<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] 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)
<TABLE>
<S> <C>
Puerto Rico 66-0312162
----------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1159 F.D. Roosevelt Avenue,
San Juan, Puerto Rico 00920-2998
- --------------------- ----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code (787) 749-7100
Former name, former address --------------
and
Former fiscal year, if changed Not Applicable
since last report --------------
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MAY 12, 2000 - 42,362,634
<PAGE> 2
DORAL FINANCIAL CORPORATION
INDEX PAGE
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2000 (Unaudited) and December
31, 1999......................................................................................... 4
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters ended
March 31, 2000 and March 31, 1999................................................................ 5
Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2000 and
March 31, 1999................................................................................... 6
Consolidated Statements of Comprehensive Income (Unaudited) - Quarters ended March 31, 2000
and March 31, 1999............................................................................... 7
Notes to Consolidated Financial Statements....................................................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk....................................... 33
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................ 34
Item 2 - Changes in Securities............................................................................ 34
Item 3 - Defaults Upon Senior Securities.................................................................. 34
Item 4 - Submission of Matters to a Vote of Security Holders.............................................. 34
Item 5 - Other Information................................................................................ 37
Item 6 - Exhibits and Reports on Form 8-K................................................................. 37
SIGNATURES................................................................................................. 38
</TABLE>
2
<PAGE> 3
FORWARD LOOKING STATEMENTS
When used in this form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities, competitive and
regulatory factors and legislative changes, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
3
<PAGE> 4
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited) (audited)
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,444 $ 25,793
------------ ------------
Money market investments:
Securities purchased under agreements to resell 9,453 21,430
Time deposits with other banks 97,476 246,010
Other short term investments, at cost 134,905 102,796
------------ ------------
Total money market investments 241,834 370,236
------------ ------------
Investment securities and other instruments:
Trading securities, at fair value 1,002,957 862,698
Securities available-for-sale, at fair value 143,442 66,325
Securities held-to-maturity, at amortized cost 1,482,409 1,509,060
Federal Home Loan Bank of NY (FHLB) stock, at cost 24,145 21,645
------------ ------------
Total investment securities and other instruments 2,652,953 2,459,728
------------ ------------
Loans:
Mortgage loans held-for-sale, at lower of cost or market 1,276,740 1,015,703
Loans receivable, net 288,726 231,184
------------ ------------
Total loans 1,565,466 1,246,887
------------ ------------
Receivables and mortgage servicing advances 54,687 56,021
Broker dealer's operations receivable 21,314 158,798
Accrued interest receivable 38,298 42,021
Servicing assets, net 116,115 109,721
Property, leasehold improvements and equipment, net 45,686 37,444
Cost in excess of fair value of net assets acquired, net 9,813 9,964
Real estate held for sale, net 5,391 3,910
Prepaid and other assets 18,465 16,820
------------ ------------
Total assets $ 4,791,466 $ 4,537,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ 2,149,720 $ 1,927,956
Loans payable 444,245 353,460
Deposits 1,087,346 1,010,424
Notes payable 455,425 461,053
Advances from FHLB 114,000 134,000
Broker dealer's operations payable 21,698 154,210
Accrued expenses and other liabilities 119,996 111,258
------------ ------------
Total liabilities 4,392,430 4,152,361
------------ ------------
Commitments and contingencies
------------ ------------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 10,000,000 shares authorized:
8% Convertible Cumulative Preferred Stock, $1 par value (liquidation
preference $1,000 per share), 20,000 shares designated and 8,460 shares
issued and outstanding in 1999, and no shares outstanding in 2000;
7% Noncumulative Monthly Income Preferred Stock, $1 par value (liquidation
preference $50 per share) 1,495,000 shares issued and outstanding 1,495 1,503
Common stock, $1 par value, 200,000,000 shares authorized; 42,418,634 and
40,484,920 shares issued in 2000 and 1999, respectively; 42,362,634 and
40,428,920 shares outstanding in 2000 and 1999, respectively 42,419 40,485
Paid-in capital 138,896 140,822
Legal surplus 3,596 3,596
Retained earnings 221,440 205,875
Accumulated other comprehensive income, net of taxes (8,754) (7,243)
Treasury stock at par value, 56,000 shares held (56) (56)
------------ ------------
Total stockholders' equity 399,036 384,982
------------ ------------
Total liabilities and stockholders' equity $ 4,791,466 $ 4,537,343
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS OF DOLLARS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Interest income:
Loans $ 24,431 $ 18,201
Mortgage-backed securities 19,237 13,496
Investment securities 22,606 7,540
Other interest-earning assets 5,230 3,501
------------ ------------
Total interest income 71,504 42,738
------------ ------------
Interest expense:
Loans payable 7,553 5,793
Securities sold under agreements to repurchase 28,883 15,010
Deposits 13,104 6,652
Other borrowed funds 11,006 4,421
------------ ------------
Total interest expense 60,546 31,876
------------ ------------
Net interest income 10,958 10,862
Provision for loan losses 848 295
------------ ------------
Net interest income after provision for loan losses 10,110 10,567
------------ ------------
Non-interest income:
Net gain on mortgage loan sales 24,136 16,234
Trading account profit 927 5,530
Gain on sale of investment securities 3,299 --
Servicing income 6,461 6,213
Commissions, fees and other income 2,098 815
------------ ------------
Total non-interest income 36,921 28,792
------------ ------------
Non-interest expense:
Compensation and benefits, net (See Note f) 9,533 10,140
Taxes, other than payroll and income taxes 1,044 483
Maintenance 303 455
Advertising 2,103 1,398
Professional services 1,008 1,236
Telephone 985 884
Rent 1,380 1,025
Amortization of servicing assets 2,921 2,715
Depreciation and amortization 1,528 931
Other, (See Note f) 3,633 2,288
------------ ------------
Total non-interest expense 24,438 21,555
------------ ------------
Income before income taxes 22,593 17,804
Income taxes 2,317 2,133
------------ ------------
Net income 20,276 15,671
Retained earnings at beginning of period 205,875 156,315
Less cash dividends paid:
8% Convertible Cumulative Preferred Stock 169 169
7% Noncumulative Monthly Income Preferred Stock 1,308 538
Common stock 3,234 2,426
------------ ------------
Retained earnings at the end of period $ 221,440 $ 168,853
============ ============
Earnings per share:
Basic $ 0.46 $ 0.37
============ ============
Diluted $ 0.45 $ 0.36
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................... $ 20,276 $ 15,671
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 1,377 931
Amortization of interest-only strips held in trading accounts ....................... 2,799 1,656
Amortization of cost in excess of fair value of net assets acquired ................. 151 89
Amortization of servicing assets .................................................... 2,921 2,715
Deferred tax provision (benefit) .................................................... 282 (82)
Provision for loan losses ........................................................... 848 295
Origination and purchases of mortgage loans held for sale ........................... (689,386) (690,424)
Principal repayment and sales of mortgage loans held for sale ....................... 190,660 685,462
Purchases of trading securities ..................................................... (279,266) (697,778)
Principal repayments and sales of trading securities ................................ 375,771 658,780
Increase in interest only strips, net ............................................... (2,099) (1,095)
Increase in servicing assets ........................................................ (9,315) (9,322)
Decrease (increase) in receivables and mortgage servicing advances .................. 1,334 (681)
Decrease in broker dealer's operations receivable ................................... 137,484 32,810
Decrease (increase) in accrued interest receivable .................................. 3,723 (518)
Decrease in interest payable ........................................................ (7,101) (1,140)
Decrease in broker dealer's operations payable ...................................... (132,512) (31,583)
Increase in accounts payable and other liabilities .................................. 12,638 17,359
(Increase) decrease in prepaid and other assets ..................................... (1,645) 918
----------- -----------
Total adjustments ................................................................ (391,336) (31,608)
----------- -----------
Net cash used in operating activities ............................................... (371,060) (15,937)
----------- -----------
Cash flows from investing activities:
Purchase of securities held to maturity ................................................ (28,154) --
Principal repayments and maturities of securities held to maturity ..................... 4,805 5,352
Origination of loans receivable ........................................................ (92,372) (11,836)
Principal repayments of loans receivable ............................................... 34,207 3,590
Purchases of securities available for sale ............................................. (138,427) (489,580)
Principal repayments and sales of securities available for sale ....................... 112,718 270,625
Purchase of FHLB stock ................................................................. (2,500) (1,981)
Purchase of property, leasehold improvements and equipment ............................. (9,619) (3,883)
(Increase) decrease in real estate held for sale ....................................... (1,481) 186
----------- -----------
Net cash used in investing activities ............................................... (120,823) (227,527)
----------- -----------
Cash flows from financing activities:
Increase in deposits ................................................................... 76,922 116,265
Increase in securities sold under agreements to repurchase ............................. 221,764 55,723
Increase (decrease) in loans payable ................................................... 90,785 (33,755)
Issuance of preferred stock ............................................................ -- 72,065
(Decrease) increase in FHLB advances ................................................... (20,000) 23,500
Decrease in notes payable .............................................................. (5,628) (271)
Dividends declared and paid ............................................................ (4,711) (3,133)
----------- -----------
Net cash provided by financing activities ........................................... 359,132 230,394
----------- -----------
Net decrease in cash and cash equivalents .............................................. (132,751) (13,070)
Cash and cash equivalents at beginning of period ....................................... 396,029 344,696
----------- -----------
Cash and cash equivalents at the end of period ......................................... $ 263,278 $ 331,626
=========== ===========
Cash and cash equivalent includes:
Cash and due from banks ............................................................. $ 21,444 $ 33,522
Money market investments ............................................................ 241,834 298,104
----------- -----------
$ 263,278 $ 331,626
=========== ===========
Supplemental schedule of non-cash activities
Loan securitizations ................................................................ $ 234,665 $ 336,143
=========== ===========
Supplemental cash flows information:
Cash used to pay interest ........................................................... $ 67,647 $ 33,016
=========== ===========
Cash used to pay income taxes ....................................................... $ 757 $ 4,603
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-----------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income: $ 20,276 $ 15,671
---------- ----------
Other comprehensive income, net of tax:
Unrealized net gains (losses) on securities arising during the period
(net of taxes of $651 - 2000 and $4.1 million - 1999) 1,018 (6,458)
Less: reclassification adjustment for (gains) losses included in net
income (net of taxes of $1.6 million - 2000 and $9 - 1999) 2,529 14
---------- ----------
Other comprehensive income (loss) (1,511) (6,472)
---------- ----------
Comprehensive income, net of taxes $ 18,765 $ 9,199
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated Financial Statements (unaudited) include the accounts
of Doral Financial Corporation ("Doral Financial" or "the Company"),
Doral Mortgage Corporation ("Doral Mortgage"), SANA Investment Mortgage
Bankers, Inc. ("SANA"), Centro Hipotecario de Puerto Rico, Inc., Doral
Securities, Inc. ("Doral Securities"), Doral Bank ("Doral Bank PR"),
Doral Bank FSB ("Doral Bank NY"), Doral Money, Inc. and Doral
Properties, Inc. ("Doral Properties"). References herein to "Doral
Financial" or "the Company" shall be deemed to refer to the Company and
its consolidated subsidiaries, unless otherwise provided. All
significant intercompany accounts and transactions have been eliminated
in consolidation. The Consolidated Financial Statements (unaudited) have
been prepared in conformity with the accounting policies stated in the
Company's Annual Audited Financial Statements included in the Company's
Annual Report for the year ended December 31, 1999, and should be read
in conjunction with the Notes to the Consolidated Financial Statements
appearing in that report. All adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of results for the interim periods have been
reflected.
b. The results of operations for the quarter ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
c. Cash dividends per share paid for the quarter ended March 31, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------
2000 1999
---- ----
<S> <C> <C>
8% Convertible Cumulative Preferred Stock $ 20.00 $ 20.00
7% Noncumulative Monthly Income Preferred Stock $ 0.88 $ 0.36
Common Stock $ 0.08 $ 0.06
</TABLE>
On March 31, 2000, all of the 8,460 shares of 8% Convertible Cumulative
Preferred Stock were converted into 1,933,714 shares of common stock.
