<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 SEPTEMBER 30, 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)
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 offices) (Zip Code)
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 --------------
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 NOVEMBER 14, 2000 - 42,362,634
<PAGE> 2
DORAL FINANCIAL CORPORATION
INDEX PAGE
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2000 (Unaudited) and
December 31, 1999................................................................................ 4
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters ended
September 30, 2000 and September 30, 1999 and nine months ended September 30, 2000 and 5
September 30, 1999 ..............................................................................
Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 2000
and September 30, 1999........................................................................... 6
Consolidated Statements of Changes in Stockholders' Equity as of September 30, 2000
(Unaudited) and December 31, 1999................................................................ 7
Consolidated Statements of Comprehensive Income (Unaudited) - Quarters ended September 30,
2000 and September 30, 1999 and nine months ended September 30, 2000 and
September 30, 1999............................................................................... 8
Notes to Consolidated Financial Statements....................................................... 9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk....................................... 38
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................ 38
Item 2 - Changes in Securities............................................................................ 38
Item 3 - Defaults Upon Senior Securities.................................................................. 38
Item 4 - Submission of Matters to a Vote of Security Holders.............................................. 38
Item 5 - Other Information................................................................................ 38
Item 6 - Exhibits and Reports on Form 8-K................................................................. 39
SIGNATURES..................................................................................................... 40
</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>
September 30, December 31,
2000 1999
(unaudited) (audited)
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,476 $ 25,793
------------ ------------
Money market investments:
Securities purchased under agreements to resell 9,010 21,430
Time deposits with other banks 117,190 246,010
Other short term investments, at cost 143,061 102,796
------------ ------------
Total money market investments 269,261 370,236
------------ ------------
Investment securities and other instruments:
Trading securities, at fair value 1,017,419 862,698
Securities available-for-sale, at fair value 213,688 66,325
Securities held-to-maturity, at amortized cost 1,543,644 1,509,060
Federal Home Loan Bank of NY (FHLB) stock, at cost 35,955 21,645
------------ ------------
Total investment securities and other instruments 2,810,706 2,459,728
------------ ------------
Loans:
Mortgage loans held-for-sale, at lower of cost or market 1,336,314 1,015,703
Loans receivable, net 369,366 231,184
------------ ------------
Total loans 1,705,680 1,246,887
------------ ------------
Receivables and mortgage servicing advances 60,868 56,021
Broker dealer's operations receivable 37,376 158,798
Accrued interest receivable 46,474 42,021
Servicing assets, net 133,822 109,721
Property, leasehold improvements and equipment, net 58,474 37,444
Cost in excess of fair value of net assets acquired, net 9,847 9,964
Real estate held for sale, net 7,008 3,910
Prepaid and other assets 24,300 16,820
------------ ------------
Total assets $ 5,192,292 $ 4,537,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ 2,222,910 $ 1,927,956
Loans payable 372,445 353,460
Deposits 1,204,912 1,010,424
Notes payable 463,208 461,053
Advances from FHLB 290,000 134,000
Broker dealer's operations payable 25,671 154,210
Accrued expenses and other liabilities 141,626 111,258
------------ ------------
Total liabilities 4,720,772 4,152,361
------------ ------------
Commitments and contingencies
------------ ------------
Stockholders' equity:
Preferred Stock ($1 par value, 10,000,000 shares authorized) at aggregate
liquidation preference 124,750 83,210
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
Additional paid-in capital 63,990 59,115
Legal surplus 3,596 3,596
Retained earnings 251,627 205,875
Accumulated other comprehensive income, net of taxes (14,806) (7,243)
Treasury stock at par value, 56,000 shares held (56) (56)
------------ ------------
Total stockholders' equity 471,520 384,982
------------ ------------
Total liabilities and stockholders' equity $ 5,192,292 $ 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 Nine Month Period Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 35,277 $ 20,184 $ 90,353 $ 55,661
Mortgage-backed securities 17,750 15,204 58,010 43,564
Investment securities 27,895 17,324 74,114 36,520
Other interest-earning assets 6,210 3,116 16,354 9,714
---------- ---------- ---------- ----------
Total interest income 87,132 55,828 238,831 145,459
---------- ---------- ---------- ----------
Interest expense:
Loans payable 9,776 5,333 26,490 16,803
Securities sold under agreements to repurchase 36,926 18,595 99,921 49,620
Deposits 16,515 9,662 44,753 24,227
Other borrowed funds 13,496 8,831 35,652 17,559
---------- ---------- ---------- ----------
Total interest expense 76,713 42,421 206,816 108,209
---------- ---------- ---------- ----------
Net interest income 10,419 13,407 32,015 37,250
Provision for loan losses 1,050 878 2,705 1,631
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 9,369 12,529 29,310 35,619
---------- ---------- ---------- ----------
Non-interest income:
Net gain on mortgage loan sales and fees 40,288 21,094 96,042 61,215
Trading account (7,373) 2,109 (7,785) 6,632
Gain on sale of investment securities (277) 1,581 3,157 1,807
Servicing income 6,615 6,170 19,618 18,581
Commissions, fees and other income 2,768 2,064 7,061 4,069
---------- ---------- ---------- ----------
Total non-interest income 42,021 33,018 118,093 92,304
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits, net (See Note f) 10,351 12,721 29,801 33,807
Taxes, other than payroll and income taxes 1,180 776 2,963 1,759
Maintenance 481 420 1,187 1,118
Advertising 1,905 1,415 5,785 4,014
Professional services 1,008 1,081 3,277 3,839
Telephone 983 886 2,908 2,612
Rent 1,502 1,113 4,675 3,270
Amortization of servicing assets 3,578 2,554 9,986 8,274
Depreciation and amortization 1,889 1,196 5,116 3,169
Other, (See Note f) 4,189 4,384 11,109 9,130
---------- ---------- ---------- ----------
Total non-interest expense 27,066 26,546 76,807 70,992
---------- ---------- ---------- ----------
Income before income taxes 24,324 19,001 70,596 56,931
Income taxes 3,286 1,723 8,683 6,714
---------- ---------- ---------- ----------
Net income 21,038 17,278 61,913 50,217
Retained earnings at beginning of period 236,493 181,410 205,875 156,315
Less cash dividends paid:
8% Convertible Cumulative Preferred Stock -- 169 169 507
7% Noncumulative Monthly Income Preferred Stock 1,308 1,308 3,925 3,155
8.35% Noncumulative Monthly Income Preferred Stock 360 -- 360 --
Common stock 4,236 3,234 11,707 8,894
---------- ---------- ---------- ----------
Retained earnings at the end of period $ 251,627 $ 193,977 $ 251,627 $ 193,976
========== ========== ========== ==========
Earnings per share:
Basic $ 0.46 $ 0.39 $ 1.38 $ 1.15
========== ========== ========== ==========
Diluted $ 0.46 $ 0.38 $ 1.38 $ 1.11
========== ========== ========== ==========
</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>
Nine Month Period Ended
September 30,
-------------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 61,913 $ 50,217
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 4,645 2,888
Amortization of interest-only strips held in trading accounts ...................... 9,355 4,673
Amortization of cost in excess of fair value of net assets acquired ................ 471 281
Amortization of servicing assets ................................................... 9,986 8,274
Deferred tax provision (benefit) ................................................... 2,872 (1,073)
Provision for loan losses .......................................................... 2,705 1,631
Origination and purchases of mortgage loans held for sale .......................... (2,106,569) (1,971,846)
Principal repayment and sales of mortgage loans held for sale ...................... 1,192,869 890,108
Purchases of trading securities .................................................... (954,505) (1,084,903)
Principal repayments and sales of trading securities ............................... 1,395,216 1,912,072
Increase in interest only strips, net .............................................. (46,200) (23,549)
Increase in servicing assets ....................................................... (34,087) (28,539)
Increase in receivables and mortgage servicing advances ............................ (4,847) (5,806)
Decrease in broker dealer's operations receivable .................................. 121,422 50,533
Increase in accrued interest receivable ............................................ (4,453) (7,295)
(Decrease) increase in interest payable ............................................ (1,559) 2,497
Decrease in broker dealer's operations payable ..................................... (128,539) (50,085)
Increase (decrease) in accounts payable and other liabilities ...................... 23,297 (4,827)
Increase in prepaid and other assets ............................................... (7,480) (2,742)
