<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 JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17224
DORAL FINANCIAL CORPORATION
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Puerto Rico 66-0312162
----------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1159 F.D. Roosevelt Avenue,
San Juan, Puerto Rico 00920-2998
--------------------- ----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code (787) 749-7100
Former name, former address --------------
and
Former fiscal year, if changed Not Applicable
since last report --------------
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT AUGUST 14, 2000 - 42,362,634
<PAGE> 2
DORAL FINANCIAL CORPORATION
INDEX PAGE
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2000 (Unaudited) and December
31, 1999....................................................................................... 4
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters ended
June 30, 2000 and June 30, 1999 and six months ended June 30, 2000 and June 30, 1999 .......... 5
Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, 2000 and June
30, 1999....................................................................................... 6
Consolidated Statements of Comprehensive Income (Unaudited)- Quarters ended June 30, 2000 and
June 30, 1999 and six months ended June 30, 2000 and June 30, 1999 ............................ 7
Notes to Consolidated Financial Statements..................................................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................................... 37
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............................................................... 38
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>
June 30, December 31,
2000 1999
(unaudited) (audited)
----------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,353 $ 25,793
----------- -----------
Money market investments:
Securities purchased under agreements to resell 96,800 21,430
Time deposits with other banks 110,688 246,010
Other short term investments, at cost 115,059 102,796
----------- -----------
Total money market investments 322,547 370,236
----------- -----------
Investment securities and other instruments:
Trading securities, at fair value 1,027,841 862,698
Securities available-for-sale, at fair value 353,471 66,325
Securities held-to-maturity, at amortized cost 1,551,302 1,509,060
Federal Home Loan Bank of NY (FHLB) stock, at cost 31,945 21,645
----------- -----------
Total investment securities and other instruments 2,964,559 2,459,728
----------- -----------
Loans:
Mortgage loans held-for-sale, at lower of cost or market 1,328,003 1,015,703
Loans receivable, net 328,834 231,184
----------- -----------
Total loans 1,656,837 1,246,887
----------- -----------
Receivables and mortgage servicing advances 67,933 56,021
Broker dealer's operations receivable 82,840 158,798
Accrued interest receivable 49,147 42,021
Servicing assets, net 125,556 109,721
Property, leasehold improvements and equipment, net 52,466 37,444
Cost in excess of fair value of net assets acquired, net 10,002 9,964
Real estate held for sale, net 6,226 3,910
Prepaid and other assets 25,261 16,820
----------- -----------
Total assets $ 5,389,727 $ 4,537,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ 2,374,966 $ 1,927,956
Loans payable 483,603 353,460
Deposits 1,180,896 1,010,424
Notes payable 468,033 461,053
Advances from FHLB 244,000 134,000
Broker dealer's operations payable 81,615 154,210
Accrued expenses and other liabilities 141,974 111,258
----------- -----------
Total liabilities 4,975,087 4,152,361
----------- -----------
Commitments and contingencies
----------- -----------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 10,000,000 shares authorized: 8%
Convertible Cumulative Preferred Stock, $1 par value (liquidation
preference $1,000 per share), 20,000 shares designated and 8,460 shares
issued and outstanding in 1999, and no shares outstanding in 2000; 7%
Noncumulative Monthly Income Preferred Stock, $1 par value (liquidation
preference $50 per share) 1,495,000 shares issued and outstanding 1,495 1,503
Common stock, $1 par value, 200,000,000 shares authorized; 42,418,634 and
40,484,920 shares issued in 2000 and 1999, respectively; 42,362,634 and
40,428,920 shares outstanding in 2000 and 1999, respectively 42,419 40,485
Paid-in capital 138,896 140,822
Legal surplus 3,596 3,596
Retained earnings 236,493 205,875
Accumulated other comprehensive income, net of taxes (8,203) (7,243)
Treasury stock at par value, 56,000 shares held (56) (56)
----------- -----------
Total stockholders' equity 414,640 384,982
----------- -----------
Total liabilities and stockholders' equity $ 5,389,727 $ 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 Six Month Period Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 30,645 $ 17,276 $ 55,076 $ 35,477
Mortgage-backed securities 21,023 14,864 40,260 28,360
Investment securities 23,613 11,656 46,219 19,196
Other interest-earning assets 4,914 3,097 10,144 6,598
-------- -------- -------- --------
Total interest income 80,195 46,893 151,699 89,631
-------- -------- -------- --------
Interest expense:
Loans payable 9,162 5,677 16,715 11,470
Securities sold under agreements to repurchase 34,111 16,015 62,994 31,025
Deposits 15,134 7,913 28,238 14,565
Other borrowed funds 11,150 4,307 22,156 8,728
-------- -------- -------- --------
Total interest expense 69,557 33,912 130,103 65,788
-------- -------- -------- --------
Net interest income 10,638 12,981 21,596 23,843
Provision for loan losses 807 458 1,655 753
-------- -------- -------- --------
Net interest income after provision for loan losses 9,831 12,523 19,941 23,090
-------- -------- -------- --------
Non-interest income:
Net gain on mortgage loan sales and fees 31,618 23,887 55,754 40,121
Trading account (1,339) (1,007) (412) 4,523
Gain on sale of investment securities 135 226 3,434 226
Servicing income 6,542 6,198 13,003 12,411
Commissions, fees and other income 2,195 1,190 4,293 2,005
-------- -------- -------- --------
Total non-interest income 39,151 30,494 76,072 59,286
-------- -------- -------- --------
Non-interest expense:
Compensation and benefits, net (See Note f) 9,917 10,946 19,450 21,086
Taxes, other than payroll and income taxes 739 500 1,783 983
Maintenance 403 243 706 698
Advertising 1,777 1,201 3,880 2,599
Professional services 1,261 1,522 2,269 2,758
Telephone 940 842 1,925 1,726
Rent 1,793 1,132 3,173 2,157
Amortization of servicing assets 3,487 3,005 6,408 5,720
Depreciation and amortization 1,699 1,042 3,227 1,973
Other, (See Note f) 3,287 2,458 6,920 4,746
-------- -------- -------- --------
Total non-interest expense 25,303 22,891 49,741 44,446
-------- -------- -------- --------
Income before income taxes 23,679 20,126 46,272 37,930
Income taxes 3,080 2,858 5,397 4,991
-------- -------- -------- --------
Net income 20,599 17,268 40,875 32,939
Retained earnings at beginning of period 221,440 168,853 205,875 156,315
Less cash dividends paid:
8% Convertible Cumulative Preferred Stock -- 169 169 338
7% Noncumulative Monthly Income Preferred Stock 1,308 1,308 2,617 1,846
Common stock 4,238 3,234 7,471 5,660
-------- -------- -------- --------
Retained earnings at the end of period $236,493 $181,410 $236,493 $181,410
======== ======== ======== ========
Earnings per share:
Basic $ 0.46 $ 0.39 $ 0.92 $ 0.76
======== ======== ======== ========
Diluted $ 0.46 $ 0.38 $ 0.92 $ 0.73
======== ======== ======== ========
</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>