d. At March 31, 2000, escrow funds include approximately $72.0 million
deposited with Doral Bank PR. These funds are included in the Company's
consolidated financial statements under "Deposits". Escrow funds of
approximately $4.6 million deposited with other banks which are excluded
from the Company's consolidated assets and liabilities.
e. The reconciliation of the numerator and denominator of the basic and
diluted earnings-per-share follows:
<TABLE>
<CAPTION>
Income Shares Per share
(Dollars in thousands, except per share data) (numerator) (denominator) amount
- --------------------------------------------- ----------- ------------- ----------
<S> <C> <C> <C>
As of March 31, 2000:
- ---------------------
Income before extraordinary item $ 20,276
Less: Convertible preferred stock dividend (169)
Less: Nonconvertible preferred stock dividend (1,308)
----------
Basic EPS
- ---------
Income available to common shareholders 18,799 40,428,920 $ 0.46
---------- ========== ========
Effect of dilutive securities
- -----------------------------
Convertible preferred stock dividend 169 1,933,714
Incremental shares options -
---------- ----------
Diluted EPS
- -----------
Income available to common shareholders
plus assumed conversions 18,968 42,362,634 $ 0.45
---------- ========== ========
As of March 31, 1999:
- ---------------------
Income before extraordinary item $ 15,671
Less: Convertible preferred stock dividend (169)
Less: Nonconvertible preferred stock dividend (538)
----------
Basic EPS
- ---------
Income available to common shareholders 14,964 40,428,920 $ 0.37
---------- ========== ========
Effect of dilutive securities
- -----------------------------
Convertible preferred stock dividend 169 1,933,714
Incremental shares options 84,755
---------- ----------
Diluted EPS
- -----------
Income available to common shareholders
plus assumed conversions 15,133 42,447,389 $ 0.36
---------- ========== ========
</TABLE>
f. Employee costs and other expenses are shown in the Consolidated
Statements of Income and Retained Earnings net of direct loan
origination costs which, pursuant to SFAS No. 91, are capitalized as
part of the carrying cost of mortgage loans and are offset against net
gains on mortgage loan sales when the loans are sold.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Set forth below is a reconciliation of the application of SFAS No. 91 to
employee costs and other expenses:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------------
(IN THOUSANDS)
-------------------------
2000 1999
---- ----
<S> <C> <C>
Employee costs, gross $ 16,144 $ 17,008
Deferred costs pursuant to SFAS No. 91 6,611 6,868
-------- --------
Employee cost, net $ 9,533 $ 10,140
======== ========
Other expenses, gross $ 5,072 $ 4,464
Deferred costs pursuant to SFAS No. 91 1,439 2,176
-------- --------
Other expenses, net $ 3,633 $ 2,288
======== ========
</TABLE>
g. Segment information
The Company operates three reportable segments identified by line of
business: mortgage banking, banking and broker-dealer operations.
Management made this determination based on operating decisions
particular to each business line and because each one targets different
customers and requires different strategies. The majority of the
Company's operations are conducted in Puerto Rico.
The Company monitors the performance of its reportable segments based on
pre-established goals for different financial parameters such as net
income, interest rate spread, loan production and increase in market
share.
The information that follows presents net interest income after
provision for loan losses, non-interest income, net income and
identifiable assets for each of the Company's reportable segments for
the periods presented.
(In thousands)
<TABLE>
<CAPTION>
Mortgage Broker
Banking Banking Dealer Eliminations Totals
---------------- --------------- ----------- ---------------- ----------------
QUARTER ENDED MARCH 31, 2000
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ (878) 10,026 679 283 $ 10,110
Non-interest income $ 32,592 3,081 1,800 (552) $ 36,921
Net income $ 16,069 4,136 339 (268) $ 20,276
Identifiable assets $2,716,594 2,034,613 793,010 (752,751) $4,791,466
QUARTER ENDED MARCH 31, 1999
--------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses $ 4,723 4,988 655 201 $ 10,567
Non-interest income $ 25,431 2,362 1,241 (242) $ 28,792
Net income $ 12,760 2,744 210 (43) $ 15,671
Identifiable assets $1,965,939 1,019,324 788,693 (635,834) $3,138,122
</TABLE>
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
h. The fair value 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 following table summarizes Doral Financial's holdings of trading
securities as of March 31, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
TRADING SECURITIES MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2000 1999
---------- ------------
<S> <C> <C>
Mortgage-backed securities........................... $ 877,540 $ 757,080
Interest-only strips................................. 87,695 84,293
U.S. Treasury and agencies........................... 34,817 15,041
Puerto Rico government obligations................... 2,213 6,284
Other................................................ 692 --
---------- ---------
Total....................................... $1,002,957 $ 862,698
========== =========
</TABLE>
The following tables summarize amortized costs, unrealized holding gains
and losses, approximate market values, weighted average yield and
contractual maturities of available-for-sale securities as of March 31,
2000 and December 31, 1999.
Expected maturities of certain debt securities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF MARCH 31, 2000 COST GAINS LOSSES VALUE YIELD
(DOLLARS IN THOUSANDS) ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Debt securities
US Treasury
Due from 5 to 10 years $ 68,908 $ -- $ 2,058 $ 66,850 5.50%
Due over 10 years 75,449 1,143 -- 76,592 6.13%
--------- ------- ------- --------- ----
$ 144,357 $ 1,143 $ 2,058 $ 143,442 5.83%
========= ======= ======= ========= ====
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF DECEMBER 31, 1999 COST GAINS LOSSES VALUE YIELD
(DOLLARS IN THOUSANDS) ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Debt securities
US Treasury
Due from 5 to 10 years $ 68,648 $ -- $ 2,323 $ 66,325 5.50%
======== ========= ======= ======== ====
</TABLE>
The following tables summarize amortized costs, unrealized holding gains
and losses, approximate market values, weighted average yields and
contractual maturities of held-to-maturity securities as of March 31,
2000 and December 31, 1999.
Expected maturities of certain mortgage-backed and debt securities might
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES HELD-TO-MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF MARCH 31, 2000 COST GAINS LOSSES VALUE YIELD
(DOLLARS IN THOUSANDS) ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES
GNMA
Due from 5 to 10 years $ 2,859 $ 84 $ -- $ 2,943 6.61%
Due over 10 years 22,687 863 54 23,496 6.99%
CMO CERTIFICATES
Due from 1 to 5 years 3,918 1 18 3,901 6.12%
Due from 5 to 10 years 5,332 -- 21 5,311 6.27%
Due over 10 years 126,220 1,059 327 126,952 5.90%
FNMA - FHLMC
Due over 10 years 13,704 -- 986 12,718 8.05%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from 1 to 5 years 4,897 -- 66 4,831 6.22%
Due from 5 to 10 years 9,995 -- 320 9,675 6.41%
FEDERAL HOME LOAN BANK NOTES
Due within a year 40,000 -- 1,050 38,950 7.40%
Due from 1 to 5 years 33,539 -- 886 32,653 7.28%
Due from 5 to 10 years 52,595 -- 1,179 51,416 7.64%
Due over 10 years 593,483 -- 10,737 582,746 6.82%
ZERO COUPON
Due from 5 to 10 years 186,329 -- -- 186,329 7.50%
Due over 10 years 135,979 -- -- 135,979 7.84%
PR HOUSING BANK NOTES
Due over 10 years 5,000 -- 250 4,750 6.20%
U.S. TREASURY
Due within a year 1,195 5 -- 1,200 5.29%
Due from 5 to 10 years 70,054 -- 754 69,300 6.00%
Due over 10 years 174,623 -- 12,188 162,435 5.29%
---------- ------- ---------- ---------- ----
$1,482,409 $ 2,012 $ 28,836 $1,455,585 6.76%
========== ======= ========== ========== ====
</TABLE>
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES HELD-TO-MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF DECEMBER 31, 1999 COST GAINS LOSSES VALUE YIELD
(DOLLARS IN THOUSANDS) ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES
GNMA
Due from 5 to 10 years $ 2,295 $ 51 $ -- $ 2,346 6.50%
Due over 10 years 24,294 941 67 25,168 6.99%
CMO CERTIFICATES
Due from 1 to 5 years 5,227 -- 37 5,190 6.06%
Due from 5 to 10 years 5,944 4 29 5,919 6.71%
Due over 10 years 127,764 1,072 70 128,766 5.89%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from 1 to 5 years 4,994 -- 269 4,725 6.22%
Due from 5 to 10 years 9,885 -- 435 9,450 6.42%
FEDERAL HOME LOAN BANK NOTES
Due from 1 to 5 years 26,539 -- 1,359 25,180 7.31%
Due from 5 to 10 years 72,592 -- 4,345 68,247 7.30%
Due over 10 years 598,031 -- 30,459 567,572 6.84%
ZERO COUPON
Due from 5 to 10 years 182,944 -- -- 182,944 7.50%
Due over 10 years 146,823 -- 923 145,900 7.86%
PR HOUSING BANK NOTES
Due over 10 years 5,000 -- 125 4,875 6.20%
US TREASURY
Due within a year 1,597 3 -- 1,600 5.03%
Due from 5 to 10 years 70,061 -- 2,161 67,900 6.00%
Due over 10 years 225,070 -- 22,545 202,525 5.48%
---------- ------- ---------- ---------- ----
$1,509,060 $ 2,071 $ 62,824 $1,448,307 6.71%
========== ======= ========== ========== ====
</TABLE>
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
i. The following table sets forth certain information regarding Doral
Financial's loans receivable as of the dates indicated:
LOANS RECEIVABLE, NET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 AS OF DECEMBER 31, 1999
----------------------------- ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Construction loans $ 123,593 37% $ 114,853 41%
Residential mortgage loans 75,995 23% 70,659 26%
Commercial real estate 42,168 13% 32,383 12%
Consumer -- secured by mortgage 3,050 1% 3,317 1%
Consumer -- other 13,385 4% 11,629 4%
Commercial non-real estate 18,454 6% 16,989 6%
Loans on saving deposits 9,223 3% 7,793 3%
Land secured 47,261 13% 19,927 7%
--------- ------- --------- ------
Loans receivable, gross(1) 333,129 100% 277,550 100%
--------- ---------
Less:
Undisbursed portion of loans
in process (37,916) (40,571)
Unearned interest and deferred
loan fees (3,812) (3,655)
Allowance for loan losses(2) (2,675) (2,140)
--------- ---------
(44,403) (46,366)
--------- ---------
Loans receivable, net $ 288,726 $ 231,184
========= =========
</TABLE>
- ------------------
(1) Does not include mortgage loans held-for-sale by Doral Financial
of $1.3 billion as of March 31, 2000 and $1.0 billion as of
December 31, 1999.
(2) Does not include $4.2 million and $4.0 million of allowance for
loan losses allocated to mortgage loans held-for-sale as of March
31, 2000 and December 31, 1999, respectively.
j. Doral Financial is the guarantor of various serial and term bonds issued
by Doral Properties through Puerto Rico Industrial, Tourist, Educational,
Medical and Environment Control Facilities Financing Authority. The
bonds, in an aggregate principal amount of $44,765,000, were issued on
November 3, 1999 to finance the construction and development of the Doral
Financial Center, which will become the new headquarters of Doral
Financial. The bonds have varying interest rates, ranging from 6.10% to
6.90%, and maturities ranging from June 2003 to December 2029. The bonds
are secured by a mortgage on the building under construction.
k. Certain amounts reflected in the 1999 Consolidated Financial Statements
have been reclassified to conform to the presentation for 2000.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Doral Financial Corporation is a financial holding company that, together
with its wholly-owned subsidiaries, is engaged in mortgage banking, banking,
investment banking and broker-dealer activities. It is primarily engaged in a
wide range of mortgage banking activities, including the origination, purchase,
sale and servicing of mortgage loans on single-family residences, the issuance
and sale of various types of mortgage-backed securities, the holding of mortgage
loans, mortgage-backed securities and other investment securities for sale or
investment, the purchase and sale of servicing rights associated with such
mortgage loans and, to a lesser extent, the origination of construction loans
and mortgage loans secured by income producing real estate and land (the
"mortgage banking business").