----------- -----------
Total adjustments .............................................................. (525,401) (307,708)
----------- -----------
Net cash used in operating activities .......................................... (463,488) (257,491)
----------- -----------
Cash flows from investing activities:
Purchase of securities held to maturity ............................................ (128,895) (495,036)
Principal repayments and maturities of securities held to maturity ................. 42,152 77,586
Origination of loans receivable .................................................... (275,177) (82,431)
Principal repayments of loans receivable ........................................... 134,675 47,858
Purchases of securities available for sale ......................................... (383,163) (664,516)
Principal repayments and sales of securities available for sale .................... 319,917 358,109
Purchase of FHLB stock ............................................................. (14,310) (9,406)
Purchase of property, leasehold improvements and equipment ......................... (25,675) (14,209)
(Increase) decrease in real estate held for sale ................................... (3,098) 196
----------- -----------
Net cash used in investing activities .......................................... (333,574) (781,849)
----------- -----------
Cash flows from financing activities:
Increase in deposits ............................................................... 194,488 311,470
Increase in securities sold under agreements to repurchase ......................... 294,954 318,264
Increase (decrease) in loans payable ............................................... 18,985 (51,173)
Issuance of preferred stock ........................................................ 48,349 72,065
Increase in FHLB advances .......................................................... 156,000 72,000
Increase in goodwill related to the purchase price of subsidiary ................... -- (4,941)
Increase in notes payable .......................................................... 2,155 208,976
Dividends declared and paid ........................................................ (16,161) (12,556)
----------- -----------
Net cash provided by financing activities ...................................... 698,770 914,105
----------- -----------
Net decrease in cash and cash equivalents ............................................ (98,292) (125,235)
Cash and cash equivalents at beginning of period ..................................... 396,029 344,696
----------- -----------
Cash and cash equivalents at the end of period ....................................... $ 297,737 $ 219,461
=========== ===========
Cash and cash equivalent includes:
Cash and due from banks ........................................................... $ 28,476 $ 24,152
Money market investments .......................................................... 269,261 195,309
----------- -----------
$ 297,737 $ 219,461
=========== ===========
Supplemental schedule of non-cash activities
Loan securitizations .............................................................. $ 596,406 $ 975,059
=========== ===========
Reclassification of available-for-sale to held-to-maturity category ............... $ -- $ 592,200
=========== ===========
Conversion of preferred stock ..................................................... $ 1,934 $ --
=========== ===========
Supplemental cash flows information:
Cash used to pay interest ......................................................... $ 208,375 $ 105,712
=========== ===========
Cash used to pay income taxes ..................................................... $ 6,290 $ 8,403
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousand of dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
------------- ------------
<S> <C> <C>
PREFERRED STOCK:
Balance at beginning of period $ 83,210 $ 8,460
Shares converted (8% convertible) (8,460) --
Shares issued (7% noncumulative monthly income) -- 74,750
Shares issued (8.35% noncumulative monthly income) 50,000 --
---------- ----------
Balance at end of period 124,750 83,210
---------- ----------
COMMON STOCK:
Balance at beginning of period 40,485 40,485
Shares converted 1,934 --
---------- ----------
Balance at end of period 42,419 40,485
---------- ----------
ADDITIONAL PAID-IN-CAPITAL:
Balance at beginning of period 59,115 61,800
Issuance cost of preferred stock (1,651) (2,685)
Shares converted 6,526 --
---------- ----------
Balance at end of period 63,990 59,115
---------- ----------
LEGAL SURPLUS:
Balance at beginning of period 3,596 2,499
Transfer from retained earnings -- 1,097
---------- ----------
Balance at end of period 3,596 3,596
---------- ----------
RETAINED EARNINGS:
Balance at beginning of period 205,875 156,315
Net income 61,913 67,926
Cash dividends declared on common stock (11,707) (12,129)
Cash dividends declared on preferred stock (4,454) (5,140)
Transfer to legal surplus -- (1,097)
---------- ----------
Balance at end of period 251,627 205,875
---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME NET OF TAXES:
Balance at beginning of period (7,243) 56
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes (7,563) (7,299)
---------- ----------
Balance at end of period (14,806) (7,243)
---------- ----------
TREASURY STOCK AT COST: (56) (56)
---------- ----------
Total stockholders' equity $ 471,520 $ 384,982
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income: $ 21,038 $ 17,278 $ 61,913 $ 50,217
-------- -------- -------- --------
Other comprehensive income, net of tax:
Unrealized net losses on securities arising during the period
(net of taxes of $2.4 million - 2000 and $234,000 - 1999 for the
quarters; and $1.4 million - 2000 and $4.4 million - 1999 for the
nine months.) (3,694) (366) (2,247) (6,824)
Less: reclassification adjustment for (gains) losses included in net
income (net of taxes of $1.9 million - 2000 and $100,000 - 1999 for
the quarters; and $3.4 million - 2000 and $292,000 - 1999 for the nine
months) 2,909 (156) 5,316 (457)
-------- -------- -------- --------
Other comprehensive income (loss) (6,603) (210) (7,563) (6,367)
-------- -------- -------- --------
Comprehensive income, net of taxes $ 14,435 $ 17,068 $ 54,350 $ 43,850
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
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., Doral
International, 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 and nine month periods ended
September 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
c. Cash dividends per share paid for the quarter and nine month periods
ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTH PERIOD
SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
8% Convertible Cumulative Preferred Stock $ -0- $ 20.00 $ 20.00 $ 60.00
7% Noncumulative Monthly Income Preferred Stock $ 0.88 $ 0.88 $ 2.64 $ 2.12
8.35% Noncumulative Monthly Income
Preferred Stock $ 0.18 $ -- $ 0.18 $ --
Common Stock $ 0.10 $ 0.08 $ 0.28 $ 0.22
</TABLE>
d. At September 30, 2000, escrow funds include approximately $64.1 million
deposited with Doral Bank PR. These funds are included in the Company's
financial statements. Escrow funds also include approximately $3.8
million deposited with other banks which are excluded from the
Company's assets and liabilities.
e. The number of average shares of common stock used for computing the
basic and diluted net income per share was as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 42,362,634 40,428,920 41,718,063 40,428,920
Diluted 42,571,789 42,366,149 41,788,390 42,413,421
</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.
9
<PAGE> 10
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 NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
(IN THOUSANDS) (IN THOUSANDS)
------------------------------ ------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Employee costs, gross $ 15,720 $ 17,342 $ 47,935 $ 51,594
Deferred costs pursuant to SFAS No. 91 5,369 4,621 18,134 17,787
---------- ---------- ---------- ----------
Employee cost, net $ 10,351 $ 12,721 $ 29,801 $ 33,807
========== ========== ========== ==========
Other expenses, gross $ 6,056 $ 5,296 $ 16,552 $ 14,263
Deferred costs pursuant to SFAS No. 91 1,867 912 5,443 5,133
---------- ---------- ---------- ----------
Other expenses, net $ 4,189 $ 4,384 $ 11,109 $ 9,130
========== ========== ========== ==========
</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 SEPTEMBER 30, 2000
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ (2,252) 11,014 448 159 $ 9,369
Non-interest income $ 127,851 6,991 1,512 (94,333) $ 42,021
Net income $ 107,471 7,826 (83) (94,176) $ 21,038
Identifiable assets $ 2,798,665 2,348,446 727,132 (681,951) $ 5,192,292
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 3,372 8,378 561 218 $ 12,529
Non-interest income $ 29,265 2,419 1,817 (483) $ 33,018
Net income $ 12,752 4,363 426 (263) $ 17,278
Identifiable assets $ 2,293,034 1,543,181 679,058 (691,898) $ 3,823,375
</TABLE>
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Mortgage Broker
Banking Banking Dealer Eliminations Totals
----------- ---------- -------- ------------ ------------
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ (5,049) 32,036 1,657 666 $ 29,310
Non-interest income $ 196,510 11,481 5,530 (95,428) $ 118,093
Net income $ 135,981 19,910 785 (94,763) $ 61,913
Identifiable assets $ 2,798,665 2,348,446 727,132 (681,951) $ 5,192,292
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30,1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 14,199 19,075 1,729 616 $ 35,619
Non-interest income $ 81,381 7,473 4,760 (1,310) $ 92,304
Net income $ 40,052 9,797 1,062 (694) $ 50,217
Identifiable assets $ 2,293,034 1,543,181 679,058 (691,898) $ 3,823,375
</TABLE>
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.
