<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- -----------------
COMMISSION FILE NUMBER 0-17224
DORAL FINANCIAL CORPORATION
----------------------------------------------------------
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico 66-0312162
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification
number)
1159 F.D. Roosevelt Avenue,
San Juan, Puerto Rico 00920-2998
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, (787) 749-7100
including area code --------------
Former name, former address
and Not Applicable
former fiscal year, if changed --------------
since last report
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT AUGUST 13, 1998 - 40,428,920
<PAGE> 2
DORAL FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997...............................................................................3
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters
ended June 30, 1998 and June 30, 1997 and six months ended June 30, 1998 and
June 30, 1997...................................................................................4
Consolidated Statement of Cash Flows (Unaudited) - Six-month period ended June
30, 1998 and June 30, 1997......................................................................5
Consolidated Statement of Comprehensive Income - Quarters ended
June 30, 1998 and June 30, 1997 and six months ended June 30,
1998 and June 30, 1997..........................................................................6
Notes to Consolidated Financial Statements......................................................7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.....................................22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................................................22
Item 2 - Changes in Securities..........................................................................22
Item 3 - Defaults Upon Senior Securities................................................................22
Item 4 - Submission of Matters to a Vote of Security Holders............................................22
Item 5 - Other Information..............................................................................22
Item 6 - Exhibits and Reports on Form 8-K...............................................................23
SIGNATURES....................................................................................................24
</TABLE>
<PAGE> 3
FORWARD LOOKING STATEMENTS
When used in this form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, competitive and regulatory
factors and legislative changes, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
2
<PAGE> 4
DORAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands of dollars except for share information)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(unaudited) (audited)
----------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,071 $ 17,390
Money market investments 163,898 157,404
Mortgage loans held for sale, net 620,478 406,297
Securities held for trading, net 682,036 620,288
Securities held to maturity 155,128 143,534
Securities available for sale 514,077 240,876
Loans receivable, net 130,672 133,055
Accounts receivable and mortgage servicing advances, net 106,447 42,890
Accrued interest receivable 21,350 13,537
Servicing asset 57,324 46,416
Property, leasehold improvements and equipment, net 14,419 10,848
Cost in excess of fair value of net assets acquired 5,839 6,203
Federal Home Loan Bank (FHLB) stock 4,692 4,692
Real estate held for sale, net 2,562 3,025
Prepaid and other assets 9,363 11,334
------------ ------------
$ 2,497,356 $ 1,857,789
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable $ 429,583 $ 265,306
Securities sold under agreements to repurchase 1,113,183 838,142
Deposit accounts 376,304 300,494
Notes payable 174,361 164,934
Advances from Federal Home Loan Bank 32,000 32,000
Accounts payable and other liabilities 116,411 57,201
Income tax payable 3,324 2,883
Deferred tax liability 5,957 9,874
------------ ------------
Total liabilities 2,251,123 1,670,834
------------ ------------
Commitments and contingencies ---------- ---------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; 20,000 shares of 8% Convertible
Cumulative Preferred Stock, $1 par value
(liquidation preference $1,000 per share),
authorized; 8,460 shares issued 8 8
Common Stock, $1 par value, 50,000,000 shares authorized;
40,484,920 shares issued; 40,428,920 shares outstanding 40,485 36,850
Paid-in capital 70,252 33,295
Legal surplus 1,704 1,704
Retained earnings 133,568 114,253
Unrealized gain on securities available for sale, net of
deferred tax 272 901
Treasury stock at par value, 56,000 shares (56) (56)
------------ ------------
Total stockholders' equity 246,233 186,955
------------ ------------
Total liabilities and stockholders' equity $ 2,497,356 $ 1,857,789
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands of dollars, except for per share data)
Unaudited
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 10,270 $ 7,411 $ 20,856 $ 15,641
Mortgage-backed securities 14,794 11,007 26,949 21,840
Investment securities 8,216 833 15,435 1,465
Other interest-earning assets 1,682 1,436 2,766 2,127
---------- ---------- ---------- ----------
Total interest income 34,962 20,687 66,006 41,073
Interest expense:
Loans payable 6,832 3,851 12,258 7,829
Securities sold under agreements to repurchase 12,869 6,563 24,142 13,570
Deposits 3,899 2,403 7,496 4,185
Other borrowed funds 2,641 1,233 5,547 2,531
---------- ---------- ---------- ----------
Total interest expense: 26,241 14,050 49,443 28,115
Net interest income 8,721 6,637 16,563 12,958
Provision for loan losses 93 200 311 365
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 8,628 6,437 16,252 12,593
Non-interest income:
Mortgage loans sales and fees 13,661 5,740 23,055 11,057
Servicing income 5,483 3,069 10,204 7,048
Gain on sale of servicing assets 0 0 1,829 0
Other income 625 338 1,151 730
---------- ---------- ---------- ----------
Total non-interest income 19,769 9,147 36,239 18,835
Non-interest expenses:
Compensation and benefits, net (See Note f) 3,533 746 7,416 3,134
Taxes, other than payroll 410 326 801 644
Maintenance 373 237 600 448
Advertising 1,511 860 2,814 1,728
Professional services 998 802 1,876 1,564
Telephone 661 528 1,265 987
Rent 778 611 1,509 1,196
Other, (See Note f) 5,036 2,686 8,523 4,485
---------- ---------- ---------- ----------
Total non-interest expense 13,300 6,796 24,804 14,186
---------- ---------- ---------- ----------
Income before income taxes 15,097 8,788 27,687 17,242
---------- ---------- ---------- ----------
Income taxes:
Current 3,282 770 7,109 1,360
Deferred (1,189) 100 (3,523) 843
---------- ---------- ---------- ----------
Total income taxes 2,093 870 3,586 2,203
---------- ---------- ---------- ----------
Net Income 13,004 7,918 24,101 15,039
Retained earnings at beginning of period 123,159 108,497 114,253 102,925
Less cash dividends paid:
8% Convertible Cumulative Preferred stock 169 - - - 338 - - -
Common stock 2,426 1,840 4,448 3,389
---------- ---------- ---------- ----------
Retained earnings at the end of period $ 133,568 $ 114,575 $ 133,568 $ 114,575
========== ========== ========== ==========
Earnings per share (1):
Basic $ 0.32 $ 0.22 $ 0.60 $ 0.41
========== ========== ========== ==========
Diluted $ 0.31 $ 0.21 $ 0.58 $ 0.40
========== ========== ========== ==========
</TABLE>
(1) Adjusted to reflect two-for-one stock splits effected on August 28, 1997 and
May 20, 1998.
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Six-Month Period Ended
June 30,
--------------------------
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 24,101 $ 15,039
---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of interest-only strip receivable..................................... 1,687 1,848
Amortization of cost in excess of fair value of net assets acquired................ 364 191
Amortization of servicing assets................................................... 2,953 1,244
Depreciation and amortization...................................................... 1,362 1,044
Gain on sale of servicing rights................................................... (1,829) 0
Allowances for losses.............................................................. 311 461
Origination and purchases of mortgage loans held for sale.......................... (930,662) (363,485)
Principal repayment and sales of loans held for sale............................... 316,440 180,333
Purchases of securities held for trading........................................... (642,745) (185,525)
Principal repayments and sales of securities held for trading...................... 782,912 256,950
Net (increase) decrease in interest-only strip receivable.......................... 5,014 (9,079)
Increase in accounts receivable and mortgage servicing advances.................... (63,653) (6,082)
Increase in servicing asset........................................................ (13,861) (5,481)
Increase in interest receivable.................................................... (7,813) (2,983)
Increase (decrease) in loans payable............................................... 164,277 (3,027)
Increase in interest payable....................................................... 5,472 777
Increase in securities sold under agreements to repurchase......................... 275,041 143,049
Increase (decrease) in payables and accrued liabilities............................ 53,738 (783)
Increase (decrease) in income tax payable.......................................... 440 331
Deferred tax (benefit) provision................................................... (3,523) 843
Amortization of unearned compensation under employment contracts................... 0 49
---------- ----------
Total adjustments............................................................... (54,075) 10,675
---------- ----------
Net cash (used by) provided by operating activities................................ (29,974) 25,714
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held to maturity.............................................. 0 (87,774)
Principal repayments of securities held to maturity................................... 17,325 8,036
Origination of loans receivable....................................................... 0 (70,802)
Principal repayments of loans receivable.............................................. 2,168 39,406
Purchase of securities available for sale............................................. (345,400) (1,982)
Principal repayments and sales of securites available for sale........................ 233,683 0
Purchase of property, leasehold improvements and equipment........................... (4,933) 4,264
Additions to cost in excess of fair value of net assets required...................... 0 (19)
Real estate held for sale............................................................. 463 (975)
Proceeds from the sale of servicing assets............................................ 1,829 0
Decrease (increase) in other assets................................................... 1,971 (6,037)
---------- ----------
Net cash used by investing activities.............................................. (92,894) (115,883)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance - Increase/Decrease of common stock......................................... 40,592 (3)
Increase (decrease) in notes payable.................................................. 9,427 1,734
Increase in deposits.................................................................. 75,810 55,386
Dividends declared and paid........................................................... (4,786) (3,389)
---------- ----------
Net cash provided by financing activities............................................ 121,043 53,728
---------- ----------
Net decrease in cash and cash equivalents............................................ (1,825) (36,441)
Cash and cash equivalents at beginning of period..................................... 174,794 81,213
---------- ----------
Cash and cash equivalents at the end of period....................................... $ 172,969 $ 44,772
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Noncash investing activities-conversion of subordinated debentures.................... $ 0 $ 1,540
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used to pay interest............................................................. $ 43,971 $ 27,338
========== ==========
Cash used to pay income taxes......................................................... $ 6,669 $ 1,029
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income: $ 13,004 $ 7,918 $ 24,101 $15,039
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (251) -- 218 968
Less: reclassification adjustment for (gains) losses
included in net income (319) -- (847) (886)
-------- ------- -------- -------
Other comprehensive income (loss) (570) -- (629) 82
-------- ------- -------- -------
Comprehensive income, net of tax $ 12,434 $ 7,918 $ 23,472 $15,121
======== ======= ======== =======
</TABLE>
6
<PAGE> 8
DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated Financial Statements (unaudited) include the accounts of
Doral Financial Corporation ("Doral" or the "Company"), Doral Mortgage
Corporation ("Doral Mortgage"), Centro Hipotecario, Inc., Doral Securities,
Inc. ("Doral Securities"), Doral Bank and Doral Money, Inc. References
herein to "Doral" or the "Company" shall be deemed to refer to the Company
and its consolidated subsidiaries, unless otherwise provided. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Consolidated Financial Statements (unaudited) have been
prepared in conformity with the accounting policies stated in the Company's
Annual Audited Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, and should be read in
conjunction with the Notes to the Consolidated Financial Statements
appearing in that report. All adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for
a fair presentation of results for the interim periods have been reflected.
