMO Certificates (1) 70,467,504 76,752,780
FHLB Discount Note (1) 159,905 160,000
------------ ------------
193,880,328 206,846,613
------------ ------------
GNMA (2) 97,513,474 106,275,154
FHLMC (2) 170,608 192,775
CMO Certificates (2) 36,165,588 48,891,806
------------ ------------
133,849,670 155,359,735
------------ ------------
GNMA (3) 4,437,827 4,510,502
------------ ------------
CMO Certificates (4) 55,483,441 64,514,858
------------ ------------
$387,651,266 $431,231,708
============ ============
F-30
94
December 31, 1995:
Approximate market
Repurchase and book value of
Type of security liability underlying securities
- ---------------- --------- ---------------------
GNMA (1) $143,475,000 $152,157,723
FHLMC (1) 6,917,000 7,091,819
FNMA (1) 1,001,000 986,515
CMO Certificates (1) 126,630,000 148,223,489
------------ ------------
278,023,000 308,459,546
------------ ------------
GNMA (2) 39,998,000 42,541,205
CMO Certificates (2) 25,554,000 29,707,699
------------ ------------
65,552,000 72,248,904
------------ ------------
GNMA (3) 5,014,000 5,708,786
------------ ------------
CMO Certificates (4) 15,026,500 17,767,400
------------ ------------
$363,615,500 $404,184,636
============ ============
(1) Term up to 30 days
(2) Term over 30 days to 120 days
(3) Term over 120 days to 1 year
(4) Term between 3 to 5 years
Maximum borrowings outstanding at any month-end during 1996 and 1995 under the
repurchase agreements were $413,000,000 and $389,000,000, respectively. The
approximate average borrowings outstanding during the periods were $387,000,000
and $368,000,000, respectively. The weighted average interest rate of such
borrowings, computed on a monthly basis was 5.45% in 1996 and 5.90% in 1995.
At December 31, 1996, securities sold under agreements to repurchase are
classified by dealer as follows:
Approximate
market value of
Balance of borrowing underlying securities
-------------------- ----------------------
BP Capital Markets, Inc. $114,150,827 $133,702,984
PaineWebber, Inc. of Puerto Rico 23,018,000 26,392,352
Merrill Lynch Government Securities of Puerto Rico, SA 184,596,457 199,848,841
Bear Stearns Securities Corp. 14,362,000 15,285,675
CS First Boston Corporation 4,025,000 4,330,308
Privately placed with institutions and other investors 27,305,982 29,264,775
Conservation Trust of Puerto Rico 20,193,000 22,406,773
------------ ------------
Total $387,651,266 $431,231,708
============ ============
F-31
95
NOTE 17 - NOTES PAYABLE:
Notes payable consist of the following:
December 31,
--------------
1996 1995
---- ----
Demand note payable at 9% interest, collateralized by
CMO certificates $ 1,000,000 $ 1,000,000
Unsecured medium term notes, payable at interest rates
ranging from 7.00% to 13.63%, final payment dates
ranging from January to June 1997 660,000 1,590,000
Unsecured notes, payable at interest rates ranging from
6.50% to 9.25%, final payment dates ranging from
January 1997 to May 2001 4,675,000 5,915,480
Note payable to bank, collateralized by CMO certificates,
at 8.50% interest rate and due on October 10, 1997 9,275,447 9,776,676
Term-notes payable to corporate investors, collateralized
by stand-by letters of credit issued by the Federal Home
Loan Bank of New York:
at 5.55% maturing on October 13, 2000 8,100,000 8,100,000
at a variable rate (4.67% at December 31, 1996)
maturing on November 17, 2000 5,000,000 5,000,000
at 5.23% maturing on November 27, 2000 5,000,000 5,000,000
at 6.05% maturing on May 23, 2001 5,000,000 -
at 5.98% maturing on June 19, 2001 10,000,000 -
at 6.30% maturing on September 18, 2001 10,000,000 -
at 6.28% maturing on September 24, 2001 10,000,000 -
Note payable to bank, at 7.15% interest rate, due
June 27, 1997 3,000,000 -
Note payable to bank, collateralized by CMO certificates,
at 8.00% interest rate and due on February 15, 1997 3,280,882 -
7.84% Senior Notes due on October 10, 2006 70,766,494 -
Mortgage note secured by land at 7.63% interest rate
and due on June 11, 1997 2,135,000 -
Loan payable to Bank, collateralized by mortgage
servicing rights held by the Company - 15,300,000
------------ -----------
$147,892,823 $51,682,156
============ ===========
F-32
96
At December 31, 1996, the scheduled aggregate annual maturities of notes payable
were approximately as follows:
Year ending December 31,
------------------------
1997 $ 21,741,329
1998 735,000
1999 1,500,000
2000 18,100,000
2001 35,050,000
2002 and thereafter 75,000,000
------------
152,126,139
Less : Debt issuance costs including
interest rate hedging costs (4,233,506)
------------
$147,892,823
============
NOTE 18 - CONVERTIBLE SUBORDINATED DEBENTURES:
Consists of 8.25% Convertible Subordinated Debentures due January 1, 2006 (the
"Subordinated Convertible Debentures") sold to BanPonce Corporation ("BanPonce")
under a Debenture Purchase Agreement (the "Debenture Agreement"). The
Subordinated Convertible Debentures are convertible into shares of common stock
of the Company at a conversion price of $17.50 per share, subject to adjustments
in certain events. The Subordinated Convertible Debentures are subordinated to
all existing and future senior debt of the Company (as defined in the Debenture
Agreement). Under the Debenture Agreement, BanPonce has the right to acquire up
to 200,000 additional shares of the Company's common stock at a price of $17.50
per share (subject to adjustment in certain events) to the extent that its
investment in the Company is reduced below 5% on a fully-diluted basis. Such
right to acquire the additional shares expires on June 30, 1999 and is subject
to termination upon the occurrence of certain corporate events involving the
acquisition of the Company.