Six Month Period Ended
June 30,
-----------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 40,875 $ 32,939
----------- -----------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ...................................................... 2,911 1,795
Amortization of interest-only strips held in trading accounts ...................... 5,817 3,026
Amortization of cost in excess of fair value of net assets acquired ................ 316 178
Amortization of servicing assets ................................................... 6,408 5,720
Deferred tax provision (benefit) ................................................... 2,723 (613)
Provision for loan losses .......................................................... 1,655 753
Origination and purchases of mortgage loans held for sale .......................... (1,417,425) (1,413,822)
Principal repayment and sales of mortgage loans held for sale ...................... 657,017 640,003
Purchases of trading securities .................................................... (521,229) (803,068)
Principal repayments and sales of trading securities ............................... 762,238 1,483,128
Increase in interest only strips, net .............................................. (23,102) (14,310)
Increase in servicing assets ....................................................... (22,243) (19,742)
(Increase) decrease in receivables and mortgage servicing advances ................. (11,912) 4,711
Decrease in broker dealer's operations receivable .................................. 75,958 16,647
Increase in accrued interest receivable ............................................ (7,126) (7,111)
Increase (decrease) in interest payable ............................................ 2,843 (2,348)
Decrease in broker dealer's operations payable ..................................... (72,595) (11,102)
Increase in accounts payable and other liabilities ................................. 19,496 28,626
Increase in prepaid and other assets ............................................... (8,441) (1,936)
----------- -----------
Total adjustments .............................................................. (546,691) (89,465)
----------- -----------
Net cash used in operating activities .......................................... (505,816) (56,526)
----------- -----------
Cash flows from investing activities:
Purchase of securities held to maturity ............................................ (93,536) (169,700)
Principal repayments and maturities of securities held to maturity ................. 4,745 59,929
Origination of loans receivable .................................................... (184,800) (39,109)
Principal repayments of loans receivable ........................................... 85,655 12,940
Purchases of securities available for sale ......................................... (357,401) (594,393)
Principal repayments and sales of securities available for sale ................... 180,225 327,414
Purchase of FHLB stock ............................................................. (10,300) (3,481)
Purchase of property, leasehold improvements and equipment ......................... (17,933) (8,676)
(Increase) decrease in real estate held for sale ................................... (2,316) 249
----------- -----------
Net cash used in investing activities .......................................... (395,661) (414,827)
----------- -----------
Cash flows from financing activities:
Increase in deposits ........................................................... 170,472 226,983
Increase in securities sold under agreements to repurchase ..................... 447,010 97,713
Increase (decrease) in loans payable ........................................... 130,143 (95,167)
Issuance of preferred stock .................................................... -- 72,065
Increase in FHLB advances ...................................................... 110,000 23,500
Increase in notes payable ...................................................... 6,980 7,373
Dividends declared and paid .................................................... (10,257) (7,844)
----------- -----------
Net cash provided by financing activities ...................................... 854,348 324,623
----------- -----------
Net decrease in cash and cash equivalents ............................................ (47,129) (146,730)
Cash and cash equivalents at beginning of period ..................................... 396,029 344,696
----------- -----------
Cash and cash equivalents at the end of period ....................................... $ 348,900 $ 197,966
=========== ===========
Cash and cash equivalent includes:
Cash and due from banks ........................................................... $ 26,353 $ 35,093
Money market investments .......................................................... 322,547 162,873
----------- -----------
$ 348,900 $ 197,966
=========== ===========
Supplemental schedule of non-cash activities
Loan securitizations .............................................................. $ 443,797 $ 753,957
=========== ===========
Supplemental cash flows information:
Cash used to pay interest ......................................................... $ 127,260 $ 68,136
=========== ===========
Cash used to pay income taxes ..................................................... $ 4,764 $ 2,991
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
-------------------- -----------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income: $ 20,599 $17,268 $ 40,875 $ 32,939
-------- ------- -------- --------
Other comprehensive income, net of tax:
Unrealized net gains (losses) on securities arising during the period
(net of taxes of $274,000 for the 2000 quarter; and
$925,000 - 2000 and $4.1 million-1999 for the six months) 429 -- 1,447 (6,458)
Less: reclassification adjustment for (gains) losses included in net
income (net of taxes of $78,000-2000 and $201,000-1999 for the
quarter, and $1.5 million-2000 and $192,000-1999 for the six months) (122) (315) 2,407 (301)
-------- ------- -------- --------
Other comprehensive income (loss) 551 315 (960) (6,157)
-------- ------- -------- --------
Comprehensive income, net of taxes $ 21,150 $17,583 $ 39,915 $ 26,782
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated Financial Statements (unaudited) include the accounts
of Doral Financial Corporation ("Doral Financial" or "the Company"),
Doral Mortgage Corporation ("Doral Mortgage"), SANA Investment
Mortgage Bankers, Inc. ("SANA"), Centro Hipotecario de Puerto Rico,
Inc., Doral Securities, Inc. ("Doral Securities"), Doral Bank ("Doral
Bank PR"), Doral Bank FSB, ("Doral Bank NY"), Doral Money, Inc., 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 six month periods ended
June 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 six month periods
ended June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTH PERIOD
JUNE 30 ENDED JUNE 30,
------------------- -------------------
2000 1999 2000 1999
------ ------- ------ ------
<S> <C> <C> <C> <C>
8% Convertible Cumulative Preferred Stock $ -0- $ 20.00 $20.00 $40.00
7% Noncumulative Monthly Income Preferred Stock $ 0.88 $ 0.88 $ 1.76 $ 1.24
Common Stock $ 0.10 $ 0.08 $ 0.18 $ 0.14
</TABLE>
d. At June 30, 2000, escrow funds include approximately $58.9 million
deposited with Doral Bank PR. These funds are included in the
Company's financial statements. Escrow funds also include
approximately $4.4 million deposited with other banks which are
excluded from the Company's assets and liabilities.