b. The results of operations for the quarter and six-month period ended June
30, 1998 are not necessarily indicative of the results to be expected for
the full year.
c. Cash dividends per share paid for the quarter and six-month period ended
June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
8% Convertible Cumulative Preferred Stock $20.00 $ --- $40.00 $ ---
Common Stock $ 0.06 $0.05 $ 0.11 $0.09
</TABLE>
d. At June 30, 1998, escrow funds include approximately $73.4 million
deposited with Doral Bank. These funds are included in the Company's
financial statements. Escrow funds also include approximately $10.2 million
deposited with other banks which are excluded from the Company's assets and
liabilities.
e. The number of average shares of common stock used for computing the basic
and diluted net income per share was as follows:
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 40,428,920 36,686,612 39,445,130 36,565,440
Diluted 42,406,241 38,728,632 41,400,647 38,728,632
</TABLE>
f. Employee costs and other expenses are shown in the Consolidated Statement
of Income and Retained Earnings net of direct loan origination costs which,
pursuant to SFAS No. 91, are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold.
Set forth below is a reconciliation of the application of SFAS No. 91 to
employee costs and other expenses:
7
<PAGE> 9
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
-------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Employee Costs, gross $12,076 $ 8,957 $23,506 $17,261
Deferred costs pursuant to SFAS No. 91 8,543 8,211 16,090 14,127
------- ------- ------- -------
Employee cost, net $ 3,533 $ 746 $ 7,416 $ 3,134
======= ======= ======= =======
Other expenses, gross $ 6,298 $ 3,391 $11,503 $ 6,701
Deferred costs pursuant to SFAS No. 91 1,262 705 2,980 2,216
------- ------- ------- -------
Other expenses, net $ 5,036 $ 2,686 $ 8,523 $ 4,485
======= ======= ======= =======
</TABLE>
g. On April 23, 1998, the Board of Directors declared a two-for-one stock
split of the Company's Common Stock, $1.00 par value (the "Common Stock").
The stock split was effected in the form of a stock dividend of one
additional share of Common Stock issued on May 20, 1998 for each share of
Common Stock held of record on May 8, 1998. Prior to the declaration of the
stock split, the Company had 20,214,460 shares outstanding. Following
distribution of the additional shares, the Company had 40,428,920 shares
outstanding. The stock split did not dilute shareholders' voting rights or
their proportionate interest in the Company.
All amounts in the financial statements and the accompanying notes have
been adjusted to reflect the stock split.
h. Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SAFS") No. 130- "Reporting Comprehensive Income."
This Statement establishes standards for reporting and displaying
comprehensive income and its components in general-purpose financial
statements. Comprehensive income is intended to report all changes in the
equity of a business enterprise during a period from transactions and other
events or circumstances, except those resulting from investments by or
distribution to owners. The only item of comprehensive income reported by
the Company is the unrealized gains on securities available for sale which,
at June 30, 1998, amounted to $272,000 net of tax.
i. The fair values of the Company's trading securities and the fair values and
carrying values of its securities classified as available for sale and held
to maturity are shown below by category. The fair values of investment
securities are based on quoted market prices and dealers quotes, except for
investment in FHLB-NY stock which is valued at its redemption value.
Expected maturities may differ from contractual maturities because of
prepayment and other market factors.
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities Held for trading:
Mortgage-backed securities:
GNMA ............................ $ 469,415 $ 420,365
CMO certificates ................ 158,426 157,236
FHLMC ........................... 26,031 4,954
FNMA ............................ 3,416 3,569
Interest-only strips ............. 22,164 29,093
US Treasury Bonds ................ -- --
US Treasury Notes ................ -- --
US Treasury Bills ................ -- --
Other ............................ 2,584 5,071
---------- ----------
$ 682,036 $ 620,288
========== ==========
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------------
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
FNMA MORTGAGE-BACKED SECURITIES
Due within one year .................... $ $
Due from one-five years ................ -- -- -- --
Due from five-ten years ................ -- -- -- --
Due over ten years ..................... 1,866 1,758 2,008 1,959
FHLMC MORTGAGE-BACKED SECURITIES
Due within one year .................... -- -- -- --
Due from one-five years ................ -- -- -- --
Due from five-ten years ................ -- -- -- --
Due over ten years ..................... 2,032 1,968 2,155 2,087
GNMA MORTGAGE-BACKED SECURITIES
Due within one year .................... -- -- -- --
Due from one-five years ................ -- -- -- --
Due from five-ten years ................ -- -- -- --
Due over ten years ..................... 36,124 36,364 43,375 44,537
DEBT SECURITIES AVAILABLE FOR SALE:
U.S. TREASURY
Due within one year .................... -- -- -- --
Due from one-five years ................ -- -- -- --
Due from five-ten years ................ -- -- -- --
Due over ten years ..................... 73,642 73,655 25,661 25,580
FEDERAL HOME LOANS BANK AND FARM
CREDIT NOTES
Due within one year .................... 22,199 22,199 -- --
Due from one-five years ................ -- -- -- --
Due from five-ten years ................ -- -- -- --
Due over ten years ..................... 377,833 378,133 166,200 166,713
--------- -------- --------- --------
TOTAL SECURITIES AVAILABLE
FOR SALE ............................... $ 513,696 $514,077 $ 239,399 $240,876
========= ======== ========= ========
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------------
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
GNMA
Due within one year .................... $ -- $ -- $ -- $ --
Due from one-five years ................ -- -- -- --
Due from five-ten years ................ -- -- -- --
Due over ten years ..................... 33,547 34,560 5,053 5,077
CMO CERTIFICATES (OTHER ISSUERS)
Due within one year .................... $ 4,021 $ 4,117 4,895 5,013
Due from one-five years ................ 4,776 4,773 5,871 5,868
Due from five-ten years ................ 12,483 12,720 12,483 12,720
Due over ten years ..................... 24,253 24,898 27,227 27,888
DEBT SECURITIES HELD TO MATURITY:
FEDERAL HOME LOAN BANK AND
FARM CREDIT NOTES
Due within one year .................... $ -- $ -- -- --
Due from one-five years ................ -- -- -- --
Due from five to ten years ............ 30,000 30,031 45,000 45,113
Due over ten years ..................... 40,000 40,094 30,000 30,125
PR. HOUSING BANK NOTES
Due within one year .................... $ -- $ -- 5,000 4,990
Due from one to five years ............. -- -- -- --
Due from five to ten years ............. 5,000 5,037 -- --
Due over ten years ..................... -- -- -- --
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------------
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. TREASURY
Due within one year ............... $ 1,048 $ 1,048 8,005 7,990
Due from one to five years ........ -- -- -- --
Due from five to ten years ........ -- -- -- --
Due from over ten years ........... -- -- -- --
TOTAL SECURITIES HELD TO MATURITY: ........... $ 155,128 $157,278 $ 143,534 $144,784
========= ======== ========= ========
</TABLE>
j. Loans Receivable
The following table sets forth certain information regarding the Company's
loans receivable as of the dates indicated:
<TABLE>
<CAPTION>
June 30, Percent December 31, Percent
1998 of Total 1997 of Total
---- -------- ---- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction loans ........................................ $ 7,890 6% $ 9,927 7%
Residential mortgage loans ................................ 82,252 62 87,037 65
Commercial real estate .................................... 21,130 16 19,036 14
Consumer-- Secured by mortgage ............................ 6,402 5 7,828 6
Consumer-- other .......................................... 4,156 3 2,328 2
Commercial (non-real estate) .............................. 4,260 3 3,461 2
Loans on Saving Deposits .................................. 4,211 3 3,513 3
Land secured .............................................. 1,726 2 1,488 1
--------- --- --------- -----
Gross loans(1)(2) ....................................... 132,027 100% 134,618 100%
--------- --- ---------
Less:
Unearned interest and deferred loan
fees ...................................................... (30) (322)
Allowance for loan losses ............................... (1,325) (1,241)
--------- ---------
---------
Loans receivable, Net (3) ............................... $ 130,672 $ 133,055
========= =========
</TABLE>
- ------------------
(1) Sum of the columns may not add up to the totals due to rounding.