F-33
97
NOTE 19 - DEPOSIT ACCOUNTS:
At December 31, 1996, deposits and their weighted average interest rates are
summarized as follows:
1996 1995
--------------------------- ---------------------
Amount % Amount %
------ - ------ -
Certificates of deposit $ 99,614,530 5.87 $ 52,326,703 6.12
Regular savings 17,054,578 4.36 10,271,981 3.68
NOW accounts 6,330,229 3.46 2,046,765 3.35
Non interest-bearing deposits 35,902,474 - 31,094,992 -
------------ -----------
$158,901,811 $95,740,441
============ ===========
At December 31, 1996, certificates of deposit over $100,000 amounted to
$44,025,000.
A summary of certificates of deposit by maturity as of December 31, 1996
follows:
1996 1995
------ -----
Within one year $64,534,289 $40,465,351
One to three years 12,253,299 5,252,095
Over three years 22,826,942 6,609,257
------------ -------------
$99,614,530 $52,326,703
=========== ===========
A summary of certificates of deposit by interest rate at December 31, 1996
follows:
Rate Amount
------ -------
2.99% or less $ 40,000
From 3.00% to 3.99% 5,000
From 4.00% to 4.99% None
From 5.00% to 5.99% 54,292,300
From 6.00% to 6.99% 36,714,218
From 7.00% to 7.99% 8,473,012
From 8.00% to 8.99% 90,000
-----------
Total $99,614,530
===========
F-34
98
At December 31, 1996, Doral Federal had brokered certificates of deposit
amounting to $16,300,000 maturing as follows:
One to three years $ 5,460,971
Over three years 10,839,029
----------
Total $16,300,000
===========
At December 31, 1996, Doral Federal had deposits from officers, directors,
employees and stockholders of the Company amounting to approximately $700,000
(1995 - $1,100,000).
The Company as a servicer of loans is required to maintain certain balances on
behalf of the borrowers, called escrow funds. At December 31, 1996, escrow funds
amounted to approximately $38,519,000 (1995 - $35,377,000), of which $30,316,000
were deposited with Doral Federal (1995 - $27,430,000). The remaining escrow
funds, $8,203,000 (1995 - $7,947,000) were deposited with other banks and
therefore excluded from the Company's assets and liabilities.
NOTE 20 - ADVANCES FROM THE FEDERAL HOME LOAN BANK:
At December 31, 1996, advances from the Federal Home Loan Bank of New York
("FHLB") consist of the following:
6.307% due on July 21, 2000 $ 5,000,000
6.445% due on July 17, 2002 5,000,000
5.959% due on January 29, 2003 5,000,000
------------
Total $ 15,000,000
============
At December 31, 1996, the Company had qualified collateral, in the form of first
mortgage notes and mortgage-backed securities with a carrying value of
$82,705,750 which were pledged to secure the above advances from the FHLB and
stand-by letters of credit issued by the FHLB as collateral for the term-notes
in the amount of $53,100,000 shown under notes payable.
F-35
99
NOTE 21 - INCOME TAXES:
Under the provisions of Law No. 38 of May 20, 1983, the Company is exempt from
the payment of Puerto Rico income taxes on the interest earned on mortgage loans
on residential properties located in Puerto Rico which were executed after June
30, 1983, and are insured or guaranteed pursuant to the provisions of the
National Housing Act of June 27, 1934, as amended, and pursuant to the
Provisions of the Servicemen's Readjustment Act of 1944, as amended.
Accordingly, the Company holds exempt loans and mortgage-backed securities for
periods of time prior to sale in order to maximize the tax exempt interest
produced by these securities and loans. Therefore, net interest income has
generally represented a greater proportion of the Company's total net income
than that of a typical non-Puerto Rican mortgage banking institution.