1. The following table summarizes Doral Financial's holdings of trading
securities as of September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
TRADING SECURITIES SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
Mortgage-backed securities.................. $ 893,952 $ 757,080
Interest-only strips........................ 121,138 84,293
U.S. Treasury and agencies.................. 824 15,041
Puerto Rico government obligations.......... 254 6,284
Other....................................... 1,251 --
---------- ----------
Total.............................. $1,017,419 $ 862,698
========== ==========
</TABLE>
2. 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 September
30, 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.
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF SEPTEMBER 30, 2000 COST GAINS LOSSES VALUE YIELD
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE-BACKED SECURITIES
GNMA
Due over 10 years $ 14,399 $ 42 $ 39 $ 14,402 7.48%
FNMA - FHLMC
Due over 10 years 8,613 65 17 8,661 7.60%
DEBT SECURITIES
US TREASURY
Due within a year 10,570 -- 358 10,212 6.25%
Due from 5 to 10 years 69,611 -- 1,536 68,075 5.50%
Due over 10 years 117,464 -- 5,126 112,338 6.25%
--------- --------- --------- --------- ---------
$ 220,657 $ 107 $ 7,076 $ 213,688 6.15%
========= ========= ========= ========= =========
<CAPTION>
WEIGHTED
SECURITIES AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF DECEMBER 31, 1999 COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DEBT SECURITIES
US TREASURY
Due from 5 to 10 years $ 68,648 $ -- $ 2,323 $ 66,325 5.50%
=========== =========== ========== ========== ==========
</TABLE>
3. 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
September 30, 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.
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES HELD-TO-MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF SEPTEMBER 30, 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 $ 2,565 $ 68 $ -- $ 2,633 6.60%
Due over 10 years 21,731 766 13 22,484 6.99%
CMO CERTIFICATES
Due from 1 to 5 years 3,228 -- 15 3,213 6.14%
Due from 5 to 10 years 5,630 -- 25 5,605 6.25%
Due over 10 years 124,768 837 482 125,123 5.95%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from 1 to 5 years 4,903 -- 103 4,800 6.22%
Due from 5 to 10 years 9,996 -- 321 9,675 6.41%
FEDERAL HOME LOAN BANK NOTES
Due within a year 40,000 -- 1,137 38,863 7.40%
Due from 1 to 5 years 31,539 -- 746 30,793 7.38%
Due from 5 to 10 years 92,595 18 1,946 90,667 7.91%
Due over 10 years 604,789 -- 28,071 576,718 6.84%
ZERO COUPON
Due from 5 to 10 years 193,279 -- -- 193,279 7.50%
Due over 10 years 155,499 -- 540 154,959 7.89%
PR HOUSING BANK NOTES
Due over 10 years 5,000 -- 200 4,800 6.20%
U.S. TREASURY
Due within a year 1,376 24 -- 1,400 5.29%
Due from 5 to 10 years 70,031 319 -- 70,350 6.00%
Due over 10 years 174,715 -- 12,240 162,475 5.29%
ECONOMIC DEVELOPMENT BANK NOTE
Due from 1 to 5 years 2,000 -- -- 2,000 6.60%
---------- ---------- ---------- ---------- ----
$1,543,644 $ 2,032 $ 45,839 $1,499,837 6.82%
========== ========== ========== ========== ====
</TABLE>
13
<PAGE> 14
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>
14
<PAGE> 15
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 SEPTEMBER 30, 2000 AS OF DECEMBER 31, 1999
------------------------ -------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Construction loans $189,303 47% $114,853 41%
Residential mortgage loans 82,447 20% 70,659 26%
Commercial real estate 32,428 8% 32,383 12%
Consumer--secured by mortgage 2,281 1% 3,317 1%
Consumer--other 15,064 4% 11,629 4%
Commercial non-real estate 33,678 8% 16,989 6%
Loans on saving deposits 10,676 3% 7,793 3%
Land secured 41,061 9% 19,927 7%
-------- --- -------- ---
Loans receivable, gross(1) 406,938 100% 277,550 100%
-------- --- -------- ---
Less:
Undisbursed portion of loans
in process (28,317) (40,571)
Unearned interest and deferred
loan fees (5,170) (3,655)
Allowance for loan losses(2) (4,085) (2,140)
-------- --------
(37,572) (46,366)
-------- --------
Loans receivable, net $369,366 $231,184
======== ========
</TABLE>
--------------
(1) Does not include mortgage loans held-for-sale by Doral Financial
of $1.3 billion as of September 30, 2000 and $1.0 billion as of
December 31, 1999.
(2) Does not include $4.3 million and $4.0 million of allowance for loan
losses allocated to mortgage loans held-for-sale as of September 30,
2000 and December 31, 1999, respectively.
j. Doral Financial is the guarantor of various serial and term bonds
issued by Doral Properties, a wholly-owned subsidiary, through Puerto
Rico's industrial development 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.
15
<PAGE> 16
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 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. Doral
Financial is the leading originator and servicer of mortgage loans on
single-family residences in Puerto Rico. The volume of loans originated and
purchased during the quarters ended September 30, 2000 and 1999 by Doral
Financial was approximately $780 million and $601 million, respectively. For the
nine month periods ended September 30, 2000 and 1999 the volume of loans
originated and purchased was approximately $2.4 billion and $2.1 billion,
respectively. Doral Financial's mortgage servicing portfolio increased to
approximately $8.6 billion as of September 30, 2000, from $7.3 billion as of the
same date a year ago, an increase of 18%. 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. At September 30, 2000, Doral Financial held securities for trading
with a fair market value of $1.0 billion, approximately $809.9 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.
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 third quarter of 2000 the Company purchased
$35.4 million in securities classified as held-to-maturity. As of September 30,
2000, Doral Financial held approximately $1.5 billion in securities and other
investments that are classified as held-to-maturity. As of September 30, 2000,
Doral Financial also held $213.7 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 September 30, 2000 and 1999, Doral Financial's
banking subsidiaries contributed approximately $7.8 million and $4.4 million, or
37% and 25%, respectively, to the Company's consolidated net income, which
includes the operations of Doral Money, Inc., a wholly-owned subsidiary of Doral
Bank PR. For the first nine months of 2000 and 1999, Doral Financial's banking
subsidiaries contributed approximately $19.9 million and $9.8 million, or 32%
and 20% respectively, to Doral Financial's consolidated net income.
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
quarter ended September 30, 2000 and 1999, Doral Securities' net loss and net
income was approximately $83,000 and $426,000, respectively. For the nine month
period ended September 30, 2000 and 1999, Doral Securities' net income was
approximately $785,000 and $1.1 million respectively. Results for the quarter
and nine month period ended September 30, 2000 reflect increased compensation
expense related to the recruitment of brokers during prior periods. Assets in
customer brokerage accounts increased to $273.5 million as of September 30,
2000, from $165.3 million as of the same date a year ago, an increase of 65%.