(2) Excludes mortgage loans held for sale.
(3) 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.
10
<PAGE> 12
k. The following table summarizes certain information regarding the Company's
allowance for loan losses related to loans receivable.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 YEAR ENDED DECEMBER 31, 1997
------------------------------ ----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ALLOWANCE FOR LOAN RECEIVABLES(1):
Balance at beginning of period ................... $1,241 $ 719
Provision for loan losses(2)...................... 115 600
CHARGE - OFFS .................................... (58) (124)
RECOVERIES: 27 46
-------
BALANCE AT END OF PERIOD ......................... $1,325 $ 1,241
====== =======
</TABLE>
(1) Excludes reserves related to mortgage loans held for sale by the Company's
mortgage banking units.
(2) The provision for loan losses also includes $196,000 related to mortgage
loans classified as held for sale which are past due.
l. Certain amounts reflected in the 1997 Consolidated Financial Statements
have been reclassified to conform to the presentation for 1998.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
This report and the consolidated financial statements of the Company
contain information regarding the Company's operations and performance for the
quarters and six-month periods ended June 30, 1998 and 1997. Doral has been
engaged in the mortgage banking business since 1972. During the first half of
1998, Doral continued to maintain its leadership position in the origination of
mortgage loans in Puerto Rico. The volume of loans originated and purchased by
Doral was approximately $543.8 million for the quarter ended June 30, 1998, as
compared to $252.2 million for the same period a year ago. For the first half of
1998, loans originated and purchased amounted to $930.7 million, versus $434.3
million for the comparable period of 1997.
Doral also continues to be the leading institution in Puerto Rico in
terms of the size of its mortgage servicing portfolio. The Company's mortgage
servicing portfolio increased approximately $1.8 billion from June 30, 1997 to
June 30, 1998, from $3.3 billion to $5.1 billion. While the Company's
traditional strategy to increase the size of its mortgage servicing portfolio
has been to rely principally on internal loan originations, it also intends to
purchase loans and mortgage servicing rights from third parties to the extent it
can identify attractive opportunities. The Company may also engage, from time to
time, in the sale of mortgage servicing rights whenever market conditions appear
favorable. During the second quarter of 1998, Doral purchased approximately
$33.0 million in mortgage servicing rights. For the first six months of 1998,
the Company purchased approximately $108 million of mortgage servicing rights
and sold approximately $103 million of servicing rights to a local financial
institution during the first quarter of 1998. The sale resulted in a gain to the
Company of $1.8 million. Doral had no such purchases or sales during the first
six months of 1997.
The Company entered the banking business in 1993 through the
acquisition of a federal savings bank, Doral Bank (formerly Doral Federal
Savings Bank). In October 1997, Doral Bank converted its charter to that of a
Puerto Rico commercial bank and currently operates through six branches in the
San Juan, Puerto Rico metropolitan area. For the quarters ended June 30, 1998
and 1997, Doral Bank contributed approximately $1.9 million and $969,000,
respectively, to the Company's consolidated net income. For the six-month
periods ended June 30, 1998 and 1997, Doral Bank's contribution to the Company's
consolidated net income was approximately $3.6 million and $1.9 million,
respectively. The increase in the contribution of Doral Bank to the Company's
consolidated results reflects a substantial increase in Doral Bank's interest
earning assets and increased gains on the sale of mortgage loans. Doral Bank
increased its assets from $319.7 million as of June 30, 1997, to $520.2 million
as of June 30, 1998. This growth was funded largely through increases in
certificates of deposit accounts and advances from the Federal Home Loan Bank of
New York ("FHLB-NY").
In addition to its mortgage banking and banking operations, the Company
is also engaged in the securities business through Doral Securities, a
broker-dealer subsidiary that operates from a single branch office located in
San Juan, Puerto Rico.
Unless otherwise indicated herein, the information in this report gives
effect to and has been adjusted for the two-for one stock splits of the
Company's Common Stock effected on August 28, 1997 and May 20, 1998.
RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1998 AND
1997
Doral's 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 interest rates on its
interest-earning assets and the cost of funds with respect to its interest
bearing liabilities.
The components of Doral's revenues are: (i) net interest income; (ii)
mortgage loans sales and fees; (iii) servicing income; (iv) gain on sale of
servicing rights; and (v) other income.
Net Income. The Company's net income for the three month period ended
June 30, 1998 increased to $13.0 million, compared to $7.9 million for the same
period a year ago, an increase of 64%. Net income per diluted share was $0.31
and $0.21 for such respective periods. For the first six months of 1998 and
1997, Doral recorded net income in
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<PAGE> 14
the amount of $24.1 million and $15.0 million, respectively, for an increase of
60% during the period. Net income per diluted share was $0.58 and $0.40, for the
six months ended June 30, 1998 and 1997, respectively.
Net Interest Income. Doral's net interest income has steadily increased
over recent periods as a result of the Company's strategy to increase its
interest earning assets, particularly its portfolio of investment securities.
Net interest income is the difference between the interest earned by Doral on
its interest earning assets and the interest paid by Doral on its interest
bearing liabilities. Doral's net interest income increased by approximately 32%
for the three month period ended June 30, 1998 compared to the three month month
period ended June 30, 1997, from $6.6 million to $8.7 million. For the first
half of 1998, net interest income was $16.6 million, compared to $13.0 million
for the corresponding period of 1997, an increase of 28%. This increase in net
interest income is primarily due to an increase in Doral's interest earning
assets, which can be attributed to increased loan originations and purchases of
mortgage-backed securities and U.S. agency securities. Doral Bank contributed
approximately $3.2 million, or 37%, of the consolidated net interest income of
the Company for the quarter ended June 30, 1998, versus to $2.4 million or 36%
for the comparable 1997 period. During the six-month period ended June 30, 1998,
Doral Bank's contribution to the Company's net interest income was approximately
$6.1 million, or 37%, compared to $4.7 million, or 36%, for the first six months
of 1997.
Interest Income. Doral's total interest income increased from
approximately $20.7 million for the second quarter of 1997 to $35.0 million for
the comparable period of 1998. For the first six months of 1998, interest income
increased by approximately $24.9 million, to $66.0 million compared to $41.1
million for the first six months of 1997. The increases in interest income
during both periods is primarily related to the increase in the Company's
interest earning assets from $1.2 billion at June 30, 1997, to $2.2 billion at
June 30, 1998.
Interest income on loans increased by $2.9 million, or 39%, during the
second quarter of 1998, as compared to the same period a year ago. For the first
six months of 1998, interest income on loans increased 34%, from $15.6 million
for the six months ended June 30, 1997, to $20.9 million for the six months
ended June 30, 1998. The increase during 1998 reflects the increased loan
production for the first half of 1998 compared to the six months of 1997.
Interest income on mortgage-backed securities was approximately $14.8
million for the quarter ended June 30, 1998, as compared to $11.0 million for
the corresponding 1997 period, an increase of 34%. During the first half of
1998, income on mortgage-backed securities was $26.9 million, an increase of 23%
from the $21.8 million amount for the comparable period a year ago. This
increase for both periods is the result of the growth in the Company's portfolio
of such securities, which increased from $642.0 million at June 30, 1997, to
$775.3 million at June 30, 1998.
Interest income with respect to investment securities increased by $7.4
million during the second quarter of 1998, as compared to the same period of
1997, from $833,000 to $8.2 million. Interest income on investment securities
was $15.4 million for the six months ended June 30, 1998, as compared to $1.5
million for the same period a year ago. The increase in interest income reflects
the strategy of Doral to increase its tax exempt interest income by investing in
U.S. Treasury and agency securities, the interest on which is tax exempt under
Puerto Rico law and, in the case of Doral, is not subject to U.S. income
taxation because of its status as a foreign corporation for U.S. income tax
purposes. Doral's investment securities were approximately $552.2 million as of
June 30, 1998, compared to approximately $88.6 million as of June 30, 1997.
Interest income on other interest-earning assets was approximately $1.7
million for the second quarter of 1998, as compared to approximately $1.4
million for the same period of 1997, representing an increase of 21%. For the
six-month period ended June 30, 1998, income with respect to other
interest-earning assets increased by 33%, from $2.1 million during the first
half of 1997 to $2.8 million for the first half of 1998. Other interest-earning
assets consist primarily of overnight deposits, term deposits and reverse
repurchase agreements. The increase in this category of interest incomes is due
mainly to higher liquidity in the banking and broker-dealer subsidiaries the
Company and the investment of such reverse repurchase agreements and deposits.