e. The number of average shares of common stock used for computing the
basic and diluted net income per share was as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 42,362,634 40,428,920 41,395,777 40,428,920
Diluted 42,390,769 42,417,211 41,395,777 42,435,528
</TABLE>
f. Employee costs and other expenses are shown in the Consolidated
Statements of Income and Retained Earnings net of direct loan
origination costs which, pursuant to SFAS No. 91, are capitalized as
part of the carrying cost of mortgage loans and are offset against net
gains on mortgage loan sales when the loans are sold.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Set forth below is a reconciliation of the application of SFAS No. 91
to employee costs and other expenses:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(IN THOUSANDS) (IN THOUSANDS)
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Employee costs, gross $ 16,071 $ 17,244 $ 32,215 $ 34,252
Deferred costs pursuant to SFAS No. 91 6,154 6,298 12,765 13,166
-------- -------- -------- --------
Employee cost, net $ 9,917 $ 10,946 $ 19,450 $ 21,086
======== ======== ======== ========
Other expenses, gross $ 5,424 $ 4,503 $ 10,496 $ 8,967
Deferred costs pursuant to SFAS No. 91 2,137 2,045 3,576 4,221
-------- -------- -------- --------
Other expenses, net $ 3,287 $ 2,458 $ 6,920 $ 4,746
======== ======== ======== ========
</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 JUNE 30, 2000
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ (1,919) 10,996 530 224 $ 9,831
Non-interest income $ 36,067 1,409 2,218 (543) $ 39,151
Net income $ 12,441 7,948 529 (319) $ 20,599
Identifiable assets $3,021,700 2,296,407 838,771 (767,151) $5,389,727
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 6,104 5,709 513 197 $ 12,523
Non-interest income $ 26,685 2,692 1,702 (585) $ 30,494
Net income $ 14,540 2,690 426 (388) $ 17,268
Identifiable assets $2,030,724 1,154,604 774,769 (680,227) $3,279,870
</TABLE>
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Mortgage Broker
Banking Banking Dealer Eliminations Totals
---------- --------- ------- ------------ ----------
SIX MONTH PERIOD ENDED JUNE 30, 2000
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ (2,797) 21,022 1,209 507 $ 19,941
Non-interest income $ 68,659 4,490 4,018 (1,095) $ 76,072
Net income $ 28,510 12,084 868 (587) $ 40,875
Identifiable assets $3,021,700 2,296,407 838,771 (767,151) $5,389,727
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30,1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 10,827 10,697 1,168 398 $ 23,090
Non-interest income $ 52,116 5,054 2,943 (827) $ 59,286
Net income $ 27,300 5,434 636 (431) $ 32,939
Identifiable assets $2,030,724 1,154,604 774,769 (680,227) $3,279,870
</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 June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
TRADING SECURITIES JUNE 30, DECEMBER 31,
(IN THOUSANDS) 2000 1999
----------- ------------
<S> <C> <C>
Mortgage-backed securities ............. $ 920,210 $ 757,080
Interest-only strips ................... 105,716 84,293
U.S. Treasury and agencies ............. 199 15,041
Puerto Rico government obligations ..... 1,140 6,284
Other .................................. 576 --
----------- -----------
Total ......................... $ 1,027,841 $ 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
June 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.
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF JUNE 30, 2000 COST GAINS LOSSES VALUE YIELD
(DOLLARS IN THOUSANDS) --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES
GNMA
Due within a year $ 57,531 $ 352 $ 292 $ 57,591 7.34%
FNMA - FHLMC
Due within a year 474 16 -- 490 8.00%
Due over 10 years 5,237 -- 73 5,164 7.50%
DEBT SECURITIES
US TREASURY
Due within a year 21,150 -- 150 21,000 6.25%
Due from 5 to 10 years 69,288 -- 2,262 67,026 5.50%
Due over 10 years 200,381 1,819 -- 202,200 6.20%
--------- --------- --------- --------- ---------
$ 354,061 $ 2,187 $ 2,777 $ 353,471 6.27%
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF DECEMBER 31, 1999 COST GAINS LOSSES VALUE YIELD
(DOLLARS IN THOUSANDS) --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
DEBT SECURITIES
US TREASURY
Due from 5 to 10 years $ 68,648 $ -- $ 2,323 $ 66,325 5.50%
========= ========= ========= ========= =========
</TABLE>
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 June
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.
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED
SECURITIES HELD-TO-MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
AS OF JUNE 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 $ 2,742 $ 79 $ -- $ 2,821 6.60%
Due over 10 years 22,081 834 54 22,861 6.99%
CMO CERTIFICATES
Due within a year 893 71 -- 964 14.78%
Due from 1 to 5 years 3,259 1 15 3,245 6.16%
Due from 5 to 10 years 5,234 -- 23 5,211 6.26%
Due over 10 years 125,042 965 329 125,678 5.90%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from 1 to 5 years 4,900 -- 50 4,850 6.22%
Due from 5 to 10 years 9,996 -- 296 9,700 6.41%
FEDERAL HOME LOAN BANK NOTES
Due within a year 40,000 -- 825 39,175 7.40%
Due from 1 to 5 years 53,539 6 925 52,620 7.56%
Due from 5 to 10 years 92,595 -- 1,712 90,883 7.97%
Due over 10 years 595,636 26 10,787 584,875 6.82%
ZERO COUPON
Due from 5 to 10 years 189,713 -- -- 189,713 7.50%
Due over 10 years 152,566 -- 738 151,828 7.89%
PR HOUSING BANK NOTES
Due over 10 years 5,000 -- 200 4,800 6.20%
U.S. TREASURY
Due within a year 1,396 4 -- 1,400 5.29%
Due from 5 to 10 years 70,042 -- 742 69,300 6.00%
Due over 10 years 174,668 -- 10,815 163,853 5.29%
ECONOMIC DEVELOPMENT BANK NOTE
Due from 1 to 5 years 2,000 -- -- 2,000 6.60%
---------- --------- ---------- ---------- ---------
$1,551,302 $ 1,986 $ 27,511 $1,525,777 6.83%
========== ========= ========== ========== =========
</TABLE>
12
<PAGE> 13
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>
13
<PAGE> 14
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 JUNE 30, 2000 AS OF DECEMBER 31, 1999
------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Construction loans $ 156,574 42% $ 114,853 41%
Residential mortgage loans 77,019 21% 70,659 26%
Commercial real estate 29,530 8% 32,383 12%
Consumer-- secured by mortgage 2,595 1% 3,317 1%
Consumer-- other 15,465 4% 11,629 4%
Commercial non-real estate 25,498 7% 16,989 6%
Loans on saving deposits 10,630 3% 7,793 3%
Land secured 51,862 14% 19,927 7%
--------- ---- --------- ----
Loans receivable, gross(1) 369,173 100% 277,550 100%
--------- ---- --------- ----
Less:
Undisbursed portion of loans
in process (32,474) (40,571)
Unearned interest and deferred
loan fees (4,472) (3,655)
Allowance for loan losses(2) (3,393) (2,140)
--------- ---------
(40,339) (46,366)
--------- ---------
Loans receivable, net $ 328,834 $ 231,184
========= =========
</TABLE>
------------------
(1) Does not include mortgage loans held-for-sale by Doral
Financial of $1.3 billion as of June 30, 2000 and $1.0
billion as of December 31, 1999.