For information regarding net interest income after provision for loan
losses, non-interest income, net income and identifiable assets broken down by
Doral Financial's mortgage banking, banking and investment broker-dealer
segments, please refer to note "g" of Doral Financial's Consolidated Financial
Statements (unaudited).
16
<PAGE> 17
Unlike many holding companies, Doral Financial has significant assets
and operations at the holding company level. HF Mortgage Bankers, one of Doral
Financial's principal mortgage units, is organized as an operating division
within the parent company. As of September 30, 2000, Doral Financial had assets
and net income of $2.6 billion and $125.4 million, respectively, at the parent
company level.
RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 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 Doral Financial's revenues; (iv) the elements of
risk inherent to loan activities; and (v) Doral Financial'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 NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
2000 1999 2000 1999
------ ------ ------ -----
<S> <C> <C> <C> <C>
FHA/VA mortgage loans
Number of loans ....................... 1,728 2,272 5,087 7,006
Volume of loans ....................... $152,995 $186,850 $ 464,314 $ 572,832
Percent of total volume ............... 20% 31% 20% 28%
Conventional conforming mortgage loans
Number of loans ....................... 816 1,142 7,082 7,219
Volume of loans ....................... $101,808 $ 93,417 $ 434,939 $ 636,739
Percent of total volume ............... 13% 15% 18% 31%
Conventional non-conforming mortgage loans(1)(2)
Number of loans ....................... 4,815 3,327 12,559 7,837
Volume of loans ....................... $354,534 $214,724 $1,056,209 $ 575,681
Percent of total volume ............... 45% 36% 44% 28%
Other(3)
Number of loans ....................... 367 578 985 1,214
Volume of loans ....................... $170,184 $106,355 $ 426,284 $ 269,025
Percent of total volume ............... 22% 18% 18% 13%
Total loans
Number of loans ....................... 7,726 7,319 25,713 23,276
Volume of loans ....................... $779,521 $601,346 $2,381,746 $2,054,277
Average initial loan balance ..................... $100,896 $ 82,162 $ 92,628 $ 88,257
</TABLE>
--------------------
(1) Includes $18.1 million and $8.3 million in second mortgages for the
quarters ended September 30, 2000 and 1999, respectively, and $48.0
million and $15.8 million in second mortgages for the nine month
periods ended September 30, 2000 and 1999.
(2) Includes $ 13.9 million and $11.7 million in home equity or personal
loans secured by real estate mortgages of up to $40,000 for the
quarters ended September 30, 2000 and 1999, respectively, and $ 47.9
million and $25.8 million for the nine month periods ended September
30, 2000 and 1999.
(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.
17
<PAGE> 18
A substantial portion of Doral Financial's total mortgage loan
originations has consistently been comprised of refinance loans. For the nine
months ended September 30, 2000 and 1999, refinance loans represented
approximately 41% and 57%, 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. However, the
Company believes that refinancing activity is less sensitive to interest rate
changes in Puerto Rico than in the mainland United States because a significant
amount of refinance loans are made for debt consolidation purposes.
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>
NINE MONTH PERIOD ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
2000 1999
---------------------------------------- ---------------------------------------
PUERTO RICO US TOTAL PUERTO RICO US TOTAL
----------- --- ----- ----------- --- -----
<S> <C> <C> <C> <C> <C> <C>
Retail....................................... 37% -- 37% 46% -- 46%
Wholesale.................................... 34% 1% 35% 25% 8% 33%
New Housing Developments..................... 10% -- 10% 8% -- 8%
Multi-family................................. -- 2% 2% -- 5% 5%
Other(1)..................................... 16% -- 16% 8% -- 8%
</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 third quarters
of 2000 and 1999, Doral Financial purchased servicing rights to approximately
$20.4 million and $35.0 million, respectively, in principal amount of mortgage
loans. For the nine month periods ended September 30, 2000 and 1999 the Company
purchased servicing rights to approximately $139.9 and $168.9 million,
respectively. 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.
18
<PAGE> 19
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 SEPTEMBER 30,
--------------------------------
2000 1999
---------- ----------
<S> <C> <C>
COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END
GNMA ....................................................... $3,009,818 $2,550,686
FHLMC/FNMA ................................................. 2,137,235 2,114,013
Doral Financial grantor trusts ............................. 91,901 117,113
Other conventional mortgage loans(1) ....................... 3,317,913 2,554,349
---------- ----------
Total servicing portfolio .................................. $8,556,867 $7,336,161
========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED
Number of loans ............................................ 125,685 112,211
Weighted average interest rate ............................. 7.76% 7.44%
Weighted average remaining maturity (months) ............... 253 220
Weighted average servicing fee rate ........................ .3193% .3883%
Average servicing portfolio ................................ $8,109,619 $6,469,539
Principal prepayments ...................................... $ 420,093 $ 565,960
Prepayments to average portfolio (annualized) .............. 7% 12%
Average size of loans prepaid .............................. $ 48,426 $ 52,312
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD END
60-89 days past due ........................................ 1.56% 1.46%
90 days or more past due ................................... 2.25% 2.14%
---------- ----------
Total delinquencies excluding foreclosures ................. 3.81% 3.60%
========== ==========
Foreclosures pending ....................................... 0.98% 1.47%
========== ==========
SERVICING PORTFOLIO ACTIVITY
Beginning servicing portfolio .............................. $7,633,181 $6,186,059
Add:
Loans funded and purchased(2) ....................... 1,335,740 1,821,374
Bulk servicing acquired ............................. 139,893 168,867
Less:
Servicing sales transferred ......................... 118,786 --
Run-off(3) .......................................... 433,161 840,139
---------- ----------
Ending servicing portfolio ................................. $8,556,867 $7,336,161
========== ==========
</TABLE>
-------------------
(1) Includes $1.0 billion and $1.1 billion of loans owned by Doral
Financial at September 30, 2000 and 1999, respectively, which
represented 12% and 14% of the total servicing portfolio as of such
dates.
(2) Excludes approximately $1.0 billion and $232.9 million of commercial,
construction and loans sold with servicing released in Doral
Financial's mortgage servicing portfolio as of September 30, 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 September 30, 2000 and 1999, less than 7% and
10%, respectively, of Doral Financial's mortgage servicing portfolio was related
to mortgages secured by real property located outside Puerto Rico.
19
<PAGE> 20
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 September 30, 2000
increased $3.7 million, or 22%, from $17.3 million for the 1999 period to $21.0
million for the 2000 period. For the first nine months of 2000 and 1999, the
Company's net income amounted to $61.9 million and $50.2 million, respectively
an increase of 23%. Consolidated results include the operations of Doral Bank PR
and Doral Bank NY, Doral Financial's banking units, which contributed
approximately $19.9 million to Doral Financial's consolidated net income for the
first nine months of 2000, compared to $9.8 million for the respective 1999
period. Doral Securities, Doral Financial's investment banking and broker-dealer
unit, contributed $785,000 to consolidated net income for the first nine months
of 2000, compared to $1.1 million for the respective 1999 period. Diluted
earnings per common share for the third quarter of 2000 were $0.46 an increase
of 22% over the $0.38 per diluted share recorded for the same period a year ago.
Diluted earnings per common share for the first nine months of 2000 increased by
24% when compared to the same period of 1999, from $1.11 for 1999 to $1.38 for
2000.
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.
Net interest income for the third quarter of 2000 and 1999 was $10.4
million and $13.4 million, respectively. For the first nine months of 2000 and
1999 net interest income amounted to $32.0 million and $37.3 million,
respectively. The reduction in net interest income is due in part to the
reduction of the spread between long-term and short-term interest rates and the
increase in market interest rates, which affects borrowing costs.
The Company's banking subsidiaries contributed approximately $11.0
million to the consolidated net interest income after provision for loan losses
of Doral Financial for the quarter ended September 30, 2000, compared to $8.4
million to consolidated net interest income for the quarter ended September 30,
1999. During the first nine months of 2000, the Company's banking subsidiaries
contributed approximately $32.0 million to the consolidated net interest income
after provision for loan losses, compared to $19.1 million for the first nine
months of 1999.