Doral Financial is currently in its 28th year of operations. The Company
is the leading originator of mortgage loans on single-family residences in
Puerto Rico and also manages the largest portfolio of mortgage loans in the
Island. The volume of loans originated and purchased during the quarters ended
March 31, 2000 and 1999 by Doral Financial was approximately $781.8 million and
$702.3 million, respectively. Doral Financial's mortgage servicing portfolio
increased to approximately $7.9 billion as of March 31, 2000, from $6.6 billion
as of the same date a year ago, an increase of 20%. Doral Financial's strategy
is to increase the size of its mortgage servicing portfolio by relying
principally on internal loan originations.
Doral Financial maintains a substantial portfolio of mortgage-backed
securities. This is a direct result of the Company's mortgage securitization
activities. At March 31, 2000, Doral Financial held securities for trading with
a fair market value of $1.0 billion, approximately $665.3 million of which
consisted of Puerto Rico GNMA securities, the interest on which is tax-exempt
to the Company. These securities are generally held by Doral Financial for
longer periods prior to sale in order to maximize the tax-exempt interest
received thereon. Securities held-for-trading are reflected on Doral
Financial's Consolidated Financial Statements at their fair market value with
resulting gains or losses included in operations as part of trading account
profit.
As part of its strategy to maximize net interest income, Doral Financial
also invests in securities that are classified as available-for-sale or
held-to-maturity. During the first quarter of 2000 the Company purchased $28.1
million in securities classified as held-to-maturity. As of March 31, 2000,
Doral Financial held approximately $1.5 billion in securities and other
investments that are classified as held-to-maturity. As of March 31, 2000,
Doral Financial also held $143.4 million of investment securities that were
classified as available-for-sale and reported at fair value, with unrealized
gains or losses included in stockholders' equity and reported as "Accumulated
other comprehensive income, net of taxes," in Doral Financial's Consolidated
Financial Statements.
For the quarters ended March 31, 2000 and 1999, the Company's banking
subsidiaries contributed approximately $4.1 million and $2.7 million,
respectively, to the Company's consolidated net income, which includes the
operations of Doral Money, Inc., a wholly-owned subsidiary of Doral Bank PR.
The Company's broker-dealer operation is conducted through Doral
Securities, a NASD member subsidiary that provides retail and institutional
financial advisory and investment banking services in Puerto Rico. For the
quarters ended March 31, 2000 and 1999, Doral Securities' net income was
approximately $339,000 and $210,000, respectively. The increase in net income
reflects an increase in customer accounts and interest-earning assets during
these periods. Assets in customer brokerage accounts increased to $255 million
as of March 31, 2000, from $149 million as of the same date a year ago, an
increase of 71%.
For information regarding net interest income, non-interest income, net
income and identifiable assets broken down by the Company's mortgage banking,
banking and investment broker-dealer segments, please refer to note g of the
Company's Consolidated Financial Statements (unaudited).
Unlike most financial holding companies, Doral Financial has significant
assets and operations at the holding company level. HF Mortgage Bankers, one of
the Company's principal mortgage units, is organized as an operating
14
<PAGE> 15
division within the parent company. As of March 31, 2000 Doral Financial had
assets and net income of $2.2 billion and $9.7 million, respectively, at the
parent company level.
RESULTS OF OPERATIONS FOR THE QUARTER MARCH 31, 2000 AND 1999
Doral Financial's operations are mainly the result of: (i) the level of
loan production; (ii) the behavior of the mortgage loan servicing portfolio;
(iii) the various components of the Company's revenues; (iv) the elements of
risk inherent to loan activities; and (v) the Company's ability to manage its
liquidity demands and capital resources. These factors are, in turn, primarily
influenced by: (i) the direction of interest rates; (ii) the level of demand
for mortgage credit; (iii) the strength of the economy in Puerto Rico; and (iv)
the relationship between interest rates and the cost of funds.
LOAN PRODUCTION
The following table sets forth the number and dollar amount of Doral
Financial's loan production for the periods indicated:
TABLE A
LOAN PRODUCTION
(DOLLARS IN THOUSANDS, EXCEPT FOR AVERAGE INITIAL LOAN BALANCE)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
FHA/VA mortgage loans
Number of loans ........................................... 1,874 2,240
Volume of loans ........................................... $ 165,588 $ 181,375
Percent of total volume ................................... 21% 26%
Conventional conforming mortgage loans
Number of loans ........................................... 4,684 3,635
Volume of loans ........................................... $ 192,039 $ 313,859
Percent of total volume ................................... 24% 45%
Conventional non-conforming mortgage loans(1)(2)
Number of loans ........................................... 3,006 1,651
Volume of loans ........................................... $ 294,758 $ 139,348
Percent of total volume ................................... 38% 20%
Other(3)
Number of loans ........................................... 300 244
Volume of loans ........................................... $ 129,373 $ 67,678
Percent of total volume ................................... 17% 9%
Total loans
Number of loans ........................................... 9,864 7,770
Volume of loans ........................................... $ 781,758 $ 702,260
Average initial loan balance .................................... $ 79,254 $ 90,381
</TABLE>
- ------------
(1) Includes $12.3 million and $2.7 million in second mortgages for
the quarters ended March 31, 2000 and 1999, respectively.
(2) Includes $18.2 million and $5.7 million in home equity or
personal loans secured by real estate mortgages of up to $40,000
for the quarters ended March 31, 2000 and 1999, respectively.
(3) Consists of construction loans on residential projects, mortgage
loans secured by multi-family and commercial properties as well
as other commercial, land and consumer loans.
A substantial portion of Doral Financial's total mortgage loan
originations has consistently been comprised of refinance loans. For the three
months ended March 31, 2000 and 1999, refinance loans represented approximately
48%
15
<PAGE> 16
and 64%, respectively, of the total dollar volume of mortgage loans originated
(excluding loans purchased from third parties). Doral Financial's future
results could be adversely affected by a significant increase in mortgage
interest rates that reduces refinancing activity.
Doral Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
consumer, construction, land, and commercial loans which are held for
investment and classified as loans receivable.
The following table sets forth the sources of Doral Financial's loan
production as a percentage of total loan originations for the periods
indicated:
TABLE B
LOAN ORIGINATION SOURCES
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- -------------------------------------
PUERTO RICO US TOTAL PUERTO RICO US TOTAL
----------- -- ----- ----------- -- -----
<S> <C> <C> <C> <C> <C> <C>
Retail................................. 36% -- 36% 49% -- 49%
Wholesale.............................. 39% 1% 40% 23% 11% 34%
New housing developments............... 8% -- 8% 7% -- 7%
Multi-family........................... -- 3% 3% -- 6% 6%
Other(1)............................... 13% -- 13% 4% -- 4%
</TABLE>
- --------------------
(1) Refers to commercial, construction and land loans originated through the
banking subsidiaries and other specialized units.
MORTGAGE LOAN SERVICING
Doral Financial's principal source of servicing rights has traditionally
been its internal mortgage loan production. However, during the first quarters
of 2000 and 1999, Doral Financial purchased servicing rights to approximately
$42.5 million and $72.9 million, respectively, in principal amount of mortgage
loans. Doral Financial intends to continue growing its mortgage servicing
portfolio by internal loan originations and will continue to seek and consider
attractive opportunities for bulk purchases of servicing rights from third
parties.
16
<PAGE> 17
The following table sets forth certain information regarding the total
mortgage loan servicing portfolio of Doral Financial for the periods indicated:
TABLE C
MORTGAGE LOAN SERVICING
(DOLLARS IN THOUSANDS, EXCEPT FOR AVERAGE SIZE OF LOANS PREPAID)
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------------
2000 1999
---------- ----------
<S> <C> <C>
COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END
GNMA ............................................... $2,784,959 $2,373,492
FHLMC/FNMA ......................................... 2,214,964 1,795,626
Doral Financial grantor trusts ..................... 102,929 135,875
Other conventional mortgage loans(1) ............... 2,791,701 2,261,201
---------- ----------
Total servicing portfolio .......................... $7,894,553 $6,566,194
========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED
Number of loans .................................... 118,878 105,120
Weighted average interest rate ..................... 7.70% 7.95%
Weighted average remaining maturity (months) ....... 248 213
Weighted average servicing fee rate ................ .3703% .3934%
Average servicing portfolio ........................ $7,774,994 $6,084,915
Principal prepayments .............................. $ 135,000 $ 205,000
Prepayments to average portfolio (annualized) ...... 7% 13%
Average size of loans prepaid ...................... $ 46,656 $ 54,750
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD END
60-89 days past due ................................ 1.25% 1.19%
90 days or more past due ........................... 2.03% 2.04%
---------- ----------
Total delinquencies excluding foreclosures ......... 3.28% 3.23%
========== ==========
Foreclosures pending ............................... 1.20% 1.18%
========== ==========
SERVICING PORTFOLIO ACTIVITY
Beginning servicing portfolio ...................... $7,633,181 $6,186,059
Add:
Loans funded and purchased(2) ............... 679,008 637,329
Bulk servicing acquired ..................... 67,701 72,941
Less:
Servicing sales transferred ................. 137,952 --
Run-off(3) .................................. 347,385 330,135
---------- ----------
Ending servicing portfolio ......................... $7,894,553 $6,566,194
========== ==========
</TABLE>
(1) Includes $1.3 billion and $877 million of loans owned by the Company at
March 31, 2000 and 1999, respectively, which represented 17% and 13% of
the total servicing portfolio as of such dates.
(2) Excludes approximately $102.8 million and $64.9 million of commercial,
construction and loans sold with servicing released not included in the
Company's mortgage servicing portfolio as of March 31, 2000 and 1999.
(3) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
Substantially all of the mortgage loans in Doral Financial's servicing
portfolio are secured by single (one-to-four) family residences secured by real
estate located in Puerto Rico. At March 31, 2000 and 1999, less than 6% of Doral
Financial's mortgage servicing portfolio was related to mortgages secured by
real property located outside Puerto Rico.
17
<PAGE> 18
COMPONENTS OF REVENUES
As shown in Doral Financial's Consolidated Statements of Income, the
principal components of Doral Financial's revenues are: (i) net interest income;
(ii) net gains on mortgage loan sales; (iii) servicing income; (iv) trading
account profit; (v) gain on sale of investment securities; and (vi) commissions,
fees and other income.
NET INCOME
Doral Financial's net income for the quarter ended March 31, 2000
increased $4.6 million, or 29%, from $15.7 million for the 1999 period to $20.3
million for the 2000 period. Consolidated results include the operations of
Doral Bank PR and Doral Bank NY, Doral Financial's banking units, which
contributed approximately $4.1 million to Doral Financial's consolidated net
income for the quarter ended March 31, 2000, compared to $2.7 million for the
respective 1999 period, and Doral Securities, Doral Financial's investment
banking and broker-dealer unit, which contributed $339,000 to consolidated net
income for the quarter ended March 31, 2000, compared to $210,000 for the
respective 1999 period. Diluted earnings per common share for the first quarter
of 2000 were $0.45, an increase of 25% over the $0.36 per diluted share recorded
for the same period a year ago.
NET INTEREST INCOME
Net interest income is the excess of interest earned by Doral Financial
on its interest-earning assets over the interest incurred on its
interest-bearing liabilities.
The increase in net interest income for the first quarter of 2000, as
compared to the respective 1999 period, was principally due to an increase in
Doral Financial's average interest-earning assets. Average interest-earning
assets for the quarter grew by 61% from March 31, 1999 to March 31, 2000, while
net interest income grew by only 1% during the same period. The lower growth in
net interest income relative to the growth in average interest-earning assets
was affected by the reduction of the spread between long-term and short-term
rates, an increase in market interest rates which affects the average cost of
funds used to finance operations, and a decrease in net interest-earning assets,
which was due in part to the incurrence of borrowings not directly related to
the acquisition or creation of interest-earning assets.
The Company's banking subsidiaries contributed approximately $8.0
million or 73% of the consolidated net interest income of Doral Financial for
the quarter ended March 31, 2000, compared to $5.1 million or 52% of
consolidated net interest income for the quarter ended March 31, 1999.