Doral Federal, as a federally chartered financial institution operating in
Puerto Rico, is subject to U.S. Federal income taxes. Doral Federal has filed an
election under Section 936 of the U.S. Internal Revenue Code, whereby a
possession tax credit is allowed for part of the federal income taxes
attributable to income from operations in Puerto Rico. The 1996 Omnibus Budget
Reconciliation Act repealed the Section 936 for U.S. business operations in
Puerto Rico, effective for the taxable years beginning on January 1, 1996. A
10-year grandfather period was provided for existing credit claimants such as
Doral Federal. The Company has experienced no significant adverse effect because
of the repeal.
The mortgage banking operations of the Company conducted through Puerto Rico
corporations are not subject to United States income tax for business carried
out in Puerto Rico. Substantially all of the Company's mortgage banking
operations are conducted in Puerto Rico, therefore, the amount of U.S. income
taxes with respect to such operations is not significant.
Consolidated tax returns are not permitted under the Puerto Rico Internal
Revenue Code, therefore, income tax returns are filed individually by each
Company.
F-36
100
The provision for income taxes differs from amounts computed by applying the
applicable Puerto Rico statutory tax rate to income before taxes. A
reconciliation of the difference follows:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Income before income taxes $31,278,639 $22,060,517 $20,840,112
=========== =========== ===========
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
Tax at statutory rates $ 12,198,669 39.0 $ 9,265,417 42.0 $ 8,752,847 42.0
Tax effect of exempt interest
income - net (8,502,187) (27.2) (4,590,485) (20.8) (5,435,541) (26.1)
Tax effect of capital gains (510,588) (2.5)
Tax effect of amortization of
goodwill, other non-deductible
expenses and other 541,642 1.7 (281,246) (1.3) 602,877 2.9
Tax effect of shares issued
under employment contracts -- -- (1,893,473) (8.6) -- --
------------ ------ ------------- ---- ------------ --
Provision for income taxes $ 4,238,124 13.5 $ 2,500,213 11.3 $ 3,409,595 16.3
============ ====== ============ ==== ============ ====
At December 31, 1996, the components of the net deferred tax liability are:
1996 1995
---- ----
Deferred tax liabilities resulting from:
Untaxed income ($12,990,675) ($6,460,876)
Deferred costs (1,643,124) (1,986,637)
------------ ----------
(14,633,799) (8,447,513)
------------ ----------
Deferred tax assets:
Unrealized losses 1,570,277 1,108,105
Deferred income 3,655,434 1,539,361
Net operating loss 773,148 922,979
Reserve for doubtful accounts
and others 262,935 -
------------ ----------
6,261,794 3,570,445
------------ ----------
Net deferred tax liability ($ 8,372,005) ($4,877,068)
============ ==========
Deferred income tax expense for the year ended December 31, 1994 amounted to
$1,316,899 of which $436,899 is presented as current and $880,000 is shown as
part of the cumulative effect of change in accounting principle.
F-37
101
At December 31, 1996, a subsidiary had net operating losses available to offset
future taxable Puerto Rico source income amounting to approximately $1,982,000
expiring in 2001.
NOTE 22 - RELATED PARTY TRANSACTIONS:
Mortgage loans held for sale include approximately $230,000 of loans to various
officers of the Company at prevailing interest rates (1995 - $460,000).
The Company paid a computer service bureau, in which it holds a 33% interest,
$900,000, $860,000 and $726,000 for services rendered during the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
the Company's equity in this service bureau was not significant.
The Company has a 15% interest in a real estate partnership amounting to
approximately $135,000 and which is carried at cost because of its lack of
materiality. At December 31, 1996 and 1995, securities held to maturity include
approximately $1,800,000 and $890,000, respectively, due from the Partnership.
NOTE 23 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments may include commitments to extend credit and sell mortgage-backed
securities and loans, and options on futures contracts. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial position.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The
Company's exposure to credit losses in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on-balance
sheet instruments. At December 31, 1996, commitments to extend credit to
individuals for residential mortgages amounted to approximately $5,000,000 and
commitments to sell mortgage-backed securities and loans amounted to
approximately $32,000,000. Management believes that the Company has the ability
to meet these commitments and that no loss will result from the same.
Commitments to extend credit are agreements to lend to a customer as long as the
conditions established in the contract are met. Commitments generally have fixed
expiration dates or other termination clauses.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
F-38
102
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterpart. A
geographic concentration exists within the Company's mortgage loans portfolio
since most of the Company's business activity is with customers located in
Puerto Rico.
The Company controls the credit risk of its future contracts through credit
approvals, limits and monitoring procedures. Options on future contracts confer
the right from sellers to buyers to take a future position at a stated price.
Risks arise from the possible inability of counterparts to meet the terms of
their contracts and from movements in securities values and interest rates.
Collateral for securities purchased under agreements to resell is kept by the
seller under custody agreements. Collateral for securities sold under agreements
to repurchase is kept by the purchaser.