(2) Does not include $4.1 million and $4.0 million of allowance
for loan losses allocated to mortgage loans held-for-sale as
of June 30, 2000 and December 31, 1999, respectively.
j. Doral Financial is the guarantor of various serial and term bonds
issued by Doral Properties through Puerto Rico'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.
14
<PAGE> 15
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 June 30, 2000 and 1999 by Doral Financial
was approximately $820.5 million and $750.7 million, respectively. For the six
month periods ended June 30, 2000 and 1999 the volume of loans originated and
purchased was approximately $1.6 billion and $1.5 billion, respectively. Doral
Financial's mortgage servicing portfolio increased to approximately $8.2
billion as of June 30, 2000, from $7.0 billion as of the same date a year ago,
an increase of 17 %. 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 June 30, 2000, Doral Financial held securities for trading with
a fair market value of $1.0 billion, approximately $747.4 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 second quarter of 2000 the Company purchased
$65.4 million in securities classified as held-to-maturity. As of June 30,
2000, Doral Financial held approximately $1.6 billion in securities and other
investments that are classified as held-to-maturity. As of June 30, 2000, Doral
Financial also held $353.5 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 June 30, 2000 and 1999, Doral Financial's
banking subsidiaries contributed approximately $7.9 million and $2.7 million,
or 38% and 16%, 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 half of 2000 and 1999, Doral Financial's banking
subsidiaries contributed approximately $12.1 million and $5.4 million, or 30%
and 16% 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
quarters ended June 30, 2000 and 1999, Doral Securities' net income was
approximately $529,000 and $426,000, respectively. For the six month period
ended June 30, 2000 and 1999, Doral Securities' net income was approximately
$868,000 and $636,000, respectively. Assets in customer brokerage accounts
increased to $258.4 million as of June 30, 2000, from $150.0 million as of the
same date a year ago, an increase of 72%.
15
<PAGE> 16
For information regarding net interest income, 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).
Unlike most financial 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 June 30, 2000, Doral
Financial had assets and net income of $2.6 billion and $16.8 million,
respectively, at the parent company level.
RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 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.
16
<PAGE> 17
LOAN PRODUCTION
The following table sets forth the number and dollar amount of Doral
Financial's loan production for the periods indicated.
<TABLE>
<CAPTION>
TABLE A QUARTER ENDED SIX MONTH PERIOD ENDED
LOAN PRODUCTION JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT FOR AVERAGE INITIAL LOAN BALANCE) ------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FHA/VA mortgage loans
Number of loans ...................................... 1,485 2,494 3,359 4,734
Volume of loans ...................................... $ 145,731 $ 204,607 $ 311,319 $ 385,982
Percent of total volume .............................. 18% 27% 19% 27%
Conventional conforming mortgage loans
Number of loans ...................................... 1,582 2,442 6,266 6,077
Volume of loans ...................................... $ 141,092 $ 229,463 $ 333,131 $ 543,322
Percent of total volume .............................. 17% 30% 21% 37%
Conventional non - conforming mortgage loans(1)(2)
Number of loans ...................................... 4,738 2,859 7,744 4,510
Volume of loans ...................................... $ 406,917 $ 221,609 $ 701,675 $ 360,957
Percent of total volume .............................. 50% 30% 44% 25%
Other(3)
Number of loans ...................................... 318 392 618 636
Volume of loans ...................................... $ 126,727 $ 94,992 $ 256,100 $ 162,670
Percent of total volume .............................. 15% 13% 16% 11%
Total loans
Number of loans ...................................... 8,123 8,187 17,987 15,957
Volume of loans ...................................... $ 820,467 $ 750,671 $1,602,225 $1,452,931
Average initial loan balance .................................. $ 101,005 $ 91,691 $ 89,077 $ 91,053
</TABLE>
--------------------
(1) Includes $17.6 million and $4.8 million in second mortgages
for the quarters ended June 30, 2000 and 1999, respectively,
and $29.9 million and $7.5 million in second mortgages for the
six month periods ended June 30, 2000 and 1999.
(2) Includes $15.8 million and $8.4 million in home equity or
personal loans secured by real estate mortgages of up to
$40,000 for the quarters ended June 30, 2000 and 1999,
respectively, and $34.0 million and $14.1 million for the six
month periods ended June 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.
A substantial portion of Doral Financial's total mortgage loan
originations has consistently been comprised of refinance loans. For the six
months ended June 30, 2000 and 1999, refinance loans represented approximately
43% and 58%, 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.
17
<PAGE> 18
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>
<CAPTION>
TABLE B
LOAN ORIGINATION SOURCES
SIX MONTH PERIOD ENDED JUNE 30,
---------------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
PUERTO RICO US TOTAL PUERTO RICO US TOTAL
----------- --- ----- ----------- --- -----
<S> <C> <C> <C> <C> <C> <C>
Retail................................. 36% -- 36% 46% -- 46%
Wholesale.............................. 39% 1% 40% 25% 11% 36%
New Housing Developments............... 9% -- 9% 7% -- 7%
Multi-family........................... -- 2% 2% -- 5% 5%
Other(1)............................... 13% -- 13% 6% -- 6%
</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 second quarters
of 2000 and 1999, Doral Financial purchased servicing rights to approximately
$77.0 million and $61.0 million, respectively, in principal amount of mortgage
loans. For the six months period ended June 30, 2000 and 1999, the Company
purchased servicing rights to approximately $119.5 and $133.9 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>
<CAPTION>
TABLE C
MORTGAGE LOAN SERVICING
(DOLLARS IN THOUSANDS, EXCEPT FOR AVERAGE SIZE OF LOANS PREPAID)
AS OF JUNE 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END
GNMA ................................................. $ 2,905,448 $ 2,466,371
FHLMC/FNMA ........................................... 2,189,885 2,075,579
Doral Financial grantor trusts ....................... 96,582 124,808
Other conventional mortgage loans(1) ................. 3,049,868 2,345,448
----------- -----------
Total servicing portfolio ............................ $ 8,241,783 $ 7,012,206
=========== ===========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED
Number of loans ...................................... 122,381 108,637
Weighted average interest rate ....................... 7.71% 7.81%
Weighted average remaining maturity (months) ......... 250 232
Weighted average servicing fee rate .................. .3490% .3997%
Average servicing portfolio .......................... $ 7,935,552 $ 6,244,532
Principal prepayments ................................ $ 284,926 $ 414,591
Prepayments to average portfolio (annualized) ........ 8% 13%
Average size of loans prepaid ........................ $ 47,951 $ 53,690
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD END
60-89 days past due .................................. 1.34% 1.26%
90 days or more past due ............................. 2.23% 1.85%
----------- -----------
Total delinquencies excluding foreclosures ........... 3.57% 3.11%
=========== ===========
Foreclosures pending ................................. 1.11% 1.21%
=========== ===========
SERVICING PORTFOLIO ACTIVITY
Beginning servicing portfolio ........................ $ 7,633,181 $ 6,186,059
Add:
Loans funded and purchased(2) ................. 1,126,534 1,304,579
Bulk servicing acquired ....................... 119,451 133,886
Less:
Servicing sales transferred ................... 194,980 --
Run-off(3) .................................... 442,403 612,318
----------- -----------
Ending servicing portfolio ........................... $ 8,241,783 $ 7,012,206
=========== ===========
</TABLE>
(1) Includes $1.1 billion and $884.6 million of loans owned by Doral
Financial at June 30, 2000 and 1999, respectively, which represented
14% and 13% of the total servicing portfolio as of such dates.