20
<PAGE> 21
The following tables 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 SEPTEMBER 30,
-------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Total Loans(1) $1,744,225 $35,277 8.09% $1,089,439 $20,184 7.41%
Mortgage-Backed Securities 1,024,512 17,750 6.93% 824,543 15,204 7.38%
Investment Securities 1,743,481 27,895 6.40% 1,045,806 17,324 6.63%
Other Interest-Earning Assets(2) 361,582 6,210 6.87% 207,830 3,116 6.00%
---------- ------- ---- ---------- ------- ----
Total Interest-Earning Assets/Interest Income 4,873,800 $87,132 7.15% 3,167,618 $55,828 7.05%
======= ==== ========== ======= ====
Total Non-Interest-Earning Assets 474,405 432,618
---------- ----------
Total Assets $5,348,205 $3,600,236
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 503,263 $ 9,776 7.77% $ 334,948 $ 5,333 6.37%
Repurchase Agreements 2,300,713 36,926 6.42% 1,462,861 18,595 5.08%
Deposits 1,150,852 16,515 5.74% 830,305 9,662 4.65%
Other Borrowed Funds(3) 722,673 13,496 7.47% 432,945 8,831 8.16%
---------- ------- ---- ---------- ------- ----
Total Interest-Bearing Liabilities/Interest Expense 4,677,501 $76,713 6.56% 3,061,059 $42,421 5.54%
======= ==== ======= ====
Total Non-Interest-Bearing Liabilities 225,955 172,446
---------- ----------
Total Liabilities 4,903,456 3,233,505
Stockholders' Equity 444,749 366,731
---------- ----------
Total Liabilities and Stockholders' Equity $5,348,205 $3,600,236
========== ==========
Net Interest-Earning Assets $ 196,299 $ 106,559
Net Interest Income $10,419 $13,407
Interest Rate Spread(4) 0.59% 1.51%
Interest Rate Margin(4) 0.86% 1.69%
Net Interest-Earning Assets Ratio 104.20% 103.48%
</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.
21
<PAGE> 22
TABLE E
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2000 1999
---------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS: BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Total Loans(1) $1,498,391 $90,353 8.04% $1,009,889 $ 55,661 7.35%
Mortgage-Backed Securities 1,108,662 58,010 6.98% 798,515 43,564 7.27%
Investment Securities 1,566,072 74,114 6.31% 747,320 36,520 6.52%
Other Interest-Earning Assets(2) 355,439 16,354 6.13% 252,064 9,714 5.14%
---------- -------- ---- ---------- -------- ----
Total Interest-Earning Assets/Interest Income 4,528,564 $238,831 7.03% 2,807,788 $145,459 6.91%
======== ==== ======== ====
Total Non-Interest-Earning Assets 477,907 446,980
---------- ----------
Total Assets $5,006,471 $3,254,768
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 466,588 $26,490 7.57% $ 374,398 $ 16,803 5.98%
Repurchase Agreements 2,203,134 99,921 6.05% 1,304,905 49,620 5.07%
Deposits 1,130,129 44,753 5.28% 711,368 24,227 4.54%
Other Borrowed Funds(3) 635,128 35,652 7.48% 308,640 17,559 7.59%
---------- ------- ---- ---------- ------- ----
Total Interest-Bearing Liabilities/
Interest Expense 4,434,979 $206,816 6.22% 2,699,311 $108,209 5.35%
======== ==== ======== ====
Total Non-Interest-Bearing Liabilities 155,425 209,598
---------- ==========
Total Liabilities 4,590,404 2,908,909
Stockholders' Equity 416,067 345,859
---------- ----------
Total Liabilities and Stockholders' Equity $5,006,471 $3,254,768
========== ==========
Net Interest-Earning Assets $ 93,585 $ 108,477
Net Interest Income $ 32,015 $ 37,250
Interest Rate Spread(4) 0.81% 1.56%
Interest Rate Margin(4) 0.94% 1.77%
Net Interest-Earning Assets Ratio 102.11% 104.02%
</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 interest-bearing liabilities. Interest rate margin represents
net interest income on an annualized basis as a percentage of average
interest-earning assets.
Doral Financial's interest rate spread and interest rate margin for
the quarter and nine months ended September 30, 2000 are adversely affected by
the relatively small interest rate spread earned on the repurchase operation
maintained by its securities unit.
The following tables 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.
22
<PAGE> 23
TABLE F
NET INTEREST INCOME ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
-----------------------------------------------
2000 COMPARED TO 1999
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
-------- -------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
TOTAL LOANS $ 12,130 $ 2,963 $ 15,093
MORTGAGE-BACKED SECURITIES 3,687 (1,141) 2,546
INVESTMENT SECURITIES 11,557 (986) 10,571
OTHER INTEREST EARNING ASSETS 2,305 789 3,094
-------- -------- ---------
TOTAL INTEREST-EARNING ASSETS 29,679 1,625 31,304
-------- -------- ---------
INTEREST-BEARING LIABILITIES
LOANS PAYABLE 2,680 1,763 4,443
REPURCHASE AGREEMENTS 10,651 7,680 18,331
DEPOSITS 3,730 3,123 6,853
OTHER BORROWED FUNDS 5,910 (1,245) 4,665
-------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES 22,971 11,321 34,292
-------- -------- ---------
NET INTEREST-EARNING ASSETS $ 6,708 $ (9,696) $ (2,988)
======== ======== =========
</TABLE>
TABLE G
NET INTEREST INCOME ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------------------
2000 COMPARED TO 1999
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
-------- -------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
TOTAL LOANS $ 26,924 $ 7,768 $ 34,692
MORTGAGE-BACKED SECURITIES 16,921 (2,475) 14,446
INVESTMENT SECURITIES 40,011 (2,417) 37,594
OTHER INTEREST EARNING ASSETS 3,984 2,656 6,640
-------- -------- ---------
TOTAL INTEREST-EARNING ASSETS 87,840 5,532 93,372
-------- -------- ---------
INTEREST-BEARING LIABILITIES
LOANS PAYABLE 4,138 5,549 9,687
REPURCHASE AGREEMENTS 34,156 16,145 50,301
DEPOSITS 14,262 6,264 20,526
OTHER BORROWED FUNDS 18,575 (482) 18,093
-------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES 71,131 27,476 98,607
-------- -------- ---------
NET INTEREST-EARNING ASSETS $ 16,709 $(21,944) $ (5,235)
======== ======== =========
</TABLE>
23
<PAGE> 24
INTEREST INCOME
Total interest income increased from approximately $55.8 million
during the third quarter of 1999, to $87.1 million during the third quarter of
2000, an increase of 56%. For the first nine months of 2000, interest income
increased by approximately $93.4 million, to $238.8 million compared to $145.5
million for the first nine months of 1999. The increases in interest income
during both periods is primarily related to the increase in Doral Financial's
total average interest-earning assets, which increased from $2.8 billion at
September 30, 1999 to $4.5 billion at September 30, 2000.
Interest income on loans increased by $15.1 million or 75% during the
third quarter of 2000, as compared to the respective 1999 period. For the first
nine months of 2000, interest income on loans increased by $34.7 million or 62%,
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 third quarter of
2000 increased by 17% compared to the respective 1999 period. For the quarters
ended September 30, 2000 and 1999, interest income on mortgage-backed securities
amounted to $17.8 million and $15.2 million, respectively. During the first nine
months of 2000, interest income on mortgage-backed securities was $58.0 million,
versus $43.6 million for the comparable 1999 period. The results for the 2000
periods 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 received.