NOTE 24 - PENSION AND COMPENSATION PLANS:
The Company has a noncontributory target benefit pension plan ("the Plan"). The
Plan generally covers all full time Company employees that have completed one
year of service and have attained age 21.
Under the Plan, the Company contributes annually the funding amount which is
projected to be necessary to fund the target benefit. The target benefit is
based on years of service and employees' compensation, as defined in the Plan.
The Company has the right to terminate the Plan at any time. Upon termination,
all amounts credited to the participants' accounts will become 100% vested.
Contributions to the Plan during the years ended December 31, 1996, 1995 and
1994 amounted to approximately $722,000, $640,000 and $700,000, respectively.
Plan assets consist principally of mortgage loans and mortgage-backed
securities.
The Company has unfunded deferred incentive compensation arrangements (the
"Deferred Compensation") with certain employees. The Deferred Compensation is
determined as a percentage of net income arising from the mortgage banking
activities, as defined, and is payable to participants after a five-year vesting
period. The expense for the years ended December 31, 1996 and 1995 amounted to
approximately $232,000 and $62,000, respectively. For the year ended December
31, 1994 there was no deferred compensation expense.
F-39
103
The Company also has incentive compensation arrangements with certain employees
payable currently. The incentive payments are based on the amount of
consolidated net income in excess of an established return on stockholders'
equity, as defined in the agreements. The expense under these arrangements for
the years ended December 31, 1996, 1995 and 1994 amounted to approximately
$6,446,000, $2,415,000 and $2,721,000, respectively.
NOTE 25 - COMMITMENTS AND CONTINGENCIES:
The Company has several noncancellable operating leases for office facilities
expiring through 2005. Total minimum rental commitments for leases in effect at
December 31, 1996 are as follows:
Year Amount
---- ------
1997 $ 1,538,000
1998 938,000
1999 400,000
2000 247,000
2001 229,000
2002 and thereafter 5,590,000
Total rental expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $2,100,000, $2,100,000 and $2,000,000, respectively.
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been finally adjudicated. These
actions, when finally concluded and determined, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.
From time to time the Company may sell mortgage-backed securities with put
options. At December 31, 1996, the amounts outstanding under these arrangements
were as follows:
Amount
Dates on which put expires outstanding
-------------------------- -----------
Within six months $ 55,932,000
One to two years 34,405,000
Three years and thereafter 14,663,000
------------
$105,000,000
============
F-40
104
If the put option is exercised, the Company would have to buy back these
securities at an agreed price, adjusted for future prepayments. As part of its
hedging program, the Company includes the risks associated with its put
arrangements.
The Insurance and Indemnity Agreements (the "Agreements") covering certain
financial guaranty insurance policies covering the payment of senior
certificates issued by CMO grantors trusts established by the Company, provide,
among other things, that the Company cannot sell, transfer or pledge the
residual certificates issued by the trusts (amounting to approximately
$4,833,000) without the insurance company approval because the residual
certificates are pledged as collateral to the insurance company.
FFCC currently benefits from Puerto Rico tax laws. Of particular importance is
the current income tax exemption, available under Puerto Rico law for interest
on FHA loans and VA loans secured by residential property located in Puerto Rico
and mortgage-backed securities backed by such mortgage loans. As a result of
this exemption, FFCC has been able to sell tax-exempt Puerto Rico GNMA
mortgage-backed securities to local investors at higher prices than those at
which comparable instruments would be sold in the mainland United States. This
exemption has also permitted the Company to reduce its effective tax rate, since
a significant portion of its net interest income is tax exempt. The government
of Puerto Rico announced that it plans to eliminate the exemption on new FHA and
VA loans closed after July 1, 1997, except for loans made to finance the
purchase of homes in low and moderate income housing projects sponsored by local
housing authorities. This proposal must be approved by the Puerto Rico
legislature before becoming effective. Such interest income would be taxed at a
preferential rate of 17%. FHA and VA loans closed before July 1, 1997, as well
as securities backed by such mortgage loans would continue to be tax exempt.
While the impact of such proposal cannot be fully measured until management has
the opportunity to review the implementing legislation as finally approved,
management believes that the adoption of the proposal in its current form would
not have a material adverse effect in the Company's results of operations.
F-41
105
NOTE 26 - CAPITAL STOCK AND PAID-IN CAPITAL:
The authorized number of shares was increased during 1996 from 10,000,000 to
20,000,000 shares.
The Company has a Restricted Stock Plan (the "Restricted Stock Plan") and a
Stock Option Plan. The Restricted Stock Plan provides for the granting of up to
250,000 shares of common stock to selected officers at no cost. During 1994 and
prior years 177,806 shares were awarded and issued under the Restricted Stock
Plan. No additional shares have been awarded subsequent to 1994. The terms of
the Restricted Stock Plan permit the imposition of restrictions ranging from one
to five years on the sale or disposition of the shares issued. The Stock Option
Plan provides for the granting to selected officers and key employees of option
to purchase up to 300,000 shares of common stock at prices equal to the fair
market value on date of grant. No options have been awarded.