This positive trend is the result of Doral's strategy to diversify its sources
of revenue.
Interest Expense. Doral's total interest expense increased to $26.2
million during the quarter ended June 30, 1998, from $14.1 million for the
comparable period of 1997, an increase of 86%. Total interest expense for the
first half of 1998 was $49.4 million, as compared to $28.1 million for the same
period of 1997, an increase of 76%. The increases in interest expense for both
periods was due primarily to the increase in the amount of Doral's
interest-bearing liabilities
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<PAGE> 15
used to fund the increase in the Company's interest-earning assets and loan
production. Interest-bearing liabilities increased to $2.1 billion at an average
cost of 5.82% for the six-month period ended June 30, 1998, compared to $1.1
billion at an average cost of 5.59% for the same period a year ago.
Interest expense related to loans payable increased by $3.0 million, or
77%, for the second quarter of 1998, when compared to the corresponding 1997
period. For the first half of 1998, interest expense associated to loans payable
was $12.3 million, an increase of 57% from $7.8 million for the six months ended
June 30, 1997. The increases reflect increased borrowings required to fund the
increase in loan originations and holding of the Company's mortgage loans. The
weighted-average interest rate for borrowings under the Company's warehouse
lines of credit was 7.04% for the first half of 1998, as compared to 6.93% for
the same period a year ago.
Interest expense related to securities sold under agreements to
repurchase for the quarters ended June 30, 1998 and 1997, amounted to
approximately $12.9 million and $6.6 million, respectively, an increase of 95%.
During the first six months of 1998, interest expense related to securities sold
under agreements to repurchase was $24.1 million, versus $13.6 million for the
corresponding 1997 period, an increase of 77%. The increases during these
periods reflect increased borrowings to finance the acquisition of U.S. treasury
and agency securities classified as available for sale and of mortgage-backed
securities related to the Company's securitization activities. The
weighted-average interest rate of Doral's borrowings under repurchase agreements
was 5.78% for the six-month period ended June 30, 1998 and 5.70% for the
corresponding period of 1997.
Interest expense on deposits increased by $1.5 million to approximately
$3.9 million for the second quarter of 1998, from $2.4 million for the
comparable period of 1997, an increase of 63%. For the six-month periods ended
June 30, 1998 and 1997, interest expense on deposits amounted to $7.5 million
and $4.2 million, respectively, an increase of 79%. The increase in interest
expense on deposits reflects the increase of such funds held at Doral Bank,
which grew from $214.3 million as of June 30, 1997, to $376.3 million as of June
30, 1998. This rise in deposits is the result of the opening of additional
branches by Doral Bank, which now provides services through six branches, and
the offering of competitive rates. Doral Bank intends to continue its branch
expansion program during 1998. The average interest cost on deposits was 4.41%
for the first half of 1998, compared to 4.53% for the same period a year ago. As
of June 30, 1998, approximately $73.4 million, or 19.5% of total deposits ($10.2
million of such deposits are not reflected in the Company's Consolidated
Financial Statements because of inter-company eliminations) held at Doral Bank
consisted of non-interest bearing accounts comprised primarily of servicing
custodial accounts and corporate deposit accounts maintained by Doral and its
subsidiaries.
Interest expense on other borrowed funds was $2.6 million for the
quarter ended June 30, 1998, as compared to $1.2 million for the same period a
year ago, an increase of approximately 117%. Interest expense on other borrowed
funds for the first half of 1998 and 1997 was $5.5 million and $2.5 million,
respectively, which represents an increase of approximately 119% for such
comparable periods. This element of interest expense includes various term notes
issued by Doral Bank, the Company's $75 million senior notes, due on October 10,
2006, and Doral Bank's advances from the Federal Home Loan Bank of New York, as
well as various other borrowings.
Provision For Loan Losses. The provision for loan losses is charged to
earnings during the period it is accounted for in order to bring the total
allowance for loan losses to a level considered appropriate by management, based
on the Company's loss experience, current delinquency rates, known and inherent
risk in the loan portfolio, the estimated value of any underlying collateral and
an assessment of current economic conditions. While management believes that the
current provision for loan losses is sufficient, future additions to the
allowance could be necessary if economic conditions change substantially from
the assumptions used by the Company in determining such allowance. The Company
made provisions to its allowance for loan losses for the quarters ended June 30,
1998 and 1997, of approximately $93,000 and $200,000, respectively. Charges to
the provision for the six-month periods ended June 30, 1998 and 1997, were
$311,000 and $365,000, respectively. The decrease in the charges to the
provision during 1998 as compared to 1997 is due, in part, to a steady
improvement in delinquency ratios in loans receivable held by Doral Bank and to
management's consideration of the appropriateness of the allowance.
Revenues From Mortgage Loans Sales and Fees. Revenues from mortgage
loans sales and fees consist of the following: (i) gains on sales of loans and
origination fees (net of direct loan origination costs), (ii) net gains or
losses on hedging instruments and (iii) unrealized gains or losses on securities
held for trading.
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<PAGE> 16
Revenues from mortgage loan sales and fees increased by 140% for the
quarter ended June 30, 1998, as compared to the same period a year ago, from
approximately $5.7 million for the second quarter 1997 to $13.7 million for the
second quarter 1998. For the six-month periods ended June 30, 1998 and 1997,
mortgage loans sales and fees were $23.1 million and $11.1 million,
respectively, an increase of 108%. The increases experienced during 1998 is
mainly the result of increased loan originations and increased profitability on
sales of various loan products, including the creation and sale of Interest Only
strips ("IOs") in connection with bulk sales of mortgage loans to corporate
investors.
The Company creates IOs (previously classified as excess servicing fees
receivable) as the result of the sale of loans in bulk or securitization
transactions. IOs are created on the sale of loans by computing the present
value of the excess of the weighted-average coupon on the loans sold over the
sum of: (i) the pass-through interest paid to the investor and (ii) a basic
servicing fee, based on the servicing fee permitted by FNMA and FHLMC, and
adjusting such amount for expected losses and prepayments. The amount of the IO
is recognized at the time of the sale of the loans as an adjustment to the
resulting gain or loss on the sale of loans and is recorded at such time as a
component of "Mortgage Loans Sales and Fees" on the Company's Consolidated
Statement of Income, even though the cash is received over the life of the loans
sold. While the Company traditionally retains the IOs it creates as a result of
loans sales, Doral may, from time to time, sell such instruments whenever market
conditions are favorable and benefits can be readily measured. During the first
half of 1998, the Company was able to successfully sell IOs, with the proceeds
of such sales exceeding the creation of IOs for the first half of 1998 by
approximately $5.0 million, in contrast with the comparable 1997 period, in
which sales of mortgage loans resulted in a net increase of approximately $9.1
million in IOs.
Beginning with the second quarter of 1995, following the implementation
by the Company of SFAS No. 122 (later superseded by SFAS 125), whenever Doral
originates a mortgage loan it assigns a fair value to the related mortgage
servicing right (the "servicing asset") associated with such mortgage loan. The
servicing asset represents the discounted present value of the servicing fees
expected to be received on the loan over the expected term of the loan. The
amount of the servicing asset is recognized at the time of sale of the related
loan as an adjustment to the resulting gain or loss on the sale of the loan and
is recorded as a component of "Mortgage Loans Sales and Fees" on the Company's
Consolidated Statement of Income. During the second quarter of 1998, the Company
capitalized approximately $5.5 million in servicing assets arising from internal
loan originations, as compared to $2.1 million for the same period of 1997. For
the six months ended June 30, 1998, Doral capitalized approximately $9.1 million
in servicing assets arising from internal loan originations, compared to $3.7
million for the corresponding 1997 period. The increases reflect increased loan
originations during such periods. During the second quarter and first half of
1998, the Company also recorded $2.3 million and $4.8 million, respectively, in
servicing assets related to purchases of loans and servicing rights, compared to
$1.2 million and $1.8 million, respectively for the corresponding 1997 periods.
The increase in purchassed mortgage servicing rights during 1998 is due to
increased wholesale loan purchases by the Company and to the continuous purchase
of mortgage servicing rights under an agreement with a commercial bank pursuant
to which the Company has agreed to purchase the mortgage servicing rights
related to the mortgage loan production of such bank. The unamortized balance of
the servicing asset is reflected on the Consolidated Balance Sheet of the
Company. See "Amortization of IOs and MSRs".
Pursuant to SFAS 115, the Company includes in earnings, as a component
of "Mortgage Loans Sales and Fees", any unrealized gains or losses in the market
value of its securities held for trading. For the quarters ended June 30, 1998
and 1997, revenues from mortgage loans sales and fees included $950,000 and $1.9
million, respectively, of unrealized gains on the value of its securities held
for trading. The component of earnings attributed to unrealized gains or losses
in trading securities for the first half of 1998 amounted to $2.7 million
compared to $3.5 million for the comparable period of 1997.