18
<PAGE> 19
The following table presents, for the periods indicated, the Company's
average balance sheet, the total dollar amount of interest from average
interest-earning assets and the related yields, as well as the interest expense
on average interest-bearing liabilities expressed both in dollars and rates, and
the net interest margin. The tables do not reflect any effect of income taxes.
All average balances are based on the average of month-end balances for Doral
Financial and its non-banking subsidiaries, and average daily balances for the
banking subsidiaries, in each case during the periods presented.
TABLE D
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
2000 1999
- ----------------------------------------------------------------------------------------------=------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------ ----------- -------------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Total Loans(1) ........................ $1,213,944 $24,431 8.05% $ 997,604 $18,201 7.30%
Mortgage-Backed Securities ............. 1,113,053 19,237 6.91% 784,484 13,496 6.88%
Investment Securities .................. 1,410,602 22,606 6.41% 477,029 7,540 6.32%
Other Interest-Earning Assets(2) ....... 343,665 5,230 6.09% 282,170 3,501 4.96%
---------- ------- ---- ---------- ------- ----
Total Interest-Earning Assets/
Interest Income ................. 4,081,264 $71,504 7.01% 2,541,287 $42,738 6.73%
---------- ======= ==== ----------- ======= ====
Total Non-Interest-Earning Assets ................. 542,522 399,262
---------- -----------
Total Assets $4,623,786 $ 2,940,549
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable ............................ $ 401,440 $ 7,553 7.53% $ 393,867 $ 5,793 5.88%
Repurchase Agreements .................... 2,040,854 28,883 5.66% 1,169,486 15,010 5.13%
Deposits ................................. 1,030,293 13,104 5.09% 595,990 6,652 4.46%
Other Borrowed Funds(3) .................. 580,539 11,006 7.58% 246,833 4,421 7.16%
---------- ------- ---- ---------- ------- ----
Total Interest-Bearing Liabilities/
Interest Expense .................... 4,053,126 $60,546 5.98% 2,406,176 $31,876 5.30%
---------- ======= ==== ---------- ======= ====
Total Non-Interest-Bearing Liabilities ............ 176,691 218,634
---------- ----------
Total Liabilities 4,229,817 2,624,810
Stockholders' Equity 393,969 315,739
---------- ----------
Total Liabilities and Stockholders' Equity $4,623,786 $2,940,549
========== ==========
Net Interest-Earning Assets $ 28,138 $ 135,111
Net Interest Income $10,958 $10,862
Interest Rate Spread(4) 1.03% 1.43%
Interest Rate Margin(4) 1.07% 1.71%
Net Interest-Earning Assets Ratio 100.69% 105.62%
</TABLE>
- ----------------------
(1) Average loan balances include the average balance of non-accruing
loans, on which no interest income is recognized.
(2) Consist of money market instruments, reverse repurchase agreements and
interest-bearing deposits at other banks.
(3) Consist of FHLB-NY advances and notes payable.
(4) Interest rate spread represents the difference between Doral
Financial's weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities. Interest rate
margin represents net interest income on an annualized basis as a
percentage of average interest-earning assets.
The following table describes the extent to which changes in interest
rates and changes in volume of interest rates on interest-earning assets and
interest-bearing liabilities have affected Doral Financial's interest income and
interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by current year volume), and (iii) total change in rate and volume. The combined
effect of changes in both rate and volume has been allocated in proportion to
the absolute dollar amounts of the changes due to rate and volume.
19
<PAGE> 20
TABLE E
NET INTEREST INCOME ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
--------------------------------------------------
2000 COMPARED TO 1999
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
TOTAL LOANS $ 3,954 $ 2,276 $ 6,230
MORTGAGE-BACKED SECURITIES 5,653 88 5,741
INVESTMENT SECURITIES 14,748 318 15,066
OTHER INTEREST-EARNING ASSETS 760 969 1,729
---------- --------- -----------
TOTAL INTEREST-EARNING ASSETS 25,115 3,651 28,766
---------- --------- -----------
INTEREST-BEARING LIABILITIES
LOANS PAYABLE 108 1,652 1,760
REPURCHASE AGREEMENTS 11,164 2,709 13,873
DEPOSITS 4,836 1,616 6,452
OTHER BORROWED FUNDS 5,971 614 6,585
--------- --------- -----------
TOTAL INTEREST-BEARING LIABILITIES 22,079 6,591 28,670
---------- --------- -----------
NET INTEREST-EARNING ASSETS $ 3,036 $ (2,940) $ 96
========== ========== ===========
</TABLE>
INTEREST INCOME
Total interest income increased from approximately $42.7 million during
the first quarter of 1999, to $71.5 million during the first quarter of 2000, an
increase of 67%. The increase in interest income is primarily related to the
increase in Doral Financial's total average interest-earning assets, which
increased from $2.5 billion at March 31, 1999 to $4.1 billion at March 31, 2000.
Interest income on loans increased by $6.2 million or 34% during the
first quarter of 2000, as compared to the respective 1999 period. The increase
during 2000 reflected an increase in the level of loans held by Doral Financial
as compared to 1999, due to the increased volume of loan originations and an
increase in the average rate of loans held during the period.
Interest income on mortgage-backed securities for the first quarter of
2000 increased by 43% compared to the respective 1999 period. For the quarters
ended March 31, 2000 and 1999, interest income on this type of interest-earning
asset amounted to $19.2 million and $13.5 million, respectively. The results for
the 2000 period reflect the increase of mortgage-backed securities, mainly
comprised of tax-exempt Puerto Rico GNMA securities, which Doral Financial holds
for longer periods prior to sale in order to maximize tax-exempt interest income
on such securities.
Interest income on investment securities increased by $15.1 million
during the first quarter of 2000, as compared to the same period of 1999, from
$7.5 million to $22.6 million. These results reflect the increase in the average
balance of investment securities held during the period to $1.4 billion as of
March 31, 2000, compared to $477.0 million as of March 31, 1999. The increase in
investment securities reflects Doral Financial's strategy to increase its
tax-exempt income by investing in U.S. Treasury and agency securities, the
interest on which is tax-exempt to Doral Financial under Puerto Rico law and is
not subject to U.S. income taxation because of Doral Financial's status as a
foreign corporation for U.S. income tax purposes.
Interest income on other interest-earning assets increased by $1.7
million or 49% for the quarter ended March 31, 2000 as compared to the same
quarter a year ago. Other interest-earning assets consist primarily of money
market instruments, overnight deposits, term deposits, and reverse repurchase
agreements. The increase from 1999 to 2000 was due primarily to higher liquidity
and the investment of such liquidity in short-term investments. The increase
20
<PAGE> 21
in interest income from other interest-earning assets reflects Doral Financial's
strategy to diversify its sources of interest income by expanding its business
segments, primarily banking, investment banking and broker-dealer activities.
INTEREST EXPENSE
Total interest expense increased to $60.5 million during the first
quarter of 2000, compared to $31.9 million for the respective 1999 period, an
increase of 90%. The increase in interest expense for the 2000 period was due
primarily to the increase in the average amount of interest-bearing liabilities,
which funded the growth in interest-earning assets. Average interest-bearing
liabilities increased to $4.1 billion at an average cost of 5.98% as of March
31, 2000, compared to $2.4 billion at an average cost of 5.30% as of March 31,
1999.
Interest expense related to loans payable increased by $1.8 million or
30% during the first quarter of 2000 as compared to the same period of 1999 as a
result of higher interest rates. The weighted-average interest rate cost for
borrowings under Doral Financial's warehouse lines of credit was 7.53% and 5.88%
for the first quarters of 2000 and 1999, respectively.
Interest expense related to securities sold under agreements to
repurchase increased by $13.9 million or 92 % during the first quarter of 2000
as compared to the same period of 1999. The increase during this period
reflected increased borrowings to finance mortgage-backed securities and other
investment securities. The weighted average interest rate cost of borrowings
under repurchase agreements was 5.66% and 5.13% for the first quarters of 2000
and 1999, respectively.
Interest expense on deposits increased by $6.5 million, or 97%, for the
first quarter of 2000 as compared to the respective 1999 period. This increase
is primarily related to a higher deposit base, which increased $1.1 billion as
of March 31, 2000, from $649.4 million as of the same date a year ago due to the
fact that Doral Financial's banking subsidiaries now operate through a total of
20 branches, including one federal saving bank opened in New York City during
the fourth quarter of 1999, compared to a total of twelve branches as of the
same date a year ago. This trend of expansion is expected to continue throughout
the remainder of 2000 and into 2001. The average interest cost on deposits was
5.09% and 4.46%, respectively, for the quarters ended March 31, 2000 and 1999.
Interest expense on other borrowed funds was $11.0 million for the
quarter ended March 31, 2000, as compared to $4.4 million for the same period a
year ago, an increase of 149%. The increase for the 2000 period is mainly due to
the issuance of $229 million of medium term notes during the second half of
1999, and increases in the amount of FHLB- NY advances for the comparative
periods. For the first quarter of 2000, the weighted average interest rate cost
for other borrowed funds was 7.58%, compared to 7.16% for the corresponding 1999
period. Interest expense on other borrowed funds includes, in addition to those
mentioned above, various term notes issued by Doral Bank PR and Doral
Financial's $75 million senior notes due October 10, 2006, as well as various
other borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses relates to loans held by Doral Financial.
The provision is charged to earnings to bring the total allowance for loan
losses to a level considered appropriate by management based on Doral
Financial's loss experience, current delinquency rates, known and inherent risk
in the loan portfolio, the estimated value and equity of any underlying
collateral, and an assessment of current economic conditions. While management
believes that the current provision for loan losses is sufficient, future
additions to the allowance for loan losses could be necessary if economic
conditions change substantially from the assumptions used by Doral Financial in
determining the allowance for loan losses.
21
<PAGE> 22
The following table summarizes certain information regarding Doral
Financial's allowance for loan losses and losses on other real estate owned
("OREO"), for both Doral Financial's banking and mortgage banking business for
the periods indicated.
TABLE F
ALLOWANCE FOR LOAN LOSSES AND OREO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OREO:
Balance at beginning of period ............................. $ 910 $ 1,011
Provision for losses ....................................... 135 215
Net gains, charge-offs and others .......................... 84 (430)
------------ ------------
Balance at end of period ........................................ $ 1,129 $ 796
============ ============
Allowance for Loan Losses(1):
Balance at beginning of period .................................. $ 6,136 $ 5,166
Provision for loan losses ....................................... 848 295
------------ ------------
Charge - offs:
Mortgage loans held-for-sale ............................... (48) (84)
Construction ............................................... -- --
Residential mortgage loans ................................. -- --
Commercial real estate ..................................... -- --
Consumer ................................................... (57) (11)
Commercial non-real estate ................................. -- --
Other ...................................................... (53) (80)
------------ ------------
Total Charge-offs ............................................... (158) (175)
------------ ------------
Recoveries:
Mortgage loans held-for-sale ............................... 14 139
Construction ............................................... -- --
Residential mortgage loans ................................. -- 6
Commercial real estate ..................................... -- --
Consumer ................................................... 23 4
Commercial non-real estate ................................. -- --
Other ...................................................... -- --
------------ ------------
Total recoveries ................................................ 37 149
------------ ------------
Net charge-offs ................................................. (121) (26)
------------ ------------
Balance at end of period ........................................ $ 6,863 $ 5,435
============ ============
Allowance for loan losses as a percentage
of total loans outstanding ................................... 0.44% 0.51%
</TABLE>
- -----------------------
(1) Relates to both mortgage loans held-for-sale and to loans receivable
held for investment.
The allowance for loan losses relating to loans held by Doral Financial
was $6.9 million at March 31, 2000, compared to $5.4 million as of March 31,
1999. The increase in the allowance was primarily the result of the increase in
the size of the loan portfolio as well as an increase in the amount of
construction, commercial real estate and other commercial loans for which Doral
Financial provides a higher allowance for loan losses.