All of the outstanding shares of the Company's 10.5% Cumulative Convertible
Preferred Stock Series A, were redeemed in May 1996.
Present regulations limit the amount of dividends that Doral Federal may pay.
Payment of such dividends is prohibited if, among other things, the effect of
such payment would cause the capital of Doral Federal to fall below the
regulatory capital requirements.
The ability of the Company to pay dividends in the future is limited by various
restrictive covenants contained in the debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Indenture for the Senior Notes
and the Debenture Agreement from paying dividends on any capital stock (other
than dividends payable in capital stock or in stock rights), if an event of
default under any such agreements exist at such time, or if the amount of
dividends payable by the Company together with the aggregate amount of
dividends paid and other capital distributions made since specified dates
exceed a defined amount. In addition, under the Debenture Agreement, the
Syndicated Credit Agreement, the Senior Notes Indenture and other debt
agreements of the Company, the Company is prohibited from paying dividends if
it fails to maintain specified minimum levels of net worth, net earnings to
debt service and dividends ratios, and certain other financial ratios.
F-42
106
NOTE 27 - SUPPLEMENTAL INCOME STATEMENT INFORMATION:
Employee costs and other expenses are shown in the Consolidated Statement of
Income and Retained Earnings net of direct loan origination costs. Pursuant to
SFAS No. 91 direct loan origination costs are capitalized as part of the
carrying cost of mortgage loans and are offset against mortgage loan sales and
fees when the loans are sold. Without the application of SFAS No. 91, employee
costs and other expenses would have been as follows:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Employee costs $31,487,527 $24,395,306 $28,537,321
=========== =========== ===========
Other expenses $13,104,839 $12,042,064 $12,802,432
=========== =========== ===========
Set forth below is a breakdown of direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loans inventory or offset
against mortgage loan sales and fees.
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Offset against mortgage loan
sales and fees $22,006,118 $16,398,038 $21,008,323
Capitalized as part of loan inventory 4,213,138 5,093,940 5,093,940
----------- ----------- -----------
$26,219,256 $21,491,978 $26,102,263
=========== =========== ===========
F-43
107
NOTE 28 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995. FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments," defines the
fair value of financial instruments as the amount at which the instruments could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Significant differences can arise between the fair
value and carrying amount of financial instruments that are recognized at
historical cost amounts.
1996 1995
---- ----
Carrying Carrying
amount Fair value amount Fair value
------ ---------- ------ ----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 81,213 $ 81,213 $ 59,872 $ 59,872
Mortgage loans held for sale 261,608 265,190 244,132 244,148
Securities held for trading 411,447 411,447 407,941 407,941
Securities held to maturity 109,055 110,652 77,945 78,392
Securities available for sale 12,007 12,007 14,579 14,579
Loans receivable 128,766 128,766 51,355 51,355
Accounts receivable and
mortgage servicing advances 15,882 15,882 9,592 9,592
Accrued interest receivable 10,091 10,091 8,155 8,155
Excess servicing fees receivable 24,678 24,678 10,407 10,407
Mortgage servicing rights 20,969 20,969 11,164 11,164
---------- ---------- -------- --------
$1,075,716 $1,080,895 $895,142 $895,605
========== ========== ======== ========
Financial liabilities:
Loans payable $ 196,397 $ 196,397 $234,367 $234,367
Securities sold under agreements
to repurchase 387,651 387,651 363,616 363,616
Deposit accounts 158,902 158,902 95,740 95,740
Notes payable 147,893 147,893 51,682 51,682
Advances from FHLB 15,000 15,000 10,407 10,407
Payables and accrued liabilities 26,992 26,992 16,024 16,024
Convertible Subordinated Debentures 10,000 10,000 10,000 10,000
Income tax payable 8,589 8,589 5,265 5,265
---------- ---------- -------- --------
$ 951,424 $ 951,424 $787,101 $787,101
========== ========== ======== ========
F-44
108
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Cash and cash equivalents: valued at the carrying amounts in the consolidated
balance sheet. The carrying amounts are reasonable estimates of fair value due
to the short period to maturity. This approach applies to cash and cash
equivalents, accounts receivable and mortgage servicing advances, accrued
interest receivables and the majority of short-term financial liabilities.
Mortgage loans held for sale, securities held for trading, securities held to
maturity and securities available-for-sale: valued at quoted market prices if
available. For securities without quoted prices, fair values represent quoted
market prices for comparable instruments. In a few other cases, fair values have
been estimated based on assumptions concerning the amount and timing of
estimated future cash flows and assumed discount rates reflecting varying
degrees of risk.
Loans receivable: valued on the basis of estimated future principal and interest
cash flows, discounted at various rates. Loan prepayments are assumed to occur
at rates experienced in previous periods when interest rates were at levels
similar to current levels, adjusted for any differences in interest rate
outlook. Future cash flows for homogeneous categories of loans, such as
residential mortgage loans, are estimated on a portfolio basis and discounted at
current rates offered for similar loan terms to new borrowers with similar
credit profiles. Quoted market prices for securities backed by similar loans,
adjusted for different loan characteristics, are also used in estimating fair
value.