Servicing Income. Servicing income represents revenues earned by Doral
for administering mortgage loans. Doral's loan servicing fees depend on the type
of mortgage loan being serviced and range from 0.25% to 0.50% of the declining
outstanding principal amount of such loan. The size of Doral's loan servicing
portfolio and the amount of its servicing fees have increased substantially
since Doral's inception as a result of increases in loan originations and in the
size of its servicing portfolio. While the Company's strategy is to rely
primarily on internal mortgage loan originations to increase the size of its
servicing portfolio, it complements such internal originations with the purchase
of mortgage servicing rights and loans from third parties. The Company purchased
rights to service mortgage loans aggregating approximately $33.0 million and
$108 million
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during the second quarter and first half of 1998, respectively. There were no
such purchases during the comparable 1997 periods.
Servicing fees for the three month period ended June 30, 1998, were
approximately $5.5 million, compared to $3.1 million for the 1997 period, for an
increase of 77% for the quarter. For the first half of 1998, servicing income
increased to $10.2 million from $7.0 million for the first half of 1997, an
increase of 46%. The increase in the amount of loan servicing fees for the
second quarter and first half of 1998 was principally due to an increase in the
principal amount of loans serviced as compared to prior periods. The mortgage
servicing portfolio was approximately $5.1 billion as of June 30, 1998, compared
to $3.3 billion as of the same date a year ago. At June 30, 1998, less than 1%
of the Company's servicing portfolio was associated to mortgages originated
outside Puerto Rico (substantially all of which were originated in Florida).
The amount of principal prepayments on mortgage loans serviced by the
Company for the six months ended June 30, 1998 and 1997, was $285.8 million and
$122.8 million, respectively. This represents approximately 5.83% and 3.85% of
the aggregate principal amount of mortgage loans serviced during such periods,
and the average size of the loans prepaid was $48,370 and $38,520, respectively.
The increase in prepayments was mostly due to a decrease in prevailing mortgage
interest rates. 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 maintain or increase
the size of its servicing portfolio, even during periods of high prepayments.
Amortization of IOs and MSRs. IOs are amortized over the expected life
of the asset and such amortization is recorded as a reduction of interest
income. The amortization of IOs is based on the amount and timing of estimated
future cash flows to be received with respect to the IOs. Amortization of such
IOs for the quarters ended June 30, 1998 and 1997, was approximately $640,000
and $956,000, respectively. For the six months of 1998, amortization of IOs was
approximately $1.7 million, as compared to $1.8 million for the first half of
1997.
The Company's servicing assets are amortized in proportion to, and over
the period of, estimated servicing income. Amortization of servicing assets is
included as a component of other non-interest expenses in the Company's
Consolidated Financial Statements. During the second quarter of 1998, total
amortization of servicing assets amounted to $1.6 million, versus $666,000 for
the comparable 1997 period. Amortization of servicing assets for the six-month
periods ended June 30, 1998 and 1997, was approximately $3.0 million and $1.2
million, respectively.
Increases in prepayments rates or credit loss rates over anticipated
levels used in calculating the value of IOs and servicing assets can adversely
affect the Company's revenues and liquidity by increasing the amortization rates
for servicing assets and IOs as well as requiring the Company to recognize an
impairment against income over and above scheduled amortization. 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 Assets. The Company may also, from time to
time, participate in the sale of mortgage servicing rights if conditions exist
that make such a transaction favorable to the Company. A sale of servicing
rights occurred during the first half of 1998, where Doral sold approximately
$103 million in servicing rights, which resulted in a gain to the Company of
$1.8 million. The Company had no such sales during the first six months of 1997.
Non-Interest Income and Non-Interest Expense. Total non-interest income
increased 117% during the second quarter of 1998, as compared to the same period
of 1997, from $9.1 million for the second quarter 1997 to $19.8 million for the
second quarter 1998. For the first half of 1998, total non-interest income was
$36.2 million, as compared to $18.8 million for the corresponding 1997 period,
an increase of approximately 93%. The increases during both periods was due
principally to increases in mortgage loan sales and fees and servicing income as
discussed above. The increase for the first half of 1998 also reflected a gain
of $1.8 million on the sale of servicing rights recorded during the first
quarter of 1998.
Total non-interest expense increased $6.5 million for the quarter ended
June 30, 1998, as compared to the same period of 1997, from $6.8 million to
$13.3 million, an increase of 96%. For the first six months 1998 and 1997, total
non-interest expense amounted to approximately $24.8 million and $14.2 million,
respectively, an increase of 75%. The increases for both the quarter and six
month periods reflect additional costs associated with expanding the Company's
customer base, its loan origination and mortgage servicing capacity and its
commercial banking operations.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has an ongoing need for capital to finance its lending and
investment activities. The Company's cash requirements arise mainly from loan
originations and purchases, repayments of debt upon maturity, payments of
operating and interest expenses and servicing advances and loan repurchases. The
Company's primary sources of liquidity are sales in the secondary mortgage
market of the loans it originates and purchases, short term borrowings under
warehouse, gestation and repurchase agreement lines of credit secured by pledges
of its loans and mortgage-backed securities 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 Bank, the
Company's commercial banking subsidiary, also relies on deposits, borrowings
from the Federal Home Loan Bank of New York as well as term notes backed by
letters of credit of the FHLB-NY.
The Company is dependent upon its ability to access warehouse,
gestation and repurchase facilities in addition to its capability to continue to
pool and sell mortgage loans in the secondary market. Doral borrows money under
warehousing lines of credit to fund its mortgage loan originations and repays
the borrowings as the mortgages are sold or pooled. The warehousing lines of
credit then become available for additional borrowings. Included among Doral's
warehousing lines of credit facilities are gestation or pre-sale facilities that
permit the Company to obtain more favorable rates once mortgage loans are in the
process of securitization but prior to actual issuance of the mortgage-backed
securities as well as to finance such mortgage-backed securities upon their
issuance. Doral's warehousing lines of credit are generally subject to
termination at the discretion of the lender. The Company had several warehousing
and gestation facilities totaling $810 million as of June 30, 1998.
The Company also had available repurchase agreements lines of credit
(excluding the gestation lines of credit referred to above) of approximately
$2.3 billion at June 30, 1998. Under these agreements, Doral sells GNMA, FNMA or
FHLMC-guaranteed mortgage-backed securities or collateralized mortgage
obligations and simultaneously agrees to repurchase them at a future date at a
fixed price. Doral uses the proceeds of such sales to repay borrowings under its
warehousing lines of credit and to finance the cost of carrying its
mortgage-backed securities and other investment securities. The effective costs
of funds under repurchase agreements is typically lower than the cost of funds
borrowed under Doral's warehousing lines of credit. Doral's continued use of
repurchase agreements will depend on the cost of repurchase agreements relative
to the cost of borrowing under its warehousing lines of credit with banks and
other financial institutions. Doral's repurchase lines of credit are generally
subject to termination at the discretion of the counterparty.
Servicing agreements relating to the mortgage-backed securities
programs of FNMA, FHLMC and GNMA and certain other investors, and mortgage loans
sold to certain other purchasers, require Doral to advance funds to make
scheduled payments of principal, interest, taxes and insurance, if such payments
have not been received from the borrowers. Doral generally recovers funds
advanced pursuant to these agreements within 30 days. During the six-month
period ended June 30, 1998, the monthly average amount of funds advanced by the
Company under such servicing agreements was approximately $6.9 million.
Doral Bank obtains funding for its lending activities through the
receipt of deposits, FHLB-NY advances and from other borrowings, such as term
notes backed by FHLB-NY letters of credit. As of June 30, 1998, Doral Bank held
approximately $376.3 million in deposits (excluding $10.2 million in deposits
from affiliates that are eliminated in the preparation of the Company's
Consolidated Financial Statements) at a weighted average interest rate of 4.41%.
Doral Bank, as a member of FHLB-NY, has access to collateralized borrowings from
the FHLB-NY up to a maximum of 30% of its total assets. Advances and
reimbursement obligations with respect to letters of credit must be secured by
qualifying assets with a market value equal to 110% of the advances or
reimbursement obligations. At June 30, 1998, Doral Bank had $32 million in
outstanding advances from the FHLB-NY at a weighted average interest rate cost
of 6.30%. In addition, as of June 30, 1998, Doral Bank had $53.1 million
outstanding in term notes secured by FHLB-NY letters of credit at an average
interest rate cost of 6.56%.
As of June 30, 1998, the Company and Doral Bank were in compliance with
all the regulatory capital requirements that were applicable to them as a bank
holding company and state non-member bank, respectively (i.e. Total capital and
Tier 1 capital to risk weighted assets of at least 8% and 4%, respectively, and
Tier 1 capital to average
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assets of at least 4%). Set forth below are the Company's and Doral Bank's
regulatory capital ratios as of June 30, 1998, based on existing Federal Reserve
and FDIC guidelines:
<TABLE>
<CAPTION>
The Company Doral Bank
--------------------------- --------------------------
<S> <C> <C>
Tier 1 Capital Ratio (Tier 1 Capital to
risk weighted assets) 18.6% 16.5%
Total Capital (total capital to risk
weighted assets) 18.7% 16.4%
Leverage Ratio (Tier 1 Capital to
average assets) 9.9% 7.2%
</TABLE>
As of June 30, 1998, Doral Bank was considered a well capitalized bank
for purposes of the prompt corrective action regulations adopted by the FDIC
pursuant to the Federal Deposit Insurance Corporation Act of 1991. To be
considered a well capitalized institution under the FDIC's regulations, an
institution must maintain a Leverage Ratio of at least 5%, Tier 1 Capital Ratio
of at least 6% and a Total Capital Ratio of at least 10% and not be subject to
any written agreement or directive to meet a specific capital ratio.