22
<PAGE> 23
NON-INTEREST INCOME
Net Gains on Mortgage Loan Sales. Net gains from mortgage loan sales
increased by 49% during the first quarter of 2000 to $24.1 million, as compared
to the same period of 1999. The increase for 2000 was mainly the result of a
greater volume of loan securitizations and the ability of the Company to obtain
higher profitability through higher loan fees resulting in increased gains on
sales, including through the creation of interest only strips ("IOs") in
connection with bulk sales of mortgage loans to corporate investors. See
"Amortization of IOs and Servicing Assets."
Servicing Income. Servicing income represents revenues earned for
administering mortgage loans. The main component of Doral Financial's servicing
income is loan servicing fees, which depend on the type of mortgage loan being
serviced. The fees on residential mortgage loans range from 0.25% to 0.50% of
the declining outstanding principal amount of the serviced loan. The size of
Doral Financial's loan servicing portfolio and the amount of its servicing fees
have increased substantially since its inception as a result of increases in
internal loan originations combined with bulk purchases of servicing rights.
During the first quarters of 2000 and 1999, Doral Financial purchased servicing
rights to approximately $42.5 million and $72.9 million, respectively, of
mortgages through bulk purchases. Doral Financial anticipates that it will
continue to make bulk purchases of mortgage servicing rights in the future to
the extent it can identify attractive opportunities.
The increase in the amount of loan servicing income for the first
quarter of 2000 was primarily due to the increase in the principal amount of
loans serviced as compared to the 1999 period. The mortgage servicing portfolio
was approximately $7.9 billion at March 31, 2000, compared to $6.6 billion as of
March 31, 1999.
The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $135.0 million and $205.0 million for the three months ended March
31, 2000 and 1999, respectively. This represented approximately 7% and 13%,
respectively, on an annualized basis of the average principal amount of mortgage
loans serviced. Doral Financial reduces the sensitivity of its servicing income
to increases in prepayment rates through a strong retail origination network
that increased or maintained the size of Doral Financial's servicing portfolio
even during periods of high prepayments.
Trading Account Profit. Trading account profit includes all gains or
losses, whether realized or unrealized, in the market value of Doral Financial's
securities held-for-trading, as well as gains or losses on options and future
contracts used for interest rate management purposes. Trading account activities
for the quarters ended March 31, 2000 and 1999, resulted in gains of $927,000
and $5.5 million, respectively, including $4.5 million and $1.0 million of
unrealized gains, respectively, on the value of its securities held-for-trading
pursuant to SFAS No. 115.
For the quarters ended March 31, 2000 and 1999, trading account profit
included $2.9 million in losses and $3.6 million in gains, respectively, on
options and futures contracts used for interest rate management purposes,
including unrealized gains or losses charged to operations as a result of mark
to market adjustments.
Gain on Sale of Investment Securities. Gain on sale of investment
securities represents the impact on income of transactions involving the sale of
securities available-for-sale. During the quarter ended March 31, 2000, the
Company recorded $3.3 million in gains on sale of investment securities. During
the first quarter of 1999, the Company had no transactions involving the sale of
this type of securities.
Gain on Sale of Servicing Assets. There were no sales of servicing
assets during the first quarters of 2000 or 1999. While Doral Financial's
strategy is to continue to increase the size of its servicing portfolio by
retaining the servicing rights on the mortgage loans it originates, the Company
may sell servicing rights in the future when market conditions are favorable.
Commissions, Fees and Other Income. Other income, commissions and fees
increased 157% during the first quarter of 2000 as compared to the same 1999
period. The increase during the 2000 period was due primarily to increased
commissions and fees earned by Doral Financial's banking and broker-dealer
subsidiaries.
23
<PAGE> 24
NON-INTEREST EXPENSE
Total non-interest expense increased by only 13% during the first
quarter ended March 31, 2000, as compared to the respective 1999 period,
notwithstanding the opening of 22 retail offices since March 31, 1999, as a
result of Doral Financial's ongoing cost reduction plan.
PUERTO RICO INCOME TAXES
The maximum statutory corporate income tax rate in Puerto Rico is 39%.
For the first quarters of 2000 and 1999, the effective income tax rate of Doral
Financial was 10% and 12%, respectively.
The lower effective tax rates (as compared to the maximum statutory
rate) experienced by the Company reflect the fact that the portion of the net
interest income derived from certain FHA and VA mortgage loans secured by
properties located in Puerto Rico and on GNMA securities backed by such mortgage
loans is exempt from income tax under Puerto Rico law. The interest received on
U.S. Treasury and agency securities is also exempt from Puerto Rico income
taxation.
AMORTIZATION OF IOS AND SERVICING ASSETS
Doral Financial creates IOs (previously classified as excess servicing
fees receivable) as a result of the sale of loans in bulk or securitization
transactions. IOs are created on the sale of loans with servicing retained, by
computing the present value of the excess of the weighted-average coupon on the
loans sold over the sum of: (i) the pass-through interest paid to the investor
and (ii) normal servicing fee, based on the servicing fee permitted by FNMA and
FHLMC, and adjusting such amount for expected losses and prepayments. The amount
of the IOs is recognized at the time of sale of the related loans as an
adjustment to the resulting gain or loss on the sale of loans and is recorded as
a component of "Net Gains on Mortgage Loan Sales" on Doral Financial's
Consolidated Statements of Income. Sales of mortgage loans made during the first
quarter of 2000 resulted in the recording of approximately $17.0 million of IOs,
compared to $10.6 million for the corresponding 1999 period. The unamortized
balance of the IOs is reflected in Doral Financial's Consolidated Statement of
Condition as a component of "Trading securities."
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 IOs for each of the quarters
ended March 31, 2000 and 1999, was approximately $2.8 million and $1.7 million,
respectively.
Beginning with the second quarter of 1995, following the implementation
by Doral Financial of SFAS No. 122 (later superseded by SFAS No. 125), whenever
Doral Financial sells a mortgage loan, it assigns a fair value to the related
mortgage servicing right (the "servicing asset") associated with such mortgage
loan. The servicing asset represents the present value of the servicing fees
expected to be received on the loan over the expected term of the loan. The
amount of the servicing asset is recognized at the time of sale of the related
loan as an adjustment to the resulting gain or loss on the sale of the loan and
is recorded as a component of "Net Gains on Mortgage Loan Sales" on Doral
Financial's Consolidated Statement of Income. The increase in the creation of
servicing assets reflects increased mortgage loan sales and securitizations
during such periods and bulk purchases of servicing rights. The unamortized
balance of the servicing asset is reflected on the Consolidated Statements of
Condition of Doral Financial. (Refer to Table G for servicing assets activities
for the periods indicated).
Doral Financial's servicing assets are amortized in proportion to, and
over the period of, estimated servicing income. Amortization of servicing assets
is included as a component of "Non-interest expense-Amortization of Servicing
Assets" in Doral Financial's Consolidated Statements of Income and Retained
Earnings.
24
<PAGE> 25
The following table shows the increase in the Company's mortgage
servicing assets for each of the periods shown:
TABLE G
CAPITALIZATION OF MORTGAGE SERVICING ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Balance at beginning of period .................................. $ 109,721 $ 72,568
Capitalization of rights ........................................ 8,744 8,215
Rights sold ..................................................... -- --
Rights purchased ................................................ 571 1,107
Amortization:
Scheduled .............................................. (2,921) (2,715)
Unscheduled ............................................ -- --
------------ ------------
Balance at end of period ........................................ $ 116,115 $ 79,175
============ ============
</TABLE>
Increases in prepayment rates or credit loss rates over anticipated
levels used in calculating the value of IOs and servicing assets can adversely
affect Doral Financial's revenues and liquidity by increasing the amortization
rates for servicing assets and IOs, as well as requiring Doral Financial to
recognize an impairment against income over and above scheduled amortization.
See "Interest Rate Management." The portion of Doral Financial's mortgage
servicing portfolio consisting of the servicing asset that was originated by
Doral Financial prior to the adoption of SFAS No. 122 is not reflected as an
asset on Doral Financial's Consolidated Financial Statements, and is not subject
to amortization or impairment.
CREDIT RISKS RELATED TO LOAN ACTIVITIES
With respect to mortgage loans originated for sale as part of Doral
Financial's mortgage banking business, the Company is generally at risk for any
mortgage loan default from the time the Company originates the mortgage loan
until the time it sells the loan or packages it into a mortgage-backed security.
With respect to FHA loans, the Company is fully insured as to principal by the
FHA against foreclosure loss. VA loans are guaranteed up to 25% to 50% of the
principal amount of the loan subject to a maximum, ranging from $22,500 to
$50,750. Loan-to-value ratios for residential mortgage loans generally do not
exceed 80% (85% for qualifying home purchase transactions through Doral Bank PR)
unless private mortgage insurance is obtained.
Loans that do not qualify for the insurance or guarantee programs of
FHA and VA, or the sale or exchange programs of FNMA or FHLMC ("non-conforming
loans"), including loans secured by multi-family projects, are often sold to
investors on a partial or full recourse basis or with put back options to the
purchasers. In such cases, the Company retains part or all of the credit risk
associated with such loan after sale. As of March 31, 2000, the maximum amount
of loans that the Company would have been required to repurchase if all loans
subject to recourse defaulted or if investors exercised their put back options
was $603.0 million. As of March 31, 2000, the Company maintained a reserve of
$1.4 million for potential losses from such arrangements which is included in
"Accrued expenses and other liabilities" in the Company's Consolidated Financial
Statements.
Loans secured by income-producing residential and commercial properties
involve greater credit risk because they are larger in size and more risk is
concentrated in a single borrower. The properties securing these loans are also
more difficult to dispose of in case of foreclosure.
Doral Financial is also subject to credit risk with respect to its
portfolio of loans receivable. Loans receivable represent loans that Doral
Financial holds for investment and, therefore, Doral Financial is at risk for
the term of the loan.
25
<PAGE> 26
As of March 31, 2000, approximately 23% of Doral Financial's gross loans
receivable portfolio consisted of residential mortgage loans.
Doral Financial manages credit risk by maintaining sound underwriting
standards, monitoring the quality of the loan portfolio, assessing reserves and
loan concentrations, recruiting qualified credit officers, implementing and
monitoring lending policies and collateral requirements, and instituting
procedures to ensure appropriate actions to comply with laws and regulations.
The Company's collateral requirements for loans depend on the financial strength
of the borrower and the type of loan involved. Acceptable collateral principally
includes cash, deposit and investment accounts and real estate, and, to a lesser
extent, liens on accounts receivable, lease receivables, inventory and personal
property. In the case of non-conforming loans sold subject to recourse, the
Company also generally requires lower loan-to-value ratios to protect itself
from possible losses on foreclosure.
Because most of Doral Financial's loans are made to borrowers located
in Puerto Rico and secured by properties located in Puerto Rico, the Company is
subject to greater credit risks tied to adverse economic, political or business
developments and natural hazards, such as hurricanes, that may affect the
Island. For example, if Puerto Rico's real estate market were to experience an
overall decline in property values, the Company's rates of loss on foreclosure
would probably increase.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets ("NPAs") consist of loans held-for-sale past due
90 days and still accruing, loans on a non-accrual basis and other real estate
owned. Mortgage loans held-for-sale by Doral Financial's mortgage banking units
are not normally placed on a non-accrual basis following default. Doral
Financial believes that this policy is reasonable because these loans are
adequately secured by real estate and the amounts due on the loans are generally
recovered in foreclosure. Doral Financial's banking subsidiaries policy is to
place all loans 90 days or more past due on a non-accrual basis, at which point
a reserve for all unpaid interest previously accrued is established. Interest
income is recognized when the borrower makes a payment, and the loan will return
to an accrual basis when it is no longer 90 or more days delinquent and
collectibility is reasonably assured. For the quarters ended March 31, 2000 and
1999, Doral Financial's banking subsidiaries would have recognized $564,000 and
$379,000, respectively, in additional interest income had all delinquent loans
owned by the banking subsidiaries been accounted for on an accrual basis.
The following table sets forth information with respect to Doral
Financial's non-accrual loans, other real estate owned ("OREO") and other
non-performing assets as of the dates indicated. Doral Financial did not have
any troubled debt restructurings as of any of the periods presented.