Interest income on investment securities increased by $10.6 million
during the third quarter of 2000, as compared to the same period of 1999, from
$17.3 million to $27.9 million. Interest income on these securities was $74.1
for the nine months ended September 30, 2000 as compared to $36.5 million for
the same period a year ago. These results reflect the increase in the average
balance of investment securities held during the period to $1.6 billion as of
September 30, 2000, compared to $747.3 million as of September 30, 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 $3.1
million or 99% for the quarter ended September 30, 2000 as compared to the same
quarter a year ago. Interest income on other interest earning assets was $16.3
million for the nine months ended September 30, 2000, as compared to $9.7
million for the comparable period of 1999. 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 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 $76.7 million during the third
quarter of 2000, compared to $42.4 million for the respective 1999 period, an
increase of 81%. Total interest expense for the first nine months of 2000 was
$206.8 million, as compared to $108.2 million for the same period of 1999, an
increase of 91%. The increase in interest expense for the 2000 periods was due
primarily to the increase in the average amount of interest-bearing liabilities,
used to fund Doral Financial's growth in interest-earning assets as well as in
increase in the average cost of borrowings. Average interest-bearing liabilities
increased to $4.4 billion at an average cost of 6.22% as of September 30, 2000,
compared to $2.7 billion at an average cost of 5.35% as of September 30, 1999.
24
<PAGE> 25
Interest expense related to loans payable increased by $4.4 million or
83% during the third quarter of 2000 as compared to the same period of 1999 as a
result of higher borrowing costs. For the first nine months of 2000, interest
expense associated with loans payable was $26.5 million, an increase of 58% from
$16.8 million for the first nine months ended September 30, 1999. The
weighted-average interest rate cost for borrowings under Doral Financial's loans
payable was 7.77% and 6.37% for the third quarters of 2000 and 1999,
respectively, and 7.57% and 5.98% for the nine month periods then ended,
respectively.
Interest expense related to securities sold under agreements to
repurchase increased by $18.3 million or 99% during the third quarter of 2000 as
compared to the same period of 1999. During the first nine months of 2000,
interest expense related to securities sold under agreements to repurchase was
$100.0 million, versus $50.0 million for the corresponding 1999 period, an
increase of 100%. The increase during these periods reflected increased
borrowings to finance mortgage-backed securities and other investment securities
as well as higher borrowing costs. The weighted average interest rate cost of
borrowings under repurchase agreements was 6.42% and 5.08% for the third
quarters of 2000 and 1999, respectively.
Interest expense on deposits increased by $6.9 million, or 71%, for
the third quarter of 2000 as compared to the respective 1999 period. For the
first nine months of 2000, interest expense on deposits was $44.8 million, an
increase of 85% over the $24.2 million recorded for the same period of 1999.
This increase is primarily related to a higher deposit base, which increased to
$1.2 billion as of September 30, 2000, from $844.6 million as of the same date a
year ago. The increase in deposits reflects the expansion of Doral Financial's
banking subsidiaries branch network which included 20 branches as of September
30, 2000, compared to 15 branches as of September 30, 1999. This expansion trend
is expected to continue throughout the remainder of 2000 and into 2001. The
average interest cost on deposits was 5.74% and 5.28%, respectively, for the
quarter and nine month periods ended September 30, 2000, as compared to 4.65%
and 4.54% for the respective 1999 periods.
Interest expense on other borrowed funds was $13.5 million for the
quarter ended September 30, 2000, as compared to $8.8 million for the same
period a year ago, an increase of 53%. For the first nine months of 2000,
interest expense on other borrowed funds increased by 102%, to $35.7 million
from $17.6 million in 1999. The increase is primarily related to an increase in
borrowings from the FHLB-NY and the issuance of $200 million of medium term
notes in May 1997. For the third quarter and first nine months of 2000, the
weighted average interest rate for other borrowed funds was 7.47% and 7.48%,
respectively, compared to 8.16% and 7.59%, respectively, for the corresponding
1999 periods.
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.
25
<PAGE> 26
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 H
ALLOWANCE FOR LOAN LOSSES AND OREO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
OREO:
Balance at beginning of period .............. $ 1,223 $ 791 $ 910 $ 1,011
Provision for losses ........................ 135 135 405 485
Net gains, charge-offs and others ........... 6 (93) 49 (663)
------- ------- ------- -------
Balance at end of period ......................... $ 1,364 $ 833 $ 1,364 $ 833
======= ======= ======= =======
Allowance for Loan Losses(1):
Balance at beginning of period ................... $ 7,447 $ 5,405 $ 6,136 $ 5,166
Provision for loan losses ........................ 1,050 878 2,705 1,631
------- ------- ------- -------
Charge - offs:
Mortgage loans held-for-sale ................ (5) (690) (120) (1,134)
Construction ................................ -- -- -- --
Residential mortgage loans .................. -- (24) -- (24)
Commercial real estate ...................... -- -- -- --
Consumer .................................... (131) (82) (409) (241)
Commercial non-real estate .................. (84) (17) (158) (17)
Other ....................................... -- (25) (53) (89)
------- ------- ------- -------
Total Charge-offs ................................ (220) (838) (740) (1,505)
------- ------- ------- -------
Recoveries:
Mortgage loans held-for-sale ................ -- 90 14 229
Construction ................................ -- -- -- --
Residential mortgage loans .................. -- -- 104 --
Commercial real estate ...................... -- -- -- --
Consumer .................................... 27 24 85 38
Commercial non-real estate .................. 50 -- 50 --
Other ....................................... 6 48 6 48
------- ------- ------- -------
Total recoveries ................................. 83 162 259 315
------- ------- ------- -------
Net charge-offs .................................. (137) (676) (481) (1,190)
------- ------- ------- -------
Balance at end of period ......................... $ 8,360 $ 5,607 $ 8,360 $ 5,607
======= ======= ======= =======
Allowance for loan losses as a percentage
of total loans outstanding .................... 0.49% 0.47% 0.49% 0.47%
</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 $8.4 million at September 30, 2000, compared to $5.6 million as of
September 30, 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.
NON-INTEREST INCOME
Net Gains on Mortgage Loan Sales and Fees. Net gains from mortgage
loan sales and fees increased by 91% during the third quarter of 2000 to $40.3
million, as compared to the same period of 1999. For the nine month periods
ended September 30, 2000 and 1999, mortgage loan sales were $96.0 million and
$61.2 million, respectively, an increase of 57%.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 the
26
<PAGE> 27
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 and bulk purchases of servicing rights. During the
third quarters of 2000 and 1999, Doral Financial purchased servicing rights to
approximately $20.4 million and $35.0 million, respectively, of mortgages
through bulk purchases. For the first nine months of 2000 and 1999, such
purchases were approximately $139.9 million and $168.9 million, respectively.
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 third
quarter and first nine months 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 $8.6 billion at September 30, 2000,
compared to $7.3 billion as of September 30, 1999.
The amount of principal prepayments on mortgage loans serviced by
Doral Financial was $420.1 million and $566.0 million for the nine months ended
September 30, 2000 and 1999, respectively. This represented approximately 7% and
12%, 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. Trading account 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 September 30, 2000 and 1999, resulted in losses of $7.4 million
and gains of $2.1 million, respectively. Trading account activities for the nine
month period ended September 30, 2000, resulted in losses of $7.8 million
compared to $6.6 million in gains during the respective 1999 period. Trading
account activities for the quarters ended September 30, 2000 and 1999, included
$3.9 million of unrealized losses and $594,000 of unrealized gains,
respectively, on the value of its securities held-for-trading pursuant to SFAS
No. 115. Trading account activities for the nine month periods ended September
30, 2000 and 1999 included $4.6 million of unrealized gains and $861,000 of
unrealized losses, respectively, on the value of its securities held for trading
pursuant to SFAS No. 115.
Gain (loss) on Sale of Investment Securities. Gain (loss) on sale of
investment securities represents the impact on income of transactions involving
the sale of securities available-for-sale. For the third quarter and first nine
months of 2000, sale of investment amounted to a loss of $277,000 and a gain of
$3.2 million, respectively, compared to gains of $1.6 million and $1.8 million
for the corresponding 1999 periods.