Doral expects that it will continue to have adequate liquidity
financing arrangements and capital resources to finance its operations. The
Company will continue to explore alternative and supplementary methods of
financing its operations, including both debt and equity financing. There can be
no assurance, however, that the Company will be successful in consummating any
such transactions.
ASSETS AND LIABILITIES
At June 30, 1998, the Company's total assets were $2.50 billion,
compared to $1.86 billion at December 31, 1997. This increase was due primarily
to net increases of $273.2 million, $214.2 million and $63.6 million in
securities available for sale, mortgage loans held for sale and accounts
receivable, respectively. Total liabilities were $2.25 billion at June 30, 1998,
compared to $1.67 billion at December 31, 1997. The increase in total
liabilities was largely the result of an increase in securities sold under
agreements to repurchase, loans payable, accounts payable and deposit accounts
held at Doral Bank. The additional leverage was used to finance the increase in
the Company's interest-earning assets. At June 30, 1998, deposit accounts
totaled $376.3 million, compared to $300.5 million at December 31, 1997.
Deposits accounts include $73.4 million in non-interest bearing deposits
representing escrow funds from the servicing operations of the Company's
mortgage banking units. As of June 30, 1998, Doral Bank had $520.2 million in
assets, compared to $428.1 million as of December 31, 1997.
MARKET RISK AND INTEREST RATE MANAGEMENT
General. Market risk is the risk of economic loss arising from adverse
changes in market rates and prices, such as interest rates, foreign currency
exchange rates, commodity prices, and other relevant market factors. The
principal market risk to which the Company is exposed is interest rate
volatility. Changes in interest rates can have a variety of effects on the
Company's business. In particular, changes in interest rates affect the volume
of mortgage loan originations, the interest rate spread on the Company's
portfolio of loans and mortgage-backed securities, the amount of gain on sale of
loans and the value of the Company's loan servicing portfolio and loan and
securities holdings.
Mortgage Banking Operations. Changes in prevailing long-term market
interest rates between the time the Company commits to or establishes an
interest rate on a mortgage loan and the time commitments to purchase the
mortgage loan are obtained or the loan is sold affect Doral's gain or loss on
the sale of such mortgage loan. The Company does not generally hedge
conventional loans in the pipeline or in the process of origination because the
Company does not generally permit customers to lock-in an interest rate prior to
closing. Instead, the interest rates on loans are generally fixed at closing
based on a certain spread over a prevailing rate that adjust weekly based on the
FHLMC auction for residential mortgages. For FNMA and FHLMC conforming loans and
FNMA and FHLMC mortgage-backed securities, the Company seeks to sell or to
obtain commitments for the purchase of such loans or mortgage-backed securities
as soon as practicable following the funding as such loans. Conforming loans
18
<PAGE> 20
are normally sold to institutional investors or to FNMA and FHLMC. To the
extent the Company does engage in offering of mortgage products which lock-in
the interest rate until the closing date, it attempts to obtain forward
commitments to purchase such loans at the time it fixes the rates for the loans.
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, which tend
to increase in value when interest rates increase.
In the case of Puerto Rico tax exempt GNMA securities, the Company
normally holds such securities for longer periods prior to sale to maximize its
net interest income and to take advantage of the tax exempt status of the
interest on such securities under Puerto Rico law. Prices for tax exempt GNMA
securities in Puerto Rico tend to be more stable than for U.S. taxable GNMA
securities because the tax exempt status of interest paid on these securities
under Puerto Rico law makes them more attractive to retail investors. This
relative stability of prices for Puerto Rico GNMA securities allows the Company
to carry out a less aggressive hedging strategy to attempt to protect the value
of these assets than what might otherwise be required. The Company seeks to
protect itself from interest rate risk associated with its inventory of GNMA
securities by purchasing listed options on treasury bond futures contracts and
other interest rate sensitive instruments, as well as purchasing options on U.S.
GNMA securities in the over-the-counter market. Options are contracts that grant
the purchaser the right to buy or sell the underlying asset by a certain date
for a specified price. Interest rate futures are commitments to either purchase
or sell designated instruments (such as U.S. Treasury Note contracts or
Eurodollar certificates of deposit) at a future date for a specified price.
Future contracts are generally traded on an exchange, are marked to market daily
and are subject to initial and maintenance margin requirements.
With respect to GNMA securities that are originated by the Company and
do not qualify for Puerto Rico tax exemption, the Company implements a less
aggressive hedging strategy because it intends to sell such securities in the
United States market as soon as practicable following completion of the
securitization process.
Declines in interest rates can adversely affect the Company's revenues
by increasing prepayment rates and causing an increase of the amortization of
servicing assets and IOs or causing an impairment to be recognized with respect
to such assets. Moreover, increased prepayment rates can reduce the Company's
servicing income by decreasing the size of the Company's servicing portfolio. To
date, the Company has not used synthetic hedge devices to protect its servicing
income or the value of its servicing assets or IOs from the risks of future
interest rate fluctuations. The primary means used by the Company to reduce the
sensitivity of the Company's servicing income and the value of its servicing
asset due to possible reduction of its servicing portfolio has been the
development of a strong retail origination network that has allowed the Company
to increase or maintain the size of its servicing portfolio even during periods
of high prepayments, such as those experienced during 1993.
The net interest income of the Company is also subject to interest rate
risk because its interest earning assets and interest-bearing liabilities
reprice at different times and varying amounts. Most of the Company's interest
earning assets, including its mortgage-backed securities held for trading, are
fixed rate interest-earning assets that are not subject to repricing (except for
replacement of assets through repayments, sales and new originations) while the
short-term borrowing used to finance these positions normally reprice on a
periodic basis (e.g., daily, monthly or quarterly). In order to hedge the
interest rate risk associated with the Company's portfolio of securities held
for trading and available for sale, the Company may use a variety of hedging
instruments including listed put and call options and futures contracts on
financial instruments (primarily Eurodollar certificates of deposit and U.S.
Treasury note contracts). In determining the amount of its portfolio to hedge,
the Company will consider, among other things, the volatility of prices of its
securities. As noted above, the prices for Puerto Rico tax exempt GNMA
securities tend to be more stable than their U.S. counterparts.
The Company maintains a substantial portfolio of mortgage-backed
securities (primarily fixed-rate GNMA certificates) and other investment
securities. Generally, the value of fixed rate securities declines when interest
rates rise, and conversely, increase when interest rates fall. At June 30, 1998,
the Company held $682 million of mortgage-backed and other securities (all of
which carried fixed interest rates) which were classified as held for trading
and reported at fair value, with unrealized gains and losses included in
earnings. In addition, at June 30, 1998, the Company held $514 million of
mortgage-backed securities and other investment securities (all of which carried
fixed interest rates)
19
<PAGE> 21
which were classified as available for sale and reported at fair value, with
unrealized losses deducted from stockholders equity. Accordingly, declines in
the value of the Company's securities held for trading and available for sale
could have a negative impact on the Company's earnings or financial condition.
Banking Operations. Doral Bank has attempted to limit its exposure to
interest rate risk through the use of both the internal management of the
composition of its assets and liabilities and through the use of a hedging
instruments. Internal asset/liability management techniques involve the
attraction of longer term funds through the use of, among other things, brokered
certificates of deposits, five year term notes and FHLB-NY advances.
In addition to the use of the internal asset liability management
techniques discussed above, Doral Bank has used interest rate swap agreements to
effectively fix the cost of short-term funding sources which are used to finance
the funding and holding of interest-earnings assets with longer maturities. An
interest rate swap is an agreement where one party (in this case, Doral Bank)
agrees to pay a fixed-rate of interest on a notional principal amount to a
second party (generally a securities broker-dealer) in exchange for receiving
from the second party a variable rate of interest on the same notional amount
for a pre-determined period of time. No actual assets are exchanged in a swap of
this type and interest payments are generally netted. As of June 30, 1998, the
Bank had interest rate swap agreements in place with an aggregate notional
amount of $105 million, all of which required the Bank to pay a fixed rate in
return for a floating rate. Set forth below is information regarding the term of
the interest rate swaps in place as of June 30, 1998.
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF
INTEREST RATE SWAPS
Within
One Two Three Four Five Years
Year Years Years Years and Over
------ ------- ------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest rate swaps:
Pay fixed/receive floating:
Notional amount ........................ $ -- $ -- $ 5,000,000 $ -- $100,000,000
Weighted average fixed rates paid ...... -- -- 4.92% -- 5.81%
Weighted Rates Received................. -- -- 4.84% -- 5.70%
</TABLE>
In the future, the Company may use alternative hedging techniques
including futures, options or other hedge instruments to help mitigate interest
rate and market risk. However, there can be no assurance that any of the above
hedging techniques will be successful. To the extent they are not successful,
the Company's profitability may be adversely affected.
YEAR 2000 ISSUES
The year 2000 problem is caused by the situation whereby existing
computer software programs use only the last two digits to identify a year.