Excess servicing fees receivable and mortgage servicing rights: valued based on
the present value of the estimated remaining future servicing fee revenue.
Deposit accounts: for demand deposits and deposits with no defined maturities,
fair value is taken to be the amount payable on demand at the reporting date.
The fair values of fixed-maturity deposits, including certificates of deposit,
are estimated using rates currently offered for deposits of similar remaining
maturities. The value of long-term relationships with depositors is not taken
into account in estimating the fair values disclosed.
Loans payable and securities sold under agreements to repurchase: The carrying
amounts are reasonable estimates of fair values due to short period to maturity.
Notes payable, advances from FHLB and convertible subordinated debentures: The
carrying amounts are reasonable estimates of fair values due to recent issuance
date and current interest rates.
F-45
109
Derivatives: fair value is estimated as the amounts that the Company would
receive or pay to terminate the contracts at the reporting date, taking into
account the current unrealized gains or losses of open contracts. Market or
dealer quotes are available for many derivatives; otherwise, pricing or
valuation models are applied to current market information to estimate fair
value.
NOTE 29 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Financial data showing results of the 1996 and 1995 quarters is presented below.
These results are unaudited. In the opinion of management all adjustments
necessary for a fair presentation have been included:
Quarters
-------------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
(in thousands, except per share data)
1996
- ----
Revenue $26,035 $25,984 $28,148 $27,665
Net income 6,354 7,034 7,424 6,230
Net income per share:
Primary .71 .77 .81 .68
Fully diluted .67 .74 .78 .65
Quarters
--------------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
(in thousands, except per share data)
1995
- ----
Revenue $20,710 $23,277 $23,365 $24,487
Net income 3,430 6,137 4,928 5,065
Net income per share:
Primary .47 .84 .68 .66
Fully diluted .45 .81 .65 .62
NOTE 30 - RISK MANAGEMENT ACTIVITIES:
The Company's principal objective in holding derivatives and certain other
financial instruments is the management of interest rate risk arising out of its
portfolio holdings and related borrowings. Risk management activities are aimed
at optimizing realization on sales of mortgage loans and/or mortgage-backed
securities and net interest income, given levels of interest rate risk
consistent with the Company's business strategies.
F-46
110
Asset/liability risk management activities are conducted in the context of
Company's sensitivity to interest rate changes. This sensitivity arises due to
changes in the value of mortgage loans held for sale and mortgage-backed
securities held for trading from the time such assets are originated to the time
these are sold. In addition, interest-bearing liabilities reprice more
frequently than interest-earning assets and, therefore, the Company is affected
by the interrelationships between long-term and short-term interest rates.
To achieve its risk management objective, the Company uses a combination of
derivative financial instruments, particularly, futures and options, as well as
other types of contracts such as forward sales commitments.
As part of the interest rate risk management at December 31, 1996, the Company,
as a purchaser, had unexpired options where it had the right to sell bonds and
GNMA contracts for a notional amount of $465,000,000. It also had rights to buy
bonds and GNMA contracts for a notional amount of $290,000,000. As a writer of
options, the Company had unexpired options where it had the obligations to sell
bonds and GNMA contracts for a notional amount of $353,000,000, and obligations
to buy bonds and GNMA contracts for a notional amount of $210,000,000. In
addition, at December 31, 1996 the Company had approximately $32,000,000 of
forward commitments to sell mortgage-backed securities and loans.
Generally, the options purchased or written have expired without being
exercised. During the years ended December 31, 1996, 1995 and 1994 net gains
(net losses) from these transactions, designated as hedges, amounted to
approximately $3,100,000, ($5,400,000) and $2,172,000, respectively. These
amounts are presented as part of mortgage loan sales and fees. At December 31,
1996, mortgage loans held for sale includes capitalized costs of unexpired
options of approximately $3,185,000. At December 31, 1996, unrealized net losses
on open positions related to unexpired options, including capitalized costs,
amounted to approximately $5,900,000.
The credit risk of futures contracts is limited, due to daily cash settlement of
the net change in value of open contracts with the exchange in which the
instrument is traded. Forwards have a greater degree of credit risk, depending
on the types of counterparts involved, as daily cash settlements are not
required. Options are contracts that grant the purchaser, for a premium payment,
the right to either purchase from or sell to the writer of the option a
financial instrument at a specified price within a specified period of time or
on a specified date.
The risk that counterparts to both derivative and cash instruments might default
on their obligations is monitored on an ongoing basis. To manage the level of
credit risk the Company deals with counterparts of good credit standing, enters
into master netting agreements whenever possible and, when appropriate, obtains
collateral. Master netting agreements incorporate rights of set off that provide
for the net settlement of subject contracts with the same counterpart in the
event of default.