26
<PAGE> 27
TABLE H
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Mortgage banking business:
Loans held-for-sale past due 90 days
and still accruing(1) .................................... $ 40,192 $ 44,030
OREO ........................................................ 5,316 3,834
------------------ ------------------
Total NPAs of mortgage banking business ..................... 45,508 47,864
------------------ ------------------
Other lending activities through banking subsidiaries:
Non-accrual loans
Construction ............................................ 1,303 --
Residential mortgage loans .............................. 4,521 3,731
Commercial real estate .................................. 1,094 567
Consumer ................................................ 492 205
Commercial non-real estate .............................. 227 --
Other ................................................... -- --
------------------ ------------------
Total non-accrual loans ..................................... 7,637 4,503
OREO ........................................................ 76 76
------------------ ------------------
Total NPAs of banking subsidiaries .......................... 7,713 4,579
------------------ ------------------
Total NPAs of Doral Financial (consolidated) ................ $ 53,221 $ 52,443
================== ==================
Total NPAs of banking subsidiaries as a percentage of
their loans receivable, net and OREO ..................... 3.59% 2.53%
Total NPAs of Doral Financial (consolidated) as a
percentage of consolidated total assets ................. 1.11% 1.16%
Ratio of allowance for loan losses to
non-performing assets (consolidated) ..................... 12.90% 11.70%
</TABLE>
- ----------------------
(1) Does not include approximately $30.8 million and $26.1 million of 90
days past due FHA/VA loans as of March 31, 2000 and December 31, 1999,
respectively, which are not considered non-performing assets by Doral
Financial because the principal balance of these loans is insured or
guaranteed under applicable FHA and VA programs and interest is, in
most cases, fully recovered in foreclosure procedures.
LIQUIDITY AND CAPITAL RESOURCES
Doral Financial has an ongoing need for capital to finance its lending
and investing activities. This need is expected to increase as the volume of the
loan originations and investing activity increases. Doral Financial's cash
requirements arise from loan originations and purchases, repayments of debt upon
maturity, payments of operating and interest expenses and servicing advances and
loan repurchases. Servicing agreements relating to the mortgage-backed
securities programs of FNMA, FHLMC and GNMA, and certain other investors and
mortgage loans sold to certain other purchasers, require Doral Financial to
advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. The
Company generally recovers funds advanced pursuant to these arrangements within
30 days. During the quarter ended March 31, 2000, the average monthly amount of
funds advanced by Doral Financial under such servicing agreements was
approximately $9.7 million, compared to $7.6 million for the quarter ended March
31, 1999.
27
<PAGE> 28
Doral Financial's primary sources of liquidity are sales in the
secondary mortgage market of the loans it originates and purchases, short-term
borrowings under warehouse, gestation and repurchase agreement lines of credit
secured by pledges of its loans and mortgage-backed securities and revenues from
operations. In the past, Doral Financial has also relied on privately-placed and
publicly offered debt financings and public offerings of preferred and common
stock. Doral Financial's bank subsidiaries also rely on deposits, borrowings
from the FHLB-NY as well as term notes backed by letters of credit of the
FHLB-NY.
The following table shows Doral Financial's sources of borrowings and
the related average interest rate as of March 31, 2000 and December 31, 1999:
TABLE I
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 AS OF DECEMBER 31, 1999
-------------------------------- -----------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
------------ ------- ----------- ---------
<S> <C> <C> <C> <C>
Repurchase Agreements ............. $ 2,149,720 5.87% $ 1,927,956 5.54%
Loans Payable ..................... 444,245 7.25% 353,460 6.53%
Deposits .......................... 1,087,346 5.10% 1,010,424 4.83%
Notes Payable ..................... 455,425 7.83% 461,053 7.84%
Advances from FHLB ................ 114,000 5.88% 134,000 5.73%
</TABLE>
Doral Financial has warehousing, gestation and repurchase agreements
lines of credit totaling $5.5 billion as of March 31, 2000, of which $2.6
billion was outstanding as of such date.
The following table presents the average balance and the annualized
average rate paid on each deposit type for the period indicated:
TABLE J
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
---------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit ........... $ 731,694 6.01% $ 481,265 5.84%
Regular passbook savings .......... 59,917 4.65% 51,605 4.57%
Now accounts ...................... 145,363 4.63% 106,502 4.65%
Non-interest bearing .............. 93,319 -- 132,429 --
----------- ----------- ----------- -----------
Total deposits ........... $ 1,030,293 5.09 % $ 771,801 4.64%
=========== =========== =========== ===========
</TABLE>
28
<PAGE> 29
The following table sets forth the maturities of certificates of
deposit having principal amounts of $100,000 or more at March 31, 2000.
TABLE K
DEPOSIT MATURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Certificates of deposit maturing
Three months or less........................ $162,074
Over three through six months............... 93,928
Over six through twelve months.............. 123,471
Over twelve months.......................... 129,416
--------
Total....................................... $508,889
========
</TABLE>
As of March 31, 2000 and December 31, 1999, the banking subsidiaries
had approximately $304.7 million and $295.4 million, respectively, in brokered
deposits obtained through broker-dealers. The banking subsidiaries use such
deposits as a source of long-term funds.
As of March 31, 2000, Doral Financial, Doral Bank PR and Doral Bank NY
were in compliance with all the regulatory capital requirements that were
applicable to them as a financial holding company, state non-member bank and
Federal savings bank, respectively (i.e., total capital and Tier 1 capital to
risk weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to
average assets of at least 4%). Set forth below are Doral Financial's, Doral
Bank PR's and Doral Bank NY's regulatory capital ratios as of March 31, 2000,
based on existing Federal Reserve, OTS and FDIC guidelines.
TABLE L
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
DORAL DORAL DORAL
FINANCIAL BANK PR BANK NY(1)
--------- ------- ----------
<S> <C> <C> <C>
Tier 1 Capital Ratio (Tier 1 capital to
risk weighted assets)..................... 18.3% 14.9% 94.3%
Total Capital (total capital to risk
weighted assets).......................... 18.6% 15.3% 94.4%
Leverage Ratio (Tier 1 capital to
average assets)........................... 8.6% 6.6% 40.1%
</TABLE>
- ------------------------
(1) In connection with the chartering of Doral Bank NY in October 1999, the
FDIC required that it be initially capitalized with $25 million. As
Doral Bank NY continues to increase its assets, its capital ratios can
be expected to decline.
As of March 31, 2000, each of Doral Bank PR and Doral Bank NY were
considered well-capitalized banks for purposes of the prompt corrective action
regulations adopted by the FDIC pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991. To be considered a well capitalized
institution under the FDIC's regulations, an institution must maintain a
Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total
Capital Ratio of at least 10% and not be subject to any written agreement or
directive to meet a specific capital ratio.
Doral Financial expects that it will continue to have adequate
liquidity, financing arrangements and capital resources to finance its
operations. Doral Financial will continue to explore alternative and
supplementary methods of financing its operations, including both debt and
equity financing. There can be no assurance, however, that Doral Financial will
be successful in consummating any such transactions.
29
<PAGE> 30
ASSETS AND LIABILITIES
At March 31, 2000, Doral Financial's total assets were $4.8 billion
compared to $4.5 billion at December 31, 1999. The increase in assets was due
primarily to a net increase in the loan portfolio of $318.6 million. Total
liabilities were $4.4 billion at March 31, 2000, compared to $4.2 billion at
December 31, 1999. The increase in liabilities was largely the result of an
increase in borrowings under warehousing lines of credit, securities sold under
agreements to repurchase and deposit accounts. At March 31, 2000, deposit
accounts totaled $1.1 billion, compared to $1.0 billion at December 31, 1999. As
of March 31, 2000, Doral Financial's banking subsidiaries had $2.0 billion in
assets, compared to $1.9 billion at December 31, 1999.
INTEREST RATE MANAGEMENT
General. Interest rate fluctuations is the primary market risk
affecting Doral Financial. The effect of changes in interest rates on the volume
of mortgage loan originations, the net interest income earned on Doral
Financial's portfolio of loans and mortgage-backed securities, the amount of
gain on sale of loans, and the value of Doral Financial's loan servicing
portfolio and securities holdings, as well as Doral Financial's strategies to
manage such effects, are discussed in Doral Financial's Annual Report to
Shareholders under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Management", which information is
also incorporated by reference into the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
In the future, Doral Financial may use alternative hedging techniques
including futures, options, interest rate swap agreements or other hedge
instruments to help mitigate interest rate and market risk. However, there can
be no assurance that any of the above hedging techniques will be successful. To
the extent they are not successful, Doral Financial's profitability may be
adversely affected. For additional information on the use of derivatives to
manage interest rate risk, see "Derivatives" below.
Interest Rate Sensitivity Analysis. The following table summarizes the
expected maturities or repricing of Doral Financial's interest-earning assets
and interest-bearing liabilities as of March 31, 2000. Condensed information as
of December 31, 1999 is also shown. For purposes of this presentation, the
interest-earning components of mortgage loans held-for-sale and securities
held-for-trading are assumed to mature within one year. In addition, investments
held by Doral Financial which have call features are presented according to
their contractual maturity date. Off-balance sheet instruments represent the
notional amounts of interest rate swap agreements. Notional amounts are used to
calculate the contractual amounts to be exchanged under such swap agreements.
30
<PAGE> 31
TABLE M
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------- -----------------------------------------------------------------------------
1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF MARCH 31, 2000 OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
- --------------------------------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Money Market Instruments $ 263,278 -- $ -- $ -- $ -- $ 263,278
Total Loans 1,431,035 23,249 29,844 81,338 -- 1,565,466
Securities Held-for-Trading 1,002,957 -- -- -- -- 1,002,957
Securities Available-for-Sale -- -- -- 143,442 -- 143,442
Securities Held-to-Maturity 41,195 12,623 29,731 1,398,860 -- 1,482,409
FHLB Stock -- -- -- 24,145 -- 24,145
Other assets -- -- -- -- 309,769 309,769
---------- ------- --------- ---------- -------- ----------
TOTAL ASSETS $2,738,465 $35,872 $ 59,575 $1,647,785 $309,769 $4,791,466
========== ======= ========= ========== ======== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Loans Payable $ 444,245 $ -- $ -- $ -- $ -- $ 444,245
Repurchase Agreements 1,765,051 148,400 95,560 140,709 -- 2,149,720
Deposits 819,951 86,066 64,146 709 116,474 1,087,346
Other Borrowed Funds 119,240 47,220 218,500 184,465 -- 569,425
Other Liabilities -- -- -- -- 141,694 141,694
Stockholders' equity -- -- -- -- 399,036 399,036
---------- ------- --------- ---------- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,148,487 $281,686 $ 378,206 $ 325,883 $657,204 $4,791,466
========== ======= ========= ========== ======== ==========
Off Balance Sheet Instruments - Interest
Rate Swaps $ 105,000 ($5,000) ($100,000) $ -- $ -- $ --
Interest Rate Sensitivity Gap (305,022) (250,814) (418,631) 1,321,901 (347,435) --
Cumulative Interest Rate Sensitivity (305,022) (555,836) (974,467) 347,435 -- --
Cumulative Gap to Interest-Earning Asset (6.84)% (12.46)% (21.85)% 7.79% -- --
<CAPTION>
CONDENSED INTEREST RATE
SENSITIVITY ANALYSIS 1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF DECEMBER 31, 1999 OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
- ----------------------------------------- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Off-Balance Sheet Instruments - Interest
Rate Swaps $ 105,000 ($5,000) ($100,000) $ -- $ -- $ --
Interest Rate Sensitivity Gap (30,941) (77,539) (372,400) 817,779 (336,899) --
Cumulative Interest Rate Sensitivity Gap (30,941) (108,480) (480,880) 336,899 -- --
Cumulative Gap to Interest-Earning Assets (0.75)% (2.64)% (11.72)% 8.21% -- --
</TABLE>
Gap analysis measures the volume of assets and liabilities at a point
in time and their repricing during future periods. The volume of assets
repricing is adjusted to take into consideration the expected prepayment of
certain assets such as mortgage loans and mortgage-backed securities, which can
be prepaid before their contractual maturity. The net balance of assets and
liabilities (the "gap") repricing during future periods is an indicator of the
degree of interest rate risk being assumed by the Company. A positive gap
generally denotes asset sensitivity and that increases in interest rates would
have a positive effect on net interest income while a decrease in interest rates
would have a negative effect
31
<PAGE> 32
on net interest income. A negative gap denotes liability sensitivity and means
that an increase in interest rates would have a negative effect on net interest
income while a decrease in rates would have a positive effect on net interest
income. As of March 31, 2000 and December 31, 1999, Doral Financial had a one
year negative gap of approximately $305.0 million and $30.9 million,
respectively. Doral Financial's negative gap within one year is due primarily to
its large portfolio of FHLB notes and other U.S. agency securities which have
call features but are not likely to be exercised by such agencies due to the
actual interest rate environment. In addition, a significant portion of Doral
Financial's interest-earning assets are financed with repurchase agreements
that generally reprice within 90 days or less. While static gap analysis is a
useful measure for determining short-term risk to future net interest income,
it does not measure the sensitivity of the market value of assets and
liabilities to changes in interest rates. For example, the value of the
Company's mortgage loans held-for-sale and trading assets would probably fall
in a rising interest rate environment thereby adversely affecting the
Company's revenues from mortgage loan originations and trading account profit.