Those programs could read "00" as the year 1900, and thus, may not recognize
dates after December 31, 1999. This misinterpretation of data could cause
significant problems with banking and mortgage banking entities, such as the
Company, as the use of date calculations is extensive in daily operations for
matters such as interest accruals, maturity dates, delinquency status, and
customer statements. Year 2000 problems go beyond computer systems and affect
anything that uses an internal microchip such as telephones, fax machines,
security and alarm systems, vaults, elevators, heating and air conditioning.
Year 2000 problems suffered by third party providers of services, such as
telephones, water, sewer and electricity, could have an adverse impact on the
daily operations of the Company. As a bank holding company regulated by the
Federal Reserve Board, the Company, and all of its subsidiaries, are required to
be Year 2000 compliant by December 31, 1998. In order to comply with such
requirements, the Company has formed a Year 2000 Committee comprised of senior
management that reports to the Company's Board of Directors. The Committee has
developed, adopted, and implemented a systematic review and corrective action
plan to address year 2000 issues.
20
<PAGE> 22
As part of this plan, the Company has made an assessment of those areas
of operations, both internal and external, that could be impacted by Year 2000
and has determined the actions necessary to attain Year 2000 compliance by
December 31, 1998, including the modification or replacement of existing
hardware and/or software. As a major provider of data processing services to the
Company in its mortgage servicing operations, management is working closely with
HRU Data Center, Inc. to ensure that the applications used by HRU in connection
with the services rendered to the Company will be year 2000 complaint by
December 31, 1998. The Company estimates that the cost of addressing Year 2000
issues will be approximately $750,000 (the most significant amount of which will
be dedicated to the purchase of desk top computers) of which approximately
$150,000 has already been incurred. The testing of systems susceptible to Year
2000 problems will conclude prior to December 31, 1998. The Company is also in
the process of developing contingency plans in the event of a disruption of
services provided by third party vendors caused by Year 2000 that are beyond the
control of management of the Company.
The Company's wholly-owned banking subsidiary, Doral Bank, has adopted
and implemented a similar Year 2000 corrective action plan designed to attain
compliance by December 31, 1998. Similar to the requirements imposed on the
Company by the Federal Reserve Board, Doral Bank is required by the FDIC and the
Puerto Rico Commissioner of Financial Institutions to be Year 2000 compliant by
December 31, 1998.
RECENT DEVELOPMENTS
New Accounting Standards. In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically accounted as a hedge. The
accounting for changes in fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting designation, as
follows:
For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment
(referred to as a fair value hedge), the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk being hedged.
For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as cash flow hedge), the
effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately.
For a derivative designated as hedging the foregoing currency exposure
of a net investment in a foreign operation, the gain or loss is
reported in other comprehensive income (outside earnings) as part of
the cumulative translation adjustment.
For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this Statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this Statement.
Management believes that the adoption of this Statement will not have a
material effect on the Company's financial position or results of operations.
21
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management does not believe that there has been a material change in
the market risk to which the Company is exposed since December 31, 1997. For
information regarding market risk to which the Company is exposed, see the
information contained under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk and Interest Rate
Management".
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Stockholders Meeting on April 23, 1998.
Information regarding the proposals presented at such meeting and the results of
the voting on such proposals was reported under the caption "Item 4 - Submission
of Matters to a vote of Security Holders" of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and is incorporated herein by
reference.
ITEM 5 - OTHER INFORMATION
Stock Split
On April 23, 1998, the Board of Directors of the Company declared a
two-for-one split of the Company's Common Stock. The stock split was effected in
the form of a stock dividend of one additional share of Common Stock issued on
May 20, 1998, for each share of Common Stock held of record as of May 8, 1998.
Prior to the stock split, the Company had 20,214,460 shares outstanding.
Following the distribution of the additional shares, the Company had 40,428,920
shares outstanding. The stock split was not dilutive to voting rights or
shareholders' proportionate interest in the Company.
Shareholder Proposals
The deadline for submitting shareholder proposals for inclusion in the
Company's proxy statement for the Company's 1999 Annual Shareholder Meeting
pursuant to the procedures established by SEC Rule 14a-8 is November 25, 1998.
The date by which the Company will consider a shareholder proposal
submitted outside the procedures of SEC Rule 14a-8 to be untimely is December
25, 1998.
Appointment of New Director
On August 12, 1998, at a special meeting of the Board of Directors, the
Board voted to appoint Efrain Kier to the Company's Board of Directors to fill
the vacancy created by the resignation of Frederick M. Danziger, who
22
<PAGE> 24
resigned effective July 1, 1998, in order to dedicate additional time to his
other professional pursuits. Mr. Kier, a civil engineer by background, has more
than 30 years experience as a general contractor and developer in Puerto Rico.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.77 - Amendment, dated July 22, 1998, to Employment Agreement
dated as of December 31, 1996 between Doral Mortgage Corporation and
Edison Velez.
Exhibit 10.78 - Form of Stock Option Agreement for use under 1997
Employee Stock Option Plan.
Exhibit 27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
N/A
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DORAL FINANCIAL CORPORATION
(Registrant)
Date: August 14, 1998 /s/ Salomon Levis
-----------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: August 14, 1998 /s/ Richard F. Bonini
-----------------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: August 14, 1998 /s/ Ricardo Melendez
-----------------------------------
Ricardo Melendez
Vice President and
Principal Accounting Officer
24
<PAGE> 1
EXHIBIT 10.77
Doral Mortgage Corporation
July 22, 1998
Mr. Edison Velez
650 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Re: Employment Agreement dated as of December 31, 1996
between Doral Mortgage Corporation and Edison Velez
(the "Employment Agreement")
Dear Mr. Velez:
This letter agreement serves to amend the terms of the above-referenced
Employment Agreement as follows:
(1) Section 3(b)(i) of the Employment Agreement is amended to read in
its entirety as follows:
"(b)(i) During the term of this Agreement, you shall also be
entitled to receive an annual incentive bonus equal to the
lesser of (x) $300,000 and (y) 3% of the net income of DMC
over and above $300,000 derived from its Mortgage Banking
Activities (as hereinafter defined)
(2) Except as expressly provided herein, the terms of the Employment
Agreement shall remain in full force and effect.
Please evidence your agreement and acceptance of the foregoing
amendment by signing this letter in the space indicated below.
Very truly yours,
/s/ Salomon Levis
Salomon Levis
Chairman of the Board
AGREED AND ACCEPTED, as the date
first above set forth:
/s/ Edison Velez
- ---------------------------------
Edison Velez
<PAGE> 1
EXHIBIT 10.78
EMPLOYEE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of April 1, 1998, is made and entered into by
and between DORAL FINANCIAL CORPORATION, a Puerto Rico corporation (the
"Company"), and ___________________ (the "Optionee").
WITNESSETH:
WHEREAS, the Company has adopted and approved the 1997 Employee Stock
Option Plan (the "Plan") for the purpose of providing economic incentive to the
employees of the Company; and
WHEREAS, the Plan provides for the grant of qualified stock options
which meet the requirements of Section 1046 of the Puerto Rico Internal Revenue
Code of 1994, as amended, ("qualified stock options") incentive stock options
which meet the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended, ("incentive stock options") and stock options not intended to
qualify as incentive stock options or qualified stock options ("non-statutory
options"); and
WHEREAS, this Agreement is executed pursuant to, and is intended to
carry out the purposes of the Plan, by granting [a qualified stock option] [an
incentive stock option] [a non-statutory stock option] to the Optionee.
NOW, THEREFORE, in consideration of the Optionee's employment by the
Company, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereby agree as follows:
<PAGE> 2
2
1. GRANT OF THE OPTION. Subject to and upon the terms and conditions
set forth in this Agreement and of the Plan, a copy of which is attached hereto
as Exhibit A, the Company hereby grants to the Optionee [a qualified stock
option] [an incentive stock option] [a non-statutory stock option] (the
"Option") to purchase up to _________________ (_______) shares (the "Option
Shares") of the Company's common stock, par value $1.00 per share (the "Common
Stock"), at a price equal to $_____ per share, which is equal to the Fair Market
Value of the Common Stock, as defined in the Plan.
2. TERM. The term of the Option shall commence on the date of this
Agreement, and, subject to the provisions of Section 5 hereof, shall expire ten
(10) years from the date of this Agreement. Upon its termination, the Option
shall be of no further force and effect and shall not be exercisable to any
extent.
3. VESTING. Subject to the provisions of Section 5 of this Agreement,
the right of the Optionee to purchase the Option Shares under the Option shall
vest over a period of two (2) years at the rate of fifty percent (50%) per year,
the first fifty percent (50%) to vest on the first anniversary date of this
Agreement, and one hundred percent (100%) to vest on the second anniversary date
of this Agreement.
4. RESTRICTIONS ON TRANSFER. The Optionee may not transfer any of the
Optionee's rights in the Option or under this Agreement except upon the
Optionee's death. No transfer of an option by an Optionee by will or by the laws
of descent and distribution shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of the
will and/or
<PAGE> 3
3
such other evidence as the Committee may determine necessary to establish the
validity of the transfer.