F-47
111
All derivative financial instruments are subject to market risk, the risk that
future changes in market conditions may make an instrument less valuable or more
onerous. For example, fluctuations in market prices and interest rates change
the market value of the instruments. If the instruments are recognized at market
value, these changes directly affect reported income. Exposure to market risk is
managed in accordance with risk limits set by senior management by buying or
selling instruments or entering into offsetting positions.
The Company enters into rate swap agreements in managing its interest rate
exposure. Interest rate swap agreements generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal.
At December 31, 1996, the Company had outstanding an interest rate swap
agreement with an investment banker to change the Company's interest rate
exposure. The agreement is for a notional principal amount of $5,000,000
covering the Company's interest rate exposure of a $5,000,000 floating rate
term-note. This agreement ends at the time the related obligation matures. The
interest rate to be received is 87% of the three-months LIBOR rate minus .125%
(4.676% at December 31, 1996) and the interest rate to be paid is 4.92%.
Nonperformance by the counterpart will expose the Company to an interest rate
risk.
The Company entered into a transaction to hedge the funding cost of the 7.84%
Senior Notes due on October 10, 2006 (the "Senior Notes"). The loss incurred in
such transaction has been deferred and is being amortized throughout the life of
the Senior Notes as an adjustment to the Notes' yield. Unamortized balance at
December 31, 1996 was approximately $2,500,000, and is shown as part of the
Senior Notes.
F-48
112
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- --------------
3.1 Amended and Restated Certificate of Incorporation of FFCC, as currently in effect.(22)
3.2 By-laws of FFCC, as amended as of January 30, 1996.(18)
4.1 Common Stock Certificate.(22)
10.13 1988 FFCC Stock Option Plan.(3)
10.14 FFCC Restricted Stock Plan.(3)
10.15 Purchase Agreement dated as of September 21, 1988, between FFCC and Culbro Corporation
covering the purchase of RSC Corp. and Doral Mortgage Corporation.(3)
10.18 Form of Contract of Pledge used by FFCC in connection with the Warehousing Loan Agreement
dated November 25, 1987, as amended, with Scotiabank de Puerto Rico.(5)
10.21 Tax Indemnification Agreement between Culbro Corporation and FFCC.(3)
10.22 Purchase Agreement dated as of November 30, 1976, between CMB, Inc. and David Levis,
Salomon Levis, Aida Levis and Carmen Levis covering the purchase of FFCC together with
amendments or supplements dated August 25, 1977, November 1, 1977, January 1, 1982,
February 9, 1982, January 1, 1986 and January 1, 1987.(3)
10.23 Purchase Agreement dated as of October 15, 1986, between CMI Inc. and Salomon Levis and
Carmen Maria Serracante covering the purchase of RSC Corp.(3)
10.24 Purchase Agreement dated as of October 15, 1986, between DRL, Inc. and Jesus M. Rodriguez
and Marta Melendez covering the purchase of Doral Mortgage Corporation.(3)
10.28 Agreement among Doral Mortgage Corporation, Banco de Ponce, as trustee, and the Puerto Rico
Housing Finance Corporation dated September 25, 1990.(4)
10.30 Loan Agreement between FFCC and Puerto Rico Island Rental Limited Dividend Partnership
S.E., dated December 27, 1990.(4)
10.32 Warehousing Loan Agreement dated September 8, 1995 between FFCC and Banco Santander Puerto
Rico.(14)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto Rico.(4)
10.34 (a) Repurchase Agreement, between FFCC and BP Capital Markets, Inc., dated November 10,
1995. (18)
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated November
28, 1989.(4)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc., dated as of March 24,
1992.(5)
10.35 Employment Agreement dated August 29, 1995 between FFCC and Salomon Levis.(16)
10.36 Employment Agreement dated August 29, 1995 between FFCC and Zoila Levis.(16)
10.37 Third Amendment to Loan Agreement dated June 5, 1991 between FFCC and Scotiabank de Puerto
Rico.(2)
10.39 Mark-to-Market Agreement between FFCC and PaineWebber Incorporated, dated as of March 24,
1992.(5)
10.40 Insurance and Indemnity Agreement dated as of May 28, 1992, between FFCC and Financial
Security Assurance Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de Puerto Rico and FFCC
confirming the renewal of the Loan Agreement dated November 25, 1987.(5)
10.42 Financing Agreement dated May 14, 1992, between FFCC and Banco Popular de Puerto Rico.(5)
10.43 Employment Agreement dated August 29, 1995, between FFCC and Richard F. Bonini.(15)
113
EXHIBIT NUMBER DESCRIPTION
- --------------
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991, between FFCC and Banco
Santander Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992, between FFCC and Banco Santander
Puerto Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the Loan Agreement between FFCC and
Scotiabank de Puerto Rico dated November 25, 1987.(5)
10.47 Amendment dated June 29, 1989 to the Loan Agreement between FFCC and Scotiabank de Puerto
Rico dated November 25, 1987.(5)