Derivatives. Doral Financial uses derivatives to manage its interest
rate risk. Derivatives include interest rate swaps, futures, forwards and
options. Derivatives are generally either privately-negotiated over-the-counter
("OTC") or standard contracts transacted through regulated exchanges. OTC
contracts generally consist of swaps, forwards and options. Exchange traded
derivatives include futures and options.
Although Doral Financial uses derivatives to manage market risk, for
financial reporting purposes its general policy is to account for such
instruments on a marked-to-market basis with gains or losses charged to
operations as they occur, except for interest rate swaps entered into by Doral
Bank which are not reflected on the Company's Consolidated Financial Statements.
Contracts with positive fair values are recorded as assets and contracts with
negative fair values as liabilities after the application of netting
arrangements. For the quarter ended March 31, 2000, average assets and
liabilities related to derivatives were $7.9 million and $5.9 million,
respectively. The notional amounts of assets and liabilities related to
derivatives which are not recorded on Doral Financial's statement of condition
totaled $11.7 billion and $9.7 billion, respectively, as of March 31, 2000.
Notional amounts indicate the volume of derivatives activity but do not
represent Doral Financial's exposure to market or credit risk.
The use of derivatives involves market and credit risk. The market risk
of derivatives arises principally from the potential for changes in the value of
derivative contracts based on changes in interest rates. Doral Financial
generally manages its risks by taking risk-offsetting positions.
The credit risk of derivatives arises from the potential of a
counterparty to default on its contractual obligations. Credit risk related to
derivatives depend on the following: the current fair value of outstanding
contracts with an entity; the potential credit exposure on the derivative over
time; the extent to which legally enforceable netting arrangements allow the
offsetting of contracts with the same entity to be netted against each other;
the extent to which collateral held against the contract reduces credit risk;
and the likelihood of defaults by the counterparty.
To manage this credit risk, Doral Financial deals with counterparties
of good credit standing, enters into master netting agreements whenever possible
and, when appropriate, obtains collateral. Master netting agreements incorporate
rights of set-off that provide for the net settlement of contracts with the same
counterparty in the event of default. The credit risk associated with futures
contracts is also limited due to daily cash settlement of the net change in the
value of open contracts with the exchange on which the contract is traded.
INFLATION
General and administrative expenses increase with inflation. However,
the increase in real estate values in Puerto Rico in recent years has been a
positive factor for Doral Financial's mortgage banking business. The average
size of loans originated tends to increase as home values appreciate, which
serves to increase loan origination fees and servicing income faster than the
cost of providing such services. Additionally, appreciation in real estate
property values reduces the loan-to-value ratios of existing loans. Interest
rates normally increase during periods of high inflation and decrease during
periods of low inflation. See "Interest Rate Management" in the Company's Annual
Report for the year ended December 31, 1999, which is incorporated by reference
into the Company's Annual Report on Form 10-K for the year ended December 31,
1999, for a discussion of the effects of changes of interest rates on Doral
Financial's operations.
32
<PAGE> 33
CHANGES IN ACCOUNTING STANDARDS
Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative and Similar Financial
Instruments and for Hedging Activities" ("SFAS No. 133"). This new standard, as
amended, will become effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, but with earlier application permitted as of the
beginning of any fiscal quarter subsequent to June 15, 1998, establishes
accounting and reporting standards for derivative financial instruments and for
hedging activities, and requires all derivatives to be measured at fair value
and to be recognized as either assets or liabilities in the statement of
financial position. Under this Standard, derivatives used in hedging activities
are to be designated into one of the following categories: (a) fair value hedge;
(b) cash flow hedge; and (c) foreign currency exposure hedge. The changes in
fair value (that is, gains and losses) will be either recognized as part of
earnings in the period when the change occurs, or as a component of other
comprehensive income (outside earnings) depending on their intended use and
resulting designation. Management has determined to adopt this Statement during
the first quarter of fiscal year 2001 and believes that such adoption will not
have a material effect on the Company's financial position or results of
operations since all derivatives owned by the Company, except $105 million in
interest rate swaps, are recorded at their fair value.
EXPANDED POWERS UNDER NEW MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act"), which became effective in most significant
respects on March 11, 2000. Under the Act, bank holding companies, such as Doral
Financial, all of whose subsidiary depository institutions are
"well-capitalized" and "well-managed," as defined in the Bank Holding Company
Act of 1956 (the "BHCA"), and which obtain satisfactory Community Reinvestment
Act ratings, may elect to be treated as financial holding companies ("FHCs").
FHCs are permitted to engage in a broader spectrum of activities than those
currently permitted to bank holding companies. FHCs can engage in any activities
that are "financial" in nature, including insurance underwriting and brokerage,
and underwriting and dealing in securities without a revenue limit or a limit on
underwriting and dealing in equity securities applicable to foreign securities
affiliates (which include Puerto Rico securities affiliates for these purposes).
Subject to certain limitations, under new merchant banking rules, FHCs
will also be allowed to make investments in companies that engage in activities
that are not financial in nature without regard to the existing 5% limit for
domestic investments and 20% limit for overseas (including Puerto Rico)
investments.
On February 18, 2000, Doral Financial filed an election with the Board
of Governors of the Federal Reserve System (the "Board") to become an FHC, which
became effective on March 11, 2000. As an FHC, Doral Financial's broker-dealer
subsidiary has already commenced limited equity underwriting and dealing
activities and Doral Financial is studying the possibility of engaging in
various other activities permitted to FHC's, including insurance related
activities.
Under the Act, if after Doral Financial becomes an FHC, it later fails
to meet the requirements for being an FHC and is unable to correct such
deficiencies within certain prescribed time periods, the Board could require
Doral Financial to divest control of its depository institution subsidiaries or
alternatively to cease conducting activities that are not permissible to bank
holding companies that are not FHCs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Company is exposed,
see the information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Management."
33
<PAGE> 34
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 Annual Stockholders Meeting of Doral Financial Corporation was held
on April 13, 2000. A quorum was obtained with 31,653,817 votes represented in
person or by proxy, which represented approximately 78.3% of all votes eligible
to be cast at the meeting. Eight directors of the Company, Salomon Levis, Zoila
Levis, Richard F. Bonini, Edgar M. Cullman, Jr., John L. Ernst, Efraim Kier, A.
Brean Murray and Harold D. Vicente, were elected for one-year terms. The
appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants was also ratified. The following proposals were voted upon at the
meeting with the following results:
Proposal 1: Election of Directors:
<TABLE>
<CAPTION>
NOMINEES FOR ONE-YEAR TERM VOTES FOR VOTES WITHHELD
-------------------------- --------- --------------
<S> <C> <C>
Salomon Levis 28,389,368 3,264,449
Richard F. Bonini 31,461,413 192,404
Edgar M. Cullman, Jr. 31,553,058 100,759
John L. Ernst 31,554,083 99,734
Efraim Kier 31,496,625 157,192
Zoila Levis 28,391,208 3,262,609
A. Brean Murray 30,755,370 898,447
Harold D. Vicente 31,483,750 170,067
</TABLE>
Proposal 2: Ratification of the Appointment of PricewaterhouseCoopers
LLP as the Company's independent accountants for 2000.
<TABLE>
<S> <C>
For : 31,600,490
Against : 21,512
Abstain : 31,815
Broker Non-Votes : 0
</TABLE>
34
<PAGE> 35
ITEM 5 - OTHER INFORMATION
On April 13, 2000, the Board of Directors authorized a quarterly $0.10
per share cash dividend to be paid on June 2, 2000 to shareholders of record as
of May 12, 2000 of the Company's Common Stock. The Common Stock dividend
reflected a $0.02 per share increase over the prior quarterly dividend.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits
Exhibit 10.100 - Employment Agreement, dated March 7, 2000
between the Company and Edison Velez.
Exhibit 12(a) - Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 12(b) - Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
(i) Form 8-K, dated December 22, 1999, reporting under
Item 5 - "Other Items" the execution of employment
agreements with Salomon Levis, Zoila Levis, Richard
F. Bonini and Mario S. Levis.
(ii) Form 8-K, dated February 4, 2000, reporting under
Item 5 - "Other Items" the appointment of Harold D.
Vicente as a director.
(iii) Form 8-K, dated March 28, 2000, reporting under Item
5 - "Other Items" the expectation that first quarter
results would exceed analysts' expectations.
</TABLE>
35
<PAGE> 36
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.
<TABLE>
<CAPTION>
DORAL FINANCIAL CORPORATION
(Registrant)
<S> <C>
Date: May 12, 2000 /s/ Salomon Levis
--------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: May 12, 2000 /s/ Richard F. Bonin
--------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: May 12, 2000 /s/ Ricardo Melendez
------------------------------
Ricardo Melendez
Vice President
Principal Accounting Officer
</TABLE>
36
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.100 - Employment Agreement, dated March 7, 2000, between the Company and Edison Velez.
12(a) - Computation of Ratio of Earnings to Fixed Charges.
12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
27 - Financial Data Schedule (for SEC use only).
</TABLE>
37
<PAGE> 1
EXHIBIT 10.100
March 7, 2000
Mr. Edison Velez
650 Munoz Rivera Avenue
San Juan, PR 00918
Dear Mr. Velez:
We are pleased to detail herein below the provisions of your employment
agreement with Doral Mortgage Corporation ("DMC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing on January
1, 1999 and ending December 31, 2000 unless sooner terminated as
herein provided. This Agreement supersedes and cancels all prior
employment, personal service or similar agreements between you and DMC
or First Financial Caribbean Corporation ("FFCC") and their respective
subsidiaries, divisions and ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as President of DMC. By your acceptance of this
Agreement, you undertake to accept such employment, to devote your
full time and attention to DMC, and to use your best efforts, ability,
and fidelity in the performance of the duties attaching to such
employment. During the term of your employment hereunder, you shall
not perform any services for any other company, which services
conflict in any way with your obligations under the two preceding
sentences of this Section 2, whether or not such company is
competitive with the businesses DMC or FFCC, provided, however, that
nothing in this Agreement shall preclude you from devoting reasonable
periods required for
(i) serving as a director or member of a committee of any
organization involving no conflict or potential conflict of
interest with the interests of DMC or FFCC;
(ii) delivering lectures, fulfilling speaking engagements,
teaching at educational institutions;
(iii) engaging in charitable and community activities; and
(iv) managing your personal and family investments, provided that
such activities do not interfere with the regular performance
of your duties and responsibilities under this Agreement.
You shall, at all times during the term hereof, be subject to the supervision
and direction of the Chief Executive Officer and Chairman of the Board of DMC
with respect to your duties, responsibilities and the exercise of your powers.
<PAGE> 2
2
3. COMPENSATION
(a) During the term of this Agreement you shall receive an annual
salary of Two Hundred Forty Thousand dollars ($240,000.00)
annually payable no less often than monthly in accordance with
corporate policy.