Commissions, Fees and Other Income. Other income, commissions and fees
increased 34% during the third quarter of 2000 as compared to the same 1999
period. For the first nine months of 2000, commissions, fees and other income
increased 74%, as compared to the respective 1999 period. The increases during
the 2000 period were due primarily to increased commissions and fees earned by
Doral Financial's banking and broker-dealer subsidiaries.
NON-INTEREST EXPENSE
Total non-interest expense increased by only 2% during the third
quarter ended September 30, 2000, as compared to the respective 1999 period, as
a result of Doral Financial's ongoing cost reduction plan, notwithstanding the
opening of 16 retail offices since September 30, 1999. For the nine month period
ended September 30, 2000, total non-interest expense increased by 8% from the
comparable 1999 period.
27
<PAGE> 28
PUERTO RICO INCOME TAXES
The maximum statutory corporate income tax rate in Puerto Rico is 39%.
For the third quarters of 2000 and 1999, the effective income tax rate of Doral
Financial was 14% and 9%, respectively, while for the nine month period ended
September 30, 2000 and 1999 it was 12% for both periods.
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 by
Doral Financial 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 third
quarter of 2000 resulted in the recording of approximately $19.0 million of IOs,
compared to $9.3 million for the corresponding 1999 period. For the nine month
periods ended September 30, 2000 and 1999, the Company recorded IOs in the
amount of $52.0 million and $32.9 million, respectively. 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 September 30, 2000 and 1999, was approximately $3.6 million and $1.7
million, respectively. For the first nine month periods ended September 30, 2000
and 1999, amortization of IOs was approximately $9.4 million and $4.7 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 I 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.
28
<PAGE> 29
The following table shows the increase in the Company's mortgage
servicing assets for each of the periods shown:
TABLE I
CAPITALIZATION OF MORTGAGE SERVICING ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period ................... $125,556 $86,590 $109,721 $72,568
Capitalization of rights ......................... 9,702 8,319 30,058 26,005
Rights sold ...................................... -- -- -- (7)
Rights purchased ................................. 2,142 478 4,029 2,541
Amortization:
Scheduled ............................ (3,578) (2,554) (9,986) (8,274)
Unscheduled .......................... -- -- -- --
-------- ------- -------- -------
Balance at end of period ......................... $133,822 $92,833 $133,822 $92,833
======== ======= ======== =======
</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. In such cases, Doral Financial
retains part or all of the credit risk associated with such loan after sale. As
of September 30, 2000, the maximum amount of loans that Doral Financial would
have been required to repurchase if all loans subject to recourse defaulted or
if investors exercised their put back options was $640.0 million. As of
September 30, 2000, the Company maintained a reserve of $1.6 million for
potential losses from such arrangements which is included in "Accrued expenses
and other liabilities" in Doral Financial'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. As of September 30, 2000, approximately 20% of Doral
Financial's gross loans receivable portfolio consisted of residential mortgage
loans.
29
<PAGE> 30
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.
Doral Financial'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, Doral Financial 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, Doral Financial
is subject to greater credit risks tied to adverse economic, political or
business developments and natural hazards, such as hurricanes, that may affect
Puerto Rico. 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 September 30, 2000
and 1999, Doral Financial's banking subsidiaries would have recognized $1.1
million and $302,000, 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.
30
<PAGE> 31
TABLE J
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
2000 1999
------------------- ------------------
<S> <C> <C>
Mortgage banking business:
Loans held-for-sale past due 90 days and still accruing(1).... $ 48,738 $ 44,030
Non-accrual loans
Construction.............................................. 1,047 -
OREO.......................................................... 6,686 3,834
---------- ---------
Total NPAs of mortgage banking business....................... 56,471 47,864
---------- ---------
Other lending activities through banking subsidiaries:
Loans held for sale past due 90 days and still accruing....... 5 -
Non-accrual loans
Construction.............................................. 1,694 -
Residential mortgage loans................................ 5,033 3,731
Commercial real estate.................................... 1,250 567
Consumer.................................................. 370 205
Commercial non-real estate................................ 228 -
Other..................................................... - -
---------- ---------
Total non-accrual loans....................................... 8,575 4,503
OREO.......................................................... 322 76
---------- ---------
Total NPAs of banking subsidiaries............................ 8,902 4,579
---------- ---------
Total NPAs of Doral Financial (consolidated).................. $ 65,373 $ 52,443
========== =========
Total NPAs of banking subsidiaries as a percentage of
their loans receivable, net and OREO....................... 2.95% 2.53%
Total NPAs of Doral Financial (consolidated) as a
percentage of consolidated total assets................... 1.26% 1.16%
Ratio of allowance for loan losses to
non-performing assets (consolidated)....................... 12.79% 11.70%
</TABLE>
-------------------
(1) Does not include approximately $26.6 million and $26.1 million of 90
days past due FHA/VA loans as of September 30, 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 to mortgage loans sold to
certain other investors, require Doral Financial to advance funds to make
scheduled payments of principal, interest, taxes and insurance, if such payments
have not been received from the borrowers. The Company generally recovers funds
advanced pursuant to these arrangements within 30 days. During the nine month
period ended September 30, 2000, the average monthly amount of funds
31
<PAGE> 32
advanced by Doral Financial under such servicing agreements was approximately
$13.0 million, compared to $8.2 million for the same period during 1999,
reflecting the increase in the size of the Company's servicing portfolio.
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 banking 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 September 30, 2000 and December 31,
1999:
TABLE K
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000 AS OF DECEMBER 31, 1999
------------------------ ------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Repurchase Agreements............................... $2,222,910 6.32% $1,927,956 5.54%
Loans Payable....................................... 372,445 7.62% 353,460 6.53%
Deposits............................................ 1,204,912 5.47% 1,010,424 4.83%
Notes Payable....................................... 463,208 7.83% 461,053 7.84%
Advances from FHLB.................................. 290,000 6.07% 134,000 5.73%
</TABLE>
Doral Financial has warehousing, gestation and repurchase agreements
lines of credit totaling $5.7 billion as of September 30, 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>
<CAPTION>
TABLE L
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS) NINE MONTH PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------------- -------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
Certificates of deposit............................ $ 811,482 6.48% $481,265 5.84%
Regular passbook savings........................... 60,631 4.99% 51,605 4.57%
Now accounts....................................... 171,135 4.49% 106,502 4.65%
Non-interest bearing............................... 86,881 - 132,429 -
---------- ----- -------- -----
Total deposits............................ $1,130,129 5.28% $771,801 4.64%
========== ===== ======== =====
</TABLE>
32
<PAGE> 33
The following table sets forth the maturities of certificates of
deposit having principal amounts of $100,000 or more at September 30, 2000.
<TABLE>
<CAPTION>
TABLE M
DEPOSIT MATURITIES
(IN THOUSANDS)
AMOUNT
------
<S> <C>
Certificates of deposit maturing
Three months or less...................... $ 134,071
Over three through six months............. 55,561
Over six through twelve months............ 131,183
Over twelve months........................ 179,539
----------
Total..................................... $ 500,354
==========
</TABLE>
As of September 30, 2000 and December 31, 1999, Doral Financial's
banking subsidiaries had approximately $297.4 million and $295.4 million,
respectively, in brokered deposits obtained through broker-dealers. Brokered
deposits are used as a source of long-term funds.
As of September 30, 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 bank 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 September 30,
2000, based on existing Federal Reserve, OTS and FDIC guidelines.
<TABLE>
<CAPTION>
TABLE N
REGULATORY CAPITAL RATIOS
DORAL DORAL DORAL
FINANCIAL BANK PR BANK NY(1)
--------- ------- ----------
<S> <C> <C> <C>
Tier 1 Capital Ratio (Tier 1 capital to risk
weighted assets)......................... 18.5% 15.0% 59.3%
Total Capital (total capital to risk
weighted assets)......................... 18.8% 15.4% 59.5%
Leverage Ratio (Tier 1 capital to average
assets).................................. 8.9% 7.1% 23.3%
</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 September 30, 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.