10.49 Employment Agreement dated as of December 1, 1996 between FFCC and Luis Alvarado.(22)
10.50 Customer Agreement, dated March 9, 1993, between FFCC and Meridian Capital Markets Inc.
relating to the execution of Forward Contracts.(6)
10.51 Master Repurchase Agreement, dated March 24, 1993, between FFCC and Bear Sterns Mortgage
Capital Corporation.(7)
10.52 Amended and Restated Master Production Agreement, dated as of October 1, 1995, between
FFCC, Doral Mortgage and Doral Federal, Master Production Agreement, dated as of October 1,
1995, between FFCC, Doral Mortgage and Doral Federal.(8)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of September 15, 1993,
between FFCC and Doral Federal.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as of November 29, 1993
between FFCC and Nomura Asset Capital Corporation.(13)
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993, between FFCC and Meridian
Capital markets, a Division of Meridian Bank.(13)
10.56 Financing Facility Agreement dated March 21, 1994, between Nomura Asset Capital
Corporation, FFCC and Doral.(12)
10.57 Master Repurchase Agreement among Merrill Lynch Mortgage Capital, Inc., FFCC and Doral
together with Supplemental Terms to Master Repurchase Agreement, each dated as of January
12, 1995.(14)
10.58 Swap Agreement dated December 7, 1994, between FFCC and David Levis.(14)
10.59 Demand Note dated December 9, 1994.(14)
10.60 Form of Medium Term Note, 1994 Series Puerto Rico-A.(14)
10.61 Credit Agreement, dated as of June 30, 1995, between FFCC, Doral Mortgage, the lenders
party thereto and Bankers Trust Company, as Agent.(17)
10.62 Debenture Purchase Agreement dated as of September 25, 1995, and amended restated as of
December 15, 1995, between the Company and BanPonce Corporation (including the forms of
Series A and Series Debentures.(15)
10.63 Financing Agreement dated October 10, 1995, between FFCC and Banco Santander together with
related Assignment and Pledge Agreements.(16)
10.64 Master Servicing and Collection Agreement dated October 1, 1995, between FFCC and Doral
Federal Savings Bank.(18)
10.65 Employment Agreement, dated as of February 20, 1996, between FFCC and Frederick C. Teed.(18)
10.66 First Amendment to Master Servicing and Collection Agreement, dated as of March 1, 1996,
between FFCC and Doral Federal Savings Bank.(19)
114
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.67 First Amendment to Amended and Restated Master Production Agreement, dated as of March 1,
1996, between FFCC, Doral Mortgage Corporation and Doral Federal Savings Bank,
respectively.(19)
10.68 First Amended and Restated Credit Agreement, dated as of September 25, 1996, between FFCC,
Doral Mortgage, the lenders party thereto and Bankers Trust Company, as Agent, as amended
by First Amendment dated January 7, 1997.(22)
10.69 Indenture, dated as of October 10, 1996, between the Company and Bankers Trust Company, as
trustee, including form of Senior Note. (20)
10.70 Employment Agreement, dated as of July 1, 1996, between FFCC and Mario S. Levis.(21)
10.71 Employment Agreement, dated as of December 31, 1996, between Doral Mortgage and Edison
Velez.(22)
21 List of FFCC's subsidiaries.(22)
27 Financial Data Schedule (Edgar version only).(22)
- ---------------------
(1) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993
(File No. 0-17224).
(2) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on From 10-K for the year ended December 31, 1991 (File
No. 0-17224).
(3) Incorporated herein by reference to the same exhibit number as filed
pursuant to Item 15(b) of the Company's Form 10 filed with the Commission on
October 7, 1988, as amended by Form 8 amendments thereto.
(4) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-1 (No. 33-39651) filed with the
Commission on March 29, 1991.
(5) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.
(6) Incorporated by reference to exhibit number 19.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(7) Incorporated by reference to exhibit number 19.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(8) Incorporated by reference to exhibit number 19.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File
No. 0-17224).
(9) Incorporated by reference to exhibit number 19.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File
No. 0-17224).
(10) Incorporated herein by reference to exhibit number 1 of the Company's
Current Report on Form 8-K filed with the Commission on December 16, 1992.
(11) Incorporated herein by reference to Exhibit Number 10.26 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
115
(12) Incorporated herein by reference to same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(13) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(14) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(15) Incorporated herein by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated December 22, 1995.
(16) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(17) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(18) Incorporated herein by reference to the same exhibit number of the
Company's Annual Report on Form 10-k for the year ended December 31, 1995.
(19) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(20) Incorporated herein by reference to the same exhibit number of the
Company's Current Report on Form 8-K, dated October 10, 1996.
(21) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(22) Filed herewith.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K ("Form 8-K"), dated October 10, 1996,
reporting under Item 5 - "Other Items" the closing of the issuance and sale of
the Company's Senior Notes.