(b) (i) During the term of this Agreement, you shall also be
entitled to receive an incentive bonus equal to the lesser of
Three Hundred Thousand Dollars ($300,000.00) and (y) Three
Percent (3%) based on the net income of Doral Mortgage
Corporation over and above Three Million Dollars ($3,000,000)
derived from its Mortgage Banking activities (as hereinafter
defined).
(ii) One half (1/2) of the incentive bonus shall be payable
annually by DMC within 120 days following the end of the
preceding fiscal year, provided that such amount shall
only be payable if you shall have served as President to
DMC pursuant to this Agreement for the entire fiscal
year to which such payments relate. As used in this
Section 3, "Net Income" means the annual net income by
DMC and its subsidiaries after all taxes during the
calendar year preceding the payment as determined in
accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods
involved and as shown by DMC's audited financial
statements audited by its independent accountants
(hereinafter referred to as "GAAP"). As used in this
Section 3, "Mortgage Banking Activities, and all
expenses of DMC (including all taxes) shall be deemed to
be related to its Mortgage Banking Activities.
(iii) The remaining one-half (1/2) of the incentive bonus (the
"Deferred Bonus") shall be deferred pursuant to the
deferred compensation arrangement described in Exhibit A
hereto.
(c) You shall be entitled to participate in the other benefit
plans of DMC upon the terms and conditions on which such
benefits are made available to other employees of DMC. Nothing
herein shall obligate DMC to continue any existing benefit
plan or to establish any replacement benefit plan.
(d) You shall be entitled to reimbursement for reasonable travel
and entertainment expenses incurred in connection with the
rendering of your services hereunder. Nothing contained herein
shall authorize you to make any political contributions,
including but not limited to payments for dinners and
advertising in any political party program or any other
payment to any person which might be deemed a bribe, kickback
or otherwise and improper payment under corporate policy or
practice and no portion of the compensation payable hereunder
is for any such purpose.
(e) Payments under this Agreement shall be subject to reduction by
the amount of any applicable federal, Commonwealth, state or
municipal income, withholding, social security, state
disability insurance, or similar or other taxes or other items
which may be required or authorized to be deducted by law or
custom.
(f) No additional compensation shall be due to you for services
performed or offices held in any subsidiary, division,
affiliate, or venture of DMC or FFCC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER MATTERS
(a) Your acceptance of this Agreement will confirm that you
understand and agree that the granting of the incentive
compensation referred to in Section 3 (b) (the "incentive
<PAGE> 3
3
compensation"), and any action thereunder, does not involve
any statement or representation of any kind by DMC as to its
business, affairs, earnings or assets, or as to the tax status
of the incentive compensation or the tax consequences of any
payment thereof, or otherwise. You further agree that any
action at any time taken by or on behalf of DMC or by its
directors or any committee thereof, which might or shall at
any time adversely affect you or the incentive compensation,
may be freely taken notwithstanding any such adverse effect
without your being thereby or otherwise entitled to any right
or claim against DMC, FFCC or any other person or party by
reason thereof.
(b) The incentive compensation is personal to you and is not
transferable or assignable either by your act or by operation
of law, and no assignee, trustee in bankruptcy, receiver or
other party whosoever shall have any right to demand any
incentive compensation or any other right with respect to it.
If, in the event of your death or incapacity, your legal
representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless
otherwise indicated by the context or otherwise required by
any term hereof, references to "you" shall apply to said
representative.
(c) If and when questions arise from time to time as to the
intent, meaning or application of any one or more of the
provisions hereof such questions will be decided by the Board
of Directors of DMC or any Committee appointed to consider
such matters, or, in the event DMC is merged into or
consolidated with any other corporation, by the Board of
Directors (or a Committee appointed by it) of the surviving or
resulting corporation, and the decision of such Board of
Directors or Committee, as the case may be, as to what is a
fair and equitable settlement of each such question or as to
what is a fair and proper interpretation of any provision
hereof or thereof, whatever the effect of such a decision may
be, beneficial or adverse, upon the incentive compensation,
shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you
subject to such condition and understanding. You understand
that the incentive compensation is not held or set aside in
trust and (1) DMC may seek to retain, offset, attach or
similarly place a lien on such funds in circumstances where
you have been discharged for cause and shall be entitled to do
so for (x) malfeasance damaging to DMC, (y) conversion to you
of opportunity of DMC of FFCC, or (z) a violation of FFCC's
conflict of interest policy, in each case as determined in the
sole discretion of the Board of Directors, and (2) in the
event DMC is unable to make any payment under this Agreement
because of insolvency, bankruptcy or similar status or
proceedings, you will be treated as a general unsecured
creditor of DMC and may be entitled to no priority under
applicable law with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one year after
you cease to be an employee of DMC or an affiliate of DMC or FFCC, you
will not, without the prior written consent of DMC, (a) accept
employment or render service to any person, firm or corporation,
directly or indirectly, in competition with DMC or FFCC, or any
affiliate thereof for any purpose which would be competitive with the
mortgage banking business within the Commonwealth of Puerto Rico or any
other geographic area in which DMC or any affiliate of DMC or FFCC by
which you were employed, conducted operations (the "Restricted Area")
or any business by which you were employed within two years prior
thereto (collectively, the "Restricted Businesses") or (b) directly or
indirectly, enter into or in any manner take part in or lend your name,
counsel or assistance to any venture, enterprise, business or endeavor,
whether as proprietor, principal, investor, partner, director, officer,
employee, consultant, adviser, agent, independent contractor or in any
other capacity whatsoever for any purpose which would be competitive
with the Restricted Businesses in the Restricted Area. An investment
not exceeding 5% of the outstanding stock in any corporation regularly
traded on any national securities exchange or in the over-the-counter
market shall not be deemed to violate this provision, provided that you
shall not render any services for such corporation.
<PAGE> 4
4
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for dishonesty,
death, incapacity, or inability to perform the duties of your
employment on a daily basis, resulting from physical or mental
disability caused by illness, accident or otherwise or refusal
to perform the duties and responsibilities of your employment
hereunder, or breach of fidelity to DMC.
(b) At any time following a "Change in Control" of DMC, this
Agreement may be terminated by DMC or you on 30 days' written
notice to you or FFCC, as the case may be, such termination to
be effective as of the end of the calendar year during which
such notice is given. As used herein, a "Change in Control"
shall be deemed to have occurred at such time as any person
other than FFCC or an entity controlled by or under common
control with FFCC ceases to be the owner of at least 51% of
the outstanding voting securities of DMC.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof,
shall terminate and all further obligations of FFCC hereunder
shall cease, provided that in any termination pursuant to
subsection (b) of this Section 6 you shall be entitled to
receive all compensation due to you pursuant to Section 3(a)
hereof (but not 3 (b) --(c)) for the calendar year in which
such date of termination occurs.
You agree that this Section 6 shall create no additional
rights in you to direct the operations of DMC.
7. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any provisions
hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this
Agreement. This Agreement sets forth all of the terms of the
understandings between the parties with reference to the subject matter
set forth herein and may not be waived, changed, discharge or
terminated orally or by any course of dealing between the parties, but
only by an instrument in writing signed by the party against whom any
waiver, change, discharge or termination is sought.
8. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In
the event that any provision, or any portion of any provision, of this
Agreement shall be held to be void and unenforceable, the remaining
provisions of this Agreement, and the remaining portion of any
provision found void or unenforceable in part only, shall continue in
full force and effect.
9. ARBITRATION
Any dispute arising under this Agreement shall be submitted to
arbitration in New York, New York under the rules of the American
Arbitration Association.
10. NOTICES
Any notice or communication required or permitted to be given hereunder
shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt
<PAGE> 5
5
requested, to the address of the intended recipient as herein set forth
or to such other address as a party may therefore have specified in
writing to the other by delivering or mailing in a similar manner. Any
notice or communication intended for DMC shall be addressed to the
attention of its Board of Directors.
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Puerto Rico.
12. MISCELLANEOUS
This Agreement shall be binding upon the successors and assigns of DMC.
This Agreement is personal to you, and you therefore may not assign
your duties under this Agreement. The headings of the Sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof or to affect the meaning hereof.
If the foregoing terms and conditions correctly embody your mutual
understanding with DMC, kindly endorse your acceptance and agreement
therewith in the space below provided, whereupon this shall become a
binding agreement.
Very truly yours,
DORAL MORTGAGE CORPORATION
By: /s/ Salomon Levis
-----------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
Accepted and Agreed to as of the
date first above set forth:
/s/ Edison Velez
---------------------------------
Edison Velez
<PAGE> 1
EXHIBIT 12(A)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
MARCH 31, 2000
----------------
<S> <C>
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $22,593
Plus:
Fixed Charges (excluding capitalized interest) 61,001
-------
TOTAL EARNINGS $83,594
=======
FIXED CHARGES:
Interest expensed and capitalized $62,017
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 493
An estimate of the interest component within rental expense 455
-------
TOTAL FIXED CHARGES $62,965
=======
RATIO OF EARNINGS TO FIXED CHARGES 1.33
=======
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $22,593
Plus:
Fixed Charges (excluding capitalized interest) 47,897
-------
TOTAL EARNINGS $70,490
=======
FIXED CHARGES:
Interest expensed and capitalized $48,913
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 493
An estimate of the interest component within rental expense 455
-------
TOTAL FIXED CHARGES $49,861
=======
RATIO OF EARNINGS TO FIXED CHARGES 1.41
=======
</TABLE>
<PAGE> 1
EXHIBIT 12(B)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE
SECURITY DIVIDENDS
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
MARCH 31, 2000
--------------
<S> <C>
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $22,593
Plus:
Fixed Charges (excluding capitalized interest) 61,001
-------
TOTAL EARNINGS $83,594
=======
FIXED CHARGES:
Interest expensed and capitalized $62,017
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 493
An estimate of the interest component within rental expense 455
-------
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 62,965
-------
Preferred dividend requirements 1,477
Ratio of pre tax income to net income 1.133
-------
PREFERRED DIVIDEND FACTOR 1,673
-------
TOTAL FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS $64,638
=======
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS 1.29
=======
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $22,593
Plus:
Fixed Charges (excluding capitalized interest) 47,897
-------
TOTAL EARNINGS $70,490
=======
FIXED CHARGES:
Interest expensed and capitalized $48,913
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 493
An estimate of the interest component within rental expense 455
-------
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 49,861
-------
Preferred dividend requirements 1,477
Ratio of pre tax income to net income 1.133
-------
PREFERRED DIVIDEND FACTOR 1,673
-------
TOTAL FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS $51,534
=======
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS 1.37
=======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORAL FINANCIAL CORPORATION FOR THE QUARTER ENDED MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 21,444
<INT-BEARING-DEPOSITS> 97,476
<FED-FUNDS-SOLD> 144,358
<TRADING-ASSETS> 1,002,957
<INVESTMENTS-HELD-FOR-SALE> 143,442
<INVESTMENTS-CARRYING> 1,482,409
<INVESTMENTS-MARKET> 1,455,585
<LOANS> 1,572,329
<ALLOWANCE> 6,863
<TOTAL-ASSETS> 4,791,466
<DEPOSITS> 1,087,346
<SHORT-TERM> 2,065,587
<LIABILITIES-OTHER> 141,694
<LONG-TERM> 1,097,803
0
1,495
<COMMON> 42,419
<OTHER-SE> 355,122
<TOTAL-LIABILITIES-AND-EQUITY> 4,791,466
<INTEREST-LOAN> 24,431
<INTEREST-INVEST> 41,843
<INTEREST-OTHER> 5,230
<INTEREST-TOTAL> 71,504
<INTEREST-DEPOSIT> 13,104
<INTEREST-EXPENSE> 47,442
<INTEREST-INCOME-NET> 10,958
<LOAN-LOSSES> 848
<SECURITIES-GAINS> 28,362
<EXPENSE-OTHER> 24,438
<INCOME-PRETAX> 22,593
<INCOME-PRE-EXTRAORDINARY> 22,593
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,276
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 1.03
<LOANS-NON> 7,637
<LOANS-PAST> 70,995
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,136
<CHARGE-OFFS> 158
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 6,863
<ALLOWANCE-DOMESTIC> 6,863
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