(2) Excludes approximately $475.7 million and $148.4 million of commercial,
construction and loans sold with servicing released not included in
Doral Financial's mortgage servicing portfolio as of June 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 June 30, 2000 and 1999, less than 7% 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 and fees; (iii) servicing income;
(iv) trading account; (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 June 30, 2000
increased $3.3 million, or 19%, from $17.3 million for the 1999 period to $20.6
million for the 2000 period. For the first half of 2000 and 1999, the Company's
net income amounted to $40.9 million and $32.9 million, respectively an increase
of 24%. Consolidated results include the operations of Doral Bank PR and Doral
Bank NY, Doral Financial's banking units, which contributed approximately $7.9
million to Doral Financial's consolidated net income for the quarter ended June
30, 2000, compared to $2.7 million for the respective 1999 period. Doral
Securities, Doral Financial's investment banking and broker-dealer unit,
contributed $529,000 to consolidated net income for the quarter ended June 30,
2000, compared to $426,000 for the respective 1999 period. Diluted earnings per
common share for the second quarter of 2000 were $0.46 an increase of 21% over
the $0.38 per diluted share recorded for the same period a year ago. Diluted
earnings per common share for the first half of 2000 increased by 26% when
compared to the same period of 1999, from $0.73 for 1999 to $0.92 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 second quarter of 2000 and 1999 was $10.6
million and $13.0 million, respectively. For the first half of 2000 and 1999 net
interest income amounted to $21.6 million and $23.8 million, respectively. The
reduction in net interest income is due in part to the reduction of the spread
between long-term and short-term rates and the increase in market interest
rates, both of which affects the average cost of funds used to finance
operations.
The Company's banking subsidiaries contributed approximately $11.6
million to the consolidated net interest income of Doral Financial for the
quarter ended June 30, 2000, compared to $6.0 million to consolidated net
interest income for the quarter ended June 30, 1999. During the first half of
2000, the Company's banking subsidiaries contributed approximately $22.2 million
to the consolidated net interest income, compared to $11.1 million for the first
half 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 JUNE 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) $1,535,571 $30,645 7.98% $ 991,184 $17,276 6.97%
Mortgage-Backed Securities 1,183,675 21,023 7.10% 788,181 14,864 7.54%
Investment Securities 1,543,466 23,613 6.12% 677,580 11,656 6.88%
Other Interest-Earning Assets(2) 361,669 4,914 5.43% 270,850 3,097 4.57%
---------- ------- ------ ---------- ------- ------
Total Interest-Earning Assets/Interest
Income 4,624,381 $80,195 6.94% 2,727,795 $46,893 6.88%
======= ====== ======= ======
Total Non-Interest-Earning Assets 423,042 495,813
---------- ----------
Total Assets $5,047,423 $3,223,608
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 494,477 $ 9,162 7.41% $ 394,257 $ 5,677 5.76%
Repurchase Agreements 2,249,206 34,111 6.07% 1,257,214 16,015 5.10%
Deposits 1,208,403 15,134 5.01% 705,337 7,913 4.49%
Other Borrowed Funds(3) 603,754 11,150 7.39% 248,230 4,307 6.94%
---------- ------- ------ ---------- ------- ------
Total Interest-Bearing Liabilities/
Interest Expense 4,555,840 $69,557 6.11% 2,605,038 $33,912 5.21%
======= ====== ======= ======
Total Non-Interest-Bearing Liabilities 82,100 263,525
---------- ----------
Total Liabilities 4,637,940 2,868,563
Stockholders' Equity 409,483 355,045
---------- ----------
Total Liabilities and Stockholders' Equity $5,047,423 $3,223,608
========== ==========
Net Interest-Earning Assets $ 68,541 $ 122,757
Net Interest Income $10,638 $12,981
Interest Rate Spread(4) .83% 1.67%
Interest Rate Margin(4) .92% 1.90%
Net Interest-Earning Assets Ratio 101.50% 104.71%
</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>
SIX MONTH PERIOD ENDED JUNE 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) $1,373,806 $ 55,076 8.02% $ 976,987 $35,477 7.26%
Mortgage-Backed Securities 1,158,364 40,260 6.95% 786,375 28,360 7.21%
Investment Securities 1,477,034 46,219 6.26% 573,931 19,196 6.69%
Other Interest-Earning Assets(2) 352,667 10,144 5.75% 275,550 6,598 4.79%
---------- -------- ------ ---------- ------- ------
Total Interest-Earning Assets/Interest Income 4,361,871 $151,699 6.96% 2,612,843 $89,631 6.86%
======== ====== ======= ======
Total Non-Interest-Earning Assets 473,733 469,191
---------- ----------
Total Assets $4,835,604 $3,082,034
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 448,458 $ 16,715 7.45% $ 398,300 $11,470 5.76%
Repurchase Agreements 2,145,030 62,994 5.87% 1,216,581 31,025 5.10%
Deposits 1,122,528 28,238 5.03% 650,926 14,565 4.48%
Other Borrowed Funds(3) 592,146 22,156 7.48% 244,135 8,728 7.15%
---------- -------- ------ ---------- ------- ------
Total Interest-Bearing Liabilities/
Interest Expense 4,308,162 $130,103 6.04% 2,509,942 $65,788 5.24%
======== ====== ======= ======
Total Non-Interest-Bearing Liabilities 125,716 236,669
---------- ----------
Total Liabilities 4,433,878 2,746,611
Stockholders' Equity 401,726 335,423
---------- ----------
Total Liabilities and Stockholders' Equity $4,835,604 $3,082,034
========== ==========
Net Interest-Earning Assets $ 53,709 $ 102,901
Net Interest Income $ 21,596 $23,843
Interest Rate Spread(4) .92% 1.62%
Interest Rate Margin(4) .99% 1.83%
Net Interest-Earning Assets Ratio 101.25% 104.10%
</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 six months ended June 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
JUNE 30,