33
<PAGE> 34
ASSETS AND LIABILITIES
At September 30, 2000, Doral Financial's total assets were $5.2 billion
compared to $4.5 billion at December 31, 1999. The increase in assets was due
primarily to a net increase in the loans portfolio of approximately $458.8
million. Total liabilities were $4.7 billion at September 30, 2000, compared to
$4.2 billion at December 31, 1999. The increase in liabilities was largely the
result of an increase in securities sold under agreements to repurchase, deposit
accounts and advances from FHLB. At September 30, 2000, deposit accounts totaled
$1.2 billion, compared to $1.0 billion at December 31, 1999. As of September 30,
2000, Doral Financial's banking subsidiaries had $2.3 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, which information is also incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Management."
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 September 30, 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.
34
<PAGE> 35
<TABLE>
<CAPTION>
TABLE O
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
------------------------------------- ------------------------------------------------------------------------------------
1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF SEPTEMBER 30, 2000 OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
------------------------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and Money Market $ 297,737 $ -- $ -- $ -- $ -- $ 297,737
Total Loans 1,593,837 14,374 22,126 75,343 -- 1,705,680
Securities Held-for-Trading 1,017,419 -- -- -- -- 1,017,419
Securities Available for Sale 10,213 -- -- 203,475 -- 213,688
Securities Held-to-Maturity 41,376 7,000 34,670 1,460,598 -- 1,543,644
FHLB Stock -- -- -- 35,955 -- 35,955
Other assets -- -- -- -- 378,169 378,169
---------- --------- --------- ---------- --------- ----------
TOTAL ASSETS $2,960,582 $ 21,374 $ 56,796 $1,775,371 $ 378,169 $5,192,292
========== ========= ========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Loans Payable $ 372,445 $ -- $ -- $ -- $ -- $ 72,445
Repurchase Agreements 1,626,424 -- 55,000 541,486 -- 2,222,910
Deposits 860,361 164,543 60,479 795 118,734 1,204,912
Other Borrowed Funds 111,817 18,935 386,340 236,116 -- 753,208
Other Liabilities -- -- -- -- 167,297 167,297
Stockholders' equity -- -- -- -- 471,520 471,520
---------- --------- --------- ---------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,971,047 $ 183,478 $ 501,819 $ 778,397 $ 757,551 $5,192,292
========== ========= ========= ========== ========= ==========
Off Balance Sheet Instruments - Interest
Rate Swaps $ 105,000 $ (5,000) $(100,000) $ -- $ -- $ --
Interest Rate Sensitivity Gap 94,535 (167,104) (545,023) 996,974 (379,382) --
Cumulative Interest Rate Sensitivity 94,535 (72,569) (617,592) 379,382 -- --
Cumulative Gap to Interest-Earning Asset 1.96% (1.51%) (12.83%) 7.88% -- --
</TABLE>
<TABLE>
<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
35
<PAGE> 36
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. 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 nine month period ended September 30, 2000, average assets
and liabilities related to derivatives were $6.7 million and $6.5 million,
respectively. The notional amounts of assets and liabilities related to
derivatives which are not recorded on Doral Financial's statement of condition
totaled $12.7 billion and $9.6 billion, respectively, as of September 30, 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 for a discussion of the effects of
changes of interest rates on Doral Financial's operations.
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
36
<PAGE> 37
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.
Accounting for Transfer and Servicing of Financial Assets and
Liabilities. In September 2000, the Financial Accounting Standards Board
("FASB") issues SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Liabilities--A Replacement of SFAS 125." This statement
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS 125's provisions without reconsideration. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occuring after March 31, 2001. This statement is also effective for recognition
and reclassification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Management has not assessed the effect of the adoption of this statement on the
consolidated financial statements of the Corporation.
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 on October 10, 2000, Doral Agency, Inc., a subsidiary of Doral
Financial, was licenced to engage in insurance agency activities. Doral
Financial continues to examine the possibility of entering into 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.
37
<PAGE> 38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Company is exposed,
see the information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Management."
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
On August 23, 2000, Doral Financial entered into a Credit Agreement
with FirstBank Puerto Rico providing for a $25 million warehouse loan facility.
Under the Agreement, Doral Financial is prohibited from paying dividends if it
is in default under the Agreement.
On August 31, 2000, Doral Financial issued 2,000,000 shares of its
8.35% Noncumulative Monthly Income Preferred Stock, Series B (the "Series B
Preferred Stock") having a liquidation preference of $25 per share. The Series B
Preferred Stock ranks on parity with Doral Financial's 7% Noncumulative Monthly
Income Preferred Stock, Series A, with respect to dividend rights and rights on
liquidation. The terms of the Series B Preferred Stock do not permit Doral
Financial to declare or pay any dividends on the Common Stock (1) unless all
accrued and unpaid dividends on Series B Preferred Stock for the 12 dividend
periods preceding the dividend payment have been paid and the full dividend on
the Series B Preferred Stock for the current monthly dividend period is
contemporaneously declared and paid or set aside for payment or (2) if Doral
Financial has defaulted in the payment of the redemption price of any shares of
Series B Preferred Stock called for redemption. The terms of the Series B
Preferred Stock provide that if Doral Financial is unable to pay in full
dividends on the Series B Preferred Stock and other shares of stock of equal
rank as to the payment of dividends, all dividends declared upon the Series B
Preferred Stock and such other shares of stock be declared pro rata.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5 - OTHER INFORMATION
On October 26, 2000, the Board of Directors authorized a quarterly
$0.10 per share cash dividend to be paid on December 1, 2000 to shareholders of
record as of November 10, 2000 on the Company's Common Stock.
During the second quarter of 2000, Doral Financial incurred losses of
approximately $2.3 million related to certain options transactions entered into
by representatives of its brokerage unit for the account of clients as well as
for their personal accounts. On August 16, 2000, Doral Financial entered into an
agreement with the representatives whereby they agreed to reimburse $1,330,000
of such amount to Doral Financial. As of September 30, 2000 Doral Financial had
received cash and other assets aggregating $915,000 from the representatives.
While the Company believes that it will be able to recover all or a substantial
portion of the amounts not payable by the representatives from its insurance
company, the full amount of such losses have been reserved.
38
<PAGE> 39
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 - Certificate of Designation designating the terms
of the Series B Preferred Stock. (Incorporated by reference to
Exhibit 3.3 to Form 8-A of the Company filed August 30, 2000.)
Exhibit 10.103 - Amended and Restated Master Repurchase
Agreement, dated as of June 1, 2000, between Bear Stearns
Mortgage Capital Corporation and Doral Financial Corporation.
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) Current Report on Form 8-K, dated August 31, 2000,
reporting under Item 5 the issuance of 2,000,000
shares of Doral Financial's Series B Preferred Stock.
The Company has not filed as exhibits certain instruments defining the
rights of holders of debt of the Company not exceeding 10% of the total assets
of the Company and its consolidated subsidiaries. The Company will furnish
copies of any such instruments to the Securities and Exchange Commission upon
request.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DORAL FINANCIAL CORPORATION
(Registrant)
Date: November 14, 2000 /s/ Salomon Levis
--------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: November 14, 2000 /s/ Richard F. Bonini
--------------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: November 14, 2000 /s/ Ricardo Melendez
--------------------------------
Ricardo Melendez
Vice President
Principal Accounting Officer
40
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
3.1 - Certificate of Designation designating the terms of the Series
B Preferred Stock. (Incorporated by reference to Exhibit 3.3
to Form 8-A of the Company filed August 30, 2000.)
10.103 - Amended and Restated Master Repurchase Agreement, dated as of
June 1, 2000, between Bear Stearns Mortgage Capital
Corporation and Doral Financial Corporation.
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).
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