5. TERMINATION OF OPTION ON TERMINATION OF EMPLOYMENT AND CERTAIN OTHER
EVENTS.
(a) If the Optionee's employment with the Company or any of
its subsidiaries terminates by reason of death, the Option shall become fully
vested and may thereafter be immediately exercised by the legal representative
of the estate or by the legatee of the Optionee under the will of the Optionee,
for a period of one (1) year from the date of death or until the expiration of
the stated term of the Option, whichever period is shorter.
(b) If the Optionee's employment with the Company or any of
its subsidiaries terminates by reason of Disability (as hereinafter defined),
the Option shall become fully vested and may thereafter be exercised for a
period of one (1) year from the date of such termination of employment or the
expiration of the stated term of such Option, whichever period is shorter.
(c) If the Optionee's employment with the Company or any of
its subsidiaries terminates by reason of Retirement (as hereinafter defined),
the Option may thereafter be exercised to the extent it was exercisable at the
time of Retirement for a period of ninety (90) days from the date of Retirement
or the expiration of the stated term of the Option, whichever period is shorter.
(d) If the Optionee's employment with the Company or any of
its subsidiaries terminates for any reason other than (a) through (c) above,
whether with or without cause, the Option may thereafter
<PAGE> 4
4
be exercised to the extent it was exercisable at the time of termination of
employment for a period of ninety (90) days from the date of termination of the
expiration of the stated term of the option, whichever period is shorter,
provided that the Option shall terminate as of the date the Optionee ceased
being an employee of the Company or any of its subsidiaries if the Stock Option
Committee of the Company in its sole discretion shall determine that it is not
in the best interest of the Company that the option should continue for such
ninety (90) day period.
(e) For purposes of this Agreement, "Disability" shall mean a
written determination by a competent physician that the Optionee has been
physically or mentally unable to perform the duties of the occupation in which
the Optionee was employed when such disability commenced and that such condition
has existed for an aggregate of one hundred twenty (120) days during any period
of twelve (12) consecutive months, "Retirement" means retirement from employment
on or after reaching age 65 and "Cause" means, among other things, personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty,
insubordination, failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar minor offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement.
(f) If the Optionee commences, files or prosecutes any legal
proceeding or action against the Company, any of its sub sidiaries officers or
directors, for any reason, cause or thing whatsoever, in or before any court of
law, arbitrator, mediator, administrative tribunal, governmental agency or other
forum, then this Option shall terminate immediately and the Optionee shall
forfeit all his rights hereunder.
<PAGE> 5
5
6. ADJUSTMENT IN CERTAIN EVENTS.
(a) In the event of any stock dividend or stock split, the
Company (subject to any required action by the shareholders of the Company)
shall make such equitable adjustments as are necessary and appropriate to
protect the Option from dilution in the number, kind and the exercise price of
the Option Shares underlying the Option.
(b) Except as expressly provided by Section 6(a), the Company
shall be under no obligation to make any adjustments to the Option in the event
of any other changes involving the Company's capital structure, including, but
not limited to, merger, consolidation, dissolution, sale of assets, or sale or
redemption of capital stock. Furthermore, this Agreement shall not in any way
limit or affect the right of the Company to make such changes in its capital
structure.
7. PRIVILEGE OF STOCK OWNERSHIP. The Optionee shall not be deemed to be
the holder of, or to have any of the rights of a shareholder with respect to,
any Option Shares unless and until the Optionee properly exercises the Option in
accordance with the requirements of Sections 8 and 9. Upon the proper exercise
of the Option, the Optionee shall have full voting and other ownership rights
with respect to the Option Shares.
8. MANNER OF EXERCISING OPTION. The Option may be exercised only as to
whole shares and only by written notice signed by the Optionee (or in the case
of exercise after Optionee's death or mental disability by Optionee's legal
representative, executor, administrator or heir or legatee, as applicable), and
mailed or
<PAGE> 6
6
delivered to the Secretary of the Company at its principal office. The notice
shall specify the number of Option Shares with respect to which the Option is
being exercised. The notice must be accompanied by payment in full for such
Shares in cash and include any representations required by Section 9. If the
Option is exercised by a person other than the Optionee, such person must
provide the Company with proof, in a form satisfactory to the Company and its
counsel, that such person has the right to exercise the Option. The Company
shall have the right to accept payment, in whole or in part, for the Option in
the form of Common Stock of the Company valued at the Fair Market Value thereof,
at the sole discretion of the Committee.
9. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Prior to the exercise of the Option, the Optionee shall
deliver to the Company such representations in writing as may be requested by
the Company in order to ensure that the exercise of the Option and the issuance
of the Option Shares will comply with all applicable federal and state
securities laws.
(b) The Optionee acknowledges and confirms that (i) it has
received a copy of the Prospectus relating to the Plan; (ii) it is familiar with
the business and affairs of the Company and (iii) that the granting of the
Option by the Company does not involve any representation of any kind by the
Company as to it business, affairs, earnings or assets, the tax consequences of
the exercise thereof, or otherwise.
(c) If the Company shall determine, in its discretion, that it
is necessary or desirable to obtain the listing, registration
<PAGE> 7
7
or qualification of the Option Shares upon any securities exchange or under any
federal or state law, or the consent or approval of any government regulatory
body, then the Option may not be exercised in whole or in part, and no shares
may be issued under the Option, until such listing, registration, qualification,
consent or approval is obtained free of any conditions deemed unacceptable to
the Company.
10. TAXES. The Company shall have the right to require the Optionee to
pay to the Company, or to make arrangements satisfactory to the Company
regarding the payment of, any federal, state or local taxes required to be paid
or withheld with respect to the Option.
11. EMPLOYMENT. Nothing in this Agreement shall be deemed to grant any
right of continued employment to the Optionee or to limit, restrict or waive any
right of the Company to terminate the Optionee's employment at any time with or
without cause.
12. MISCELLANEOUS.
(a) ASSIGNMENT. This Agreement may not be assigned by the
Optionee without the prior written consent of the Company. This Agreement shall
be binding upon and inure to the benefit of the parties, and their successors
and assigns.
(b) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties regarding the subject matter hereof. This
Agreement supersedes all prior discussions and agree ment (oral or written)
between the parties with respect to the subject matter of this Agreement. This
Agreement may not be modified except in a written document signed by both of the
parties.
<PAGE> 8
8
(c) NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed to have been duly given upon
receipt if delivered in person or upon the expiration of seven (7) days after
the date of posting, if mailed by registered or certified mail, postage pre-paid
to the parties at the following addresses:
If to the Company:
Doral Financial Corporation
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Attention: Chief Executive Officer
If to the Optionee:
Any party may change the address to which notices to such
party shall be delivered or mailed by giving notice thereof to the other party
in the manner provided by this Section.
(d) GOVERNING LAW. The validity and effect of this Agreement
shall be governed by and construed and enforced in accordance with the laws of
the Commonwealth of Puerto Rico without regard to its principles of conflicts of
laws.
(e) WAIVER. Any term or condition of this Agreement may be
waived at any time by the party which is entitled to the benefit thereof, but
only if such waiver is evidenced by a writing signed by such party. No failure
on the part of a party hereto to exercise, and no delay in exercising, any
right, power or remedy created hereunder shall operate as a waiver thereof, nor
shall any single
<PAGE> 9
9
or partial exercise of such right, power or remedy by any such party preclude
any other future exercise thereof or the exercise of any other right, power or
remedy. No wavier by any party hereto to any breach of or default in any term or
condition of this Agreement shall constitute a waiver of or consent to any
subsequent breach of or default in the same or any other term or condition
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
DORAL FINANCIAL CORPORATION
By:
-------------------------------------
Name:
Title:
OPTIONEE:
By:
-------------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORAL FINANCIAL CORPORATION FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,071
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 163,898
<TRADING-ASSETS> 682,036
<INVESTMENTS-HELD-FOR-SALE> 514,077
<INVESTMENTS-CARRYING> 155,128
<INVESTMENTS-MARKET> 157,278
<LOANS> 751,150
<ALLOWANCE> 3,015
<TOTAL-ASSETS> 2,497,356
<DEPOSITS> 376,304
<SHORT-TERM> 1,542,766
<LIABILITIES-OTHER> 125,692
<LONG-TERM> 206,361
0
8
<COMMON> 40,485
<OTHER-SE> 205,740
<TOTAL-LIABILITIES-AND-EQUITY> 2,497,356
<INTEREST-LOAN> 20,856
<INTEREST-INVEST> 42,384
<INTEREST-OTHER> 2,766
<INTEREST-TOTAL> 66,006
<INTEREST-DEPOSIT> 7,496
<INTEREST-EXPENSE> 41,947
<INTEREST-INCOME-NET> 16,563
<LOAN-LOSSES> 311
<SECURITIES-GAINS> 23,055
<EXPENSE-OTHER> 24,804
<INCOME-PRETAX> 27,687
<INCOME-PRE-EXTRAORDINARY> 27,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,101
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 2.08
<LOANS-NON> 3,358
<LOANS-PAST> 53,568
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,432
<ALLOWANCE-OPEN> 1,241
<CHARGE-OFFS> 58
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 1,325
<ALLOWANCE-DOMESTIC> 311
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