----------------------------------------------
2000 COMPARED TO 1999
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
TOTAL LOANS $ 37,954 $ 15,524 $ 53,478
MORTGAGE-BACKED SECURITIES 29,834 (5,199) 24,635
INVESTMENT SECURITIES 59,581 (11,753) 47,828
OTHER INTEREST EARNING ASSETS 4,154 3,113 7,267
--------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 131,523 1,685 133,208
--------- --------- ---------
INTEREST-BEARING LIABILITIES
LOANS PAYABLE 5,773 8,165 13,938
REPURCHASE AGREEMENTS 50,592 21,736 72,328
DEPOSITS 22,587 6,280 28,867
OTHER BORROWED FUNDS 24,673 2,701 27,374
--------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES 103,625 38,882 142,507
--------- --------- ---------
NET INTEREST-EARNING ASSETS $ 27,898 $ (37,197) $ (9,299)
========= ========= =========
</TABLE>
TABLE G
NET INTEREST INCOME ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JUNE 30
----------------------------------------------
2000 COMPARED TO 1999
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
TOTAL LOANS $ 28,819 $ 10,379 $ 39,198
MORTGAGE-BACKED SECURITIES 26,831 (3,031) 23,800
INVESTMENT SECURITIES 60,411 (6,366) 54,045
OTHER INTEREST EARNING ASSETS 3,693 3,399 7,092
--------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 119,754 4,381 124,135
--------- --------- ---------
INTEREST-BEARING LIABILITIES
LOANS PAYABLE 2,889 7,598 10,487
REPURCHASE AGREEMENTS 47,351 16,592 63,943
DEPOSITS 21,128 6,187 27,315
OTHER BORROWED FUNDS 24,883 1,974 26,857
--------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES 96,251 32,351 128,602
--------- --------- ---------
NET INTEREST-EARNING ASSETS $ 23,503 $ (27,970) $ (4,467)
========= ========= =========
</TABLE>
INTEREST INCOME
Total interest income increased from approximately $46.9 million during
the second quarter of 1999, to $80.2 million during the second quarter of 2000,
an increase of 71%. For the first six months of 2000, interest income increased
by approximately $62.1 million, to $151.7 million compared to $89.6 million for
the first six months of 1999.
23
<PAGE> 24
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 $2.6 billion at June 30, 1999 to $4.4 billion at June 30, 2000.
Interest income on loans increased by $13.4 million or 77% during the
second quarter of 2000, as compared to the respective 1999 period. For the first
half of 2000, interest income on loans increased by $19.6 million or 55%, 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 second quarter of
2000 increased by 41% compared to the respective 1999 period. For the quarters
ended June 30, 2000 and 1999, interest income on this type of interest-earning
asset amounted to $21.0 million and $14.9 million, respectively. During the
first half of 2000, income on mortgage-backed securities was $40.3 million,
versus $28.4 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 $11.9 million
during the second quarter of 2000, as compared to the same period of 1999, from
$11.7 million to $23.6 million. Interest income on these securities was $46.2
for the six months ended June 30, 2000 as compared to $19.2 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 $1.5 billion as of June 30,
2000, compared to $573.9 million as of June 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 $1.8
million or 59% for the quarter ended June 30, 2000 as compared to the same
quarter a year ago. Interest income on other interest earning assets was $10.1
million for the six months ended June 30, 2000, as compared to $6.6 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 $69.6 million during the second
quarter of 2000, compared to $33.9 million for the respective 1999 period, an
increase of 105%. Total interest expense for the first half of 2000 was $130.1
million, as compared to $65.8 million for the same period of 1999, an increase
of 98%. 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 $4.3 billion at an average cost of 6.04% as of June 30, 2000,
compared to $2.5 billion at an average cost of 5.24% as of June 30,1999.
Interest expense related to loans payable increased by $3.5 million or
61% during the second quarter of 2000 as compared to the same period of 1999 as
a result of higher borrowing costs. For the first half of 2000, interest expense
associated with loans payable was $16.7 million, an increase of 46% from $11.5
million for the first six months ended June 30, 1999. The weighted-average
interest rate cost for borrowings under Doral Financial's warehouse lines of
credit was 7.41% and 5.76% for the second quarters of 2000 and 1999,
respectively, and 7.45% and 5.76% for the six month periods then ended,
respectively.
24
<PAGE> 25
Interest expense related to securities sold under agreements to
repurchase increased by $18.0 million or 113% during the second quarter of 2000
as compared to the same period of 1999. During the first six months of 2000,
interest expense related to securities sold under agreements to repurchase was
$63.0 million, versus $31.0 million for the corresponding 1999 period, an
increase of 103%. 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 6.07% and 5.10% for the second
quarters of 2000 and 1999, respectively.
Interest expense on deposits increased by $7.2 million, or 91%, for the
second quarter of 2000 as compared to the respective 1999 period. For the first
half of 2000, interest expense on deposits was $28.2 million, an increase of 94%
over the $14.6 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 June 30, 2000, from $760.1 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 June 30, 2000,
compared to 14 branches as of June 30, 1999. This expansion trend is expected to
continue throughout the remainder of 2000 and into 2001. The average interest
cost on deposits was 5.01% and 5.03%, respectively, for the quarter and six
month periods ended June 30, 2000, as compared to 4.49% and 4.48% for the
respective 1999 periods.
Interest expense on other borrowed funds was $11.2 million for the
quarter ended June 30, 2000, as compared to $4.3 million for the same period a
year ago, an increase of 160%. For the first six months of 2000, interest
expense on other borrowed funds increased by 154%, to $22.2 million from $8.7
million in 1999. For the second quarter and first half of 2000, the weighted
average interest rate for other borrowed funds was 7.39% and 7.48%,
respectively, compared to 6.94% and 7.15%, 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 SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
---------------------- -------- -------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OREO:
Balance at beginning of period ......... $ 1,129 $ 796 $ 910 $ 1,011
Provision for losses ................... 135 135 270 350
Net gains, charge-offs and others ...... (41) (140) 43 (570)
-------- -------- -------- --------
Balance at end of period .................... $ 1,223 $ 791 $ 1,223 $ 791
======== ======== ======== ========
Allowance for Loan Losses(1):
Balance at beginning of period .............. $ 6,863 $ 5,435 $ 6,136 $ 5,166
Provision for loan losses ................... 807 458 1,655 753
-------- -------- -------- --------
Charge - offs:
Mortgage loans held-for-sale ........... (67) (360) (115) (444)
Construction ........................... -- -- -- --
Residential mortgage loans ............. -- -- -- --
Commercial real estate ................. -- -- -- --
Consumer ............................... (221) (148) (278) (159)
Commercial non-real estate ............. (74) -- (74) --
Other .................................. -- 16 (53) (64)
-------- -------- -------- --------
Total Charge-offs ........................... (362) (492) (520) (667)
-------- -------- -------- --------
Recoveries:
Mortgage loans held-for-sale ........... -- -- 14 139
Construction ........................... -- -- -- --
Residential mortgage loans ............. 104 (6) 104 --
Commercial real estate ................. -- -- -- --
Consumer ............................... 35 10 58 14
Commercial non-real estate ............. -- -- -- --
Other .................................. -- -- -- --
-------- -------- -------- --------
Total recoveries ............................ 139 4 176 153
-------- -------- -------- --------
Net charge-offs ............................. (223) (488) (344) (514)
-------- -------- -------- --------
Balance at end of period .................... $ 7,447 $ 5,405 $ 7,447 $ 5,405
======== ======== ======== ========
Allowance for loan losses as a percentage
of total loans outstanding ............... 0.45% 0.49% 0.45% 0.49%
</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 $7.4 million at June 30, 2000, compared to $5.4 million as of June 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.
26
<PAGE> 27
NON-INTEREST INCOME
Net Gains on Mortgage Loan Sales and Fees. Net gains from mortgage loan
sales and fees increased by 32% during the second quarter of 2000 to $31.6
million, as compared to the same period of 1999. For the six month periods ended
June 30, 2000 and 1999, mortgage loan sales were $55.8 million and $40.1
million, respectively, an increase of 39%.The increase for 2000 was mainly the
result of the Company's ability to obtain higher profitability through higher
loan fees resulting in increased gains on sales, including the creation of
interest only strips ("IOs") in connection with bulk sales of mortgage loans to
corporate investors. See "Amortization of IOs and Servicing Assets."
Servicing Income. Servicing income represents revenues earned for
administering mortgage loans. The main component of Doral Financial's servicing
income is loan servicing fees, which depend on the type of mortgage loan being
serviced. The fees on residential mortgage loans range from 0.25% to 0.50% of
the declining outstanding principal amount of the serviced loan. The size of
Doral Financial's loan servicing portfolio and the amount of its servicing fees
have increased substantially since its inception as a result of increases in
internal loan originations and bulk purchases of servicing rights. During the
second quarters of 2000 and 1999, Doral Financial purchased servicing rights to
approximately $77.0 million and $61.0 million, respectively, of mortgages
through bulk purchases. For the first half of 2000 and 1999, such purchases were
approximately $119.5 million and $133.9 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 second
quarter and first half 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 $8.2 billion at June 30, 2000, compared to
$7.0 billion as of June 30, 1999.
The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $284.9 million and $414.6 million for the six months ended June
30, 2000 and 1999, respectively. This represented approximately 8% and 13%,
respectively, on an annualized basis of the average principal amount of mortgage
loans serviced. Doral Financial reduces the sensitivity of its servicing income
to increases in prepayment rates through a strong retail origination network
that increased or maintained the size of Doral Financial's servicing portfolio
even during periods of high prepayments.
Trading Account. 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 June 30, 2000 and 1999, resulted in losses of $1.3 million and
$1.0 million, respectively. Trading account activities for the quarters ended
June 30, 2000 and 1999, included $4.0 million of unrealized gains and $2.5
million of unrealized losses, respectively, on the value of its securities
held-for-trading pursuant to SFAS No. 115. Trading account activities for the
six month period ended June 30, 2000, resulted in losses of $412,000 compared to
$4.5 million in gains during the respective 1999 period. Trading account
activities for the six month periods ended June 30, 2000 and 1999 included $8.5
million of unrealized gains and $1.5 million of unrealized losses, respectively,
on the value of its securities held for trading pursuant to SFAS No. 115.
Gain on Sale of Investment Securities. Gain on sale of investment
securities represents the impact on income of transactions involving the sale of
securities available-for-sale. For the second quarter and first six months of
2000, gain on sale of investment amounted to $135,000 and $3.4 million,
respectively, compared to $226,000 for both periods of 1999.
27
<PAGE> 28
Gain on Sale of Servicing Assets. There were no sales of servicing
assets during the first half of 2000 or 1999. While Doral Financial's strategy
is to continue to increase the size of its servicing portfolio by retaining the
servicing rights on the mortgage loans it originates, Doral Financial may sell
servicing rights in the future when market conditions are favorable.
Commissions, Fees and Other Income. Other income, commissions and fees
increased 84% during the second quarter of 2000 as compared to the same 1999
period. For the first half of 2000, commissions, fees and other income increased
114%, 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 11% during the second
quarter ended June 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 June 30, 1999. For the six month period ended
June 30, 2000, total non-interest expense increased by 12% from the comparable
1999 period.
PUERTO RICO INCOME TAXES
The maximum statutory corporate income tax rate in Puerto Rico is 39%.
For the second quarters of 2000 and 1999, the effective income tax rate of Doral
Financial was 13% and 14%, respectively, while for the six month periods ended
June 30, 2000 and 1999 it was 12% and 13%, respectively.
The lower effective tax rates (as compared to the maximum statutory
rate) experienced by the Company reflect the fact that the portion of the net
interest income derived from certain FHA and VA mortgage loans secured by
properties located in Puerto Rico and on GNMA securities backed by such mortgage
loans is exempt from income tax under Puerto Rico law. The interest received 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
second quarter of 2000 resulted in the recording of approximately $16.0 million
of IOs, compared to $13.2 million for the corresponding 1999 period. For the six
month periods ended June 30, 2000 and 1999, the Company recorded IOs in the
amount of $33.0 million and $23.6 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 June 30, 2000 and 1999, was approximately $3.0 million and $1.3 million,
respectively. For the first six month periods ended June 30, 2000 and 1999,
amortization of IOs was approximately $5.8 million and $3.0 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 allocates the carrying amount of the
loan between the loan sold and the servicing right retained based on their
relative fair values. 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
28
<PAGE> 29
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.
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 SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period .............. $116,115 $ 79,175 $109,721 $ 72,568
Capitalization of rights .................... 11,612 9,471 20,356 17,686
Rights sold ................................. -- (7) -- (7)
Rights purchased ............................ 1,316 956 1,887 2,063
Amortization:
Scheduled .......................... (3,487) (3,005) (6,408) (5,720)
Unscheduled ........................ -- -- -- --
-------- -------- -------- --------
Balance at end of period .................... $125,556 $ 86,590 $125,556 $ 86,590
======== ======== ======== ========
</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.
However, a substantial portion of Doral Financial's servicing portfolio consists
of tax-exempt FHA/VA mortgage loans which carry lower interest rates than those
on conventional mortgage loans, which tends to reduce the prepayment risks
related to such loans. 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 to the purchasers. Generally, such
loans have a low loan-to-value ratio. In such cases, Doral Financial retains
part or all
29
<PAGE> 30
of the credit risk associated with such loan after sale. As of June 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 $621.5 million. As of June 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 June 30, 2000, approximately 21% of Doral
Financial's gross loans receivable portfolio consisted of residential mortgage
loans.
Doral Financial manages credit risk by maintaining sound underwriting
standards, monitoring the quality of the loan portfolio, assessing reserves and
loan concentrations, recruiting qualified credit officers, implementing and
monitoring lending policies and collateral requirements, and instituting
procedures to ensure appropriate actions to comply with laws and regulations.
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 June 30, 2000 and
1999, Doral Financial's banking subsidiaries would have recognized $1.1 million
and $489,000, 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.
30
<PAGE> 31
TABLE J
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 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) ................................ $ 58,337 $ 44,030
OREO .................................................... 6,116 3,834
--------- ---------
Total NPAs of mortgage banking business ................. 64,453 47,864
--------- ---------
Other lending activities through banking subsidiaries:
Non-accrual loans
Construction ........................................ 1,017 --
Residential mortgage loans .......................... 4,008 3,731
Commercial real estate .............................. 2,008 567
Consumer ............................................ 330 205
Commercial non-real estate .......................... 297 --
Other ............................................... 150 --
--------- ---------
Total non-accrual loans ................................. 7,810 4,503
OREO .................................................... 110 76
--------- ---------
Total NPAs of banking subsidiaries ...................... 7,920 4,579
--------- ---------
Total NPAs of Doral Financial (consolidated) ............ $ 72,373 $ 52,443
========= =========
Total NPAs of banking subsidiaries as a percentage of
their loans receivable, net and OREO ................. 3.24% 2.53%
Total NPAs of Doral Financial (consolidated) as a
percentage of consolidated total assets ............. 1.34% 1.16%
Ratio of allowance for loan losses to
non-performing assets (consolidated) ................. 10.29% 11.70%
</TABLE>
--------------------
(1) Does not include approximately $17.6 million and $26.1 million of 90
days past due FHA/VA loans as of June 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 certain other investors and
mortgage loans sold to certain other purchasers, require Doral Financial to
advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. The
Company generally recovers funds
31
<PAGE> 32
advanced pursuant to these arrangements within 30 days. During the six month
period ended June 30, 2000, the average monthly amount of funds advanced by
Doral Financial under such servicing agreements was approximately $10.0 million,
compared to $8.0 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 June 30, 2000 and December 31, 1999:
TABLE K
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000 AS OF DECEMBER 31, 1999
-------------------------- ---------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Repurchase Agreements ....................... $2,374,966 6.29% $1,927,956 5.54%
Loans Payable ............................... 483,603 7.43% 353,460 6.53%
Deposits .................................... 1,180,896 5.27% 1,010,424 4.83%
Notes Payable ............................... 468,033 7.83% 461,053 7.84%
Advances from FHLB .......................... 244,000 6.27% 134,000 5.73%
</TABLE>
Doral Financial has warehousing, gestation and repurchase agreements
lines of credit totaling $5.6 billion as of June 30, 2000, of which $2.8 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 L
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
---------- ------- ---------- --------
<S> <C> <C> <C> <C>
Certificates of deposit ..................... $ 784,342 6.32% $ 481,265 5.84%
Regular passbook savings .................... 54,185 4.68% 51,605 4.57%
Now accounts ................................ 150,916 4.50% 106,502 4.65%
Non-interest bearing ........................ 133,085 -- 132,429 --
---------- ---- ---------- ----
Total deposits ..................... $1,122,528 5.03% $ 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 June 30, 2000.
TABLE M
DEPOSIT MATURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Certificates of deposit maturing
Three months or less...................... $ 132,448
Over three through six months............. 92,156
Over six through twelve months............ 139,464
Over twelve months........................ 176,119
----------
Total..................................... $ 540,187
==========
</TABLE>
As of June 30, 2000 and December 31, 1999, Doral Financial's banking
subsidiaries had approximately $337.9 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 June 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 financial holding company, state non-member bank and
Federal savings bank, respectively (i.e., total capital and Tier 1 capital to
risk weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to
average assets of at least 4%). Set forth below are Doral Financial's, Doral
Bank PR's and Doral Bank NY's regulatory capital ratios as of June 30, 2000,
based on existing Federal Reserve, OTS and FDIC guidelines.
TABLE N
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
DORAL DORAL DORAL
FINANCIAL BANK PR BANK NY(1)
---------- -------- ----------
<S> <C> <C> <C>
Tier 1 Capital Ratio (Tier 1 capital to
risk weighted assets) ...................... 16.6% 14.4% 78.9%
Total Capital (total capital to risk
weighted assets) ........................... 16.9% 14.8% 79.1%
Leverage Ratio (Tier 1 capital to
average assets) ............................ 8.6% 6.9% 29.8%
</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 June 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 June 30, 2000, Doral Financial's total assets were $5.4 billion
compared to $4.5 billion at December 31, 1999. The increase in assets was due
primarily to a net increase in the securities portfolio of approximately $504.8
million. Total liabilities were $5.0 billion at June 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 June 30, 2000, deposit accounts totaled $1.2
billion, compared to $1.0 billion at December 31, 1999. As of June 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 June 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 O
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF JUNE 30, 2000 OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
--------------------------------------------- ---------- --------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and Money Market ................... $ 348,900 $ -- $ -- $ -- $ -- $ 348,900
Total Loans ............................. 1,552,439 11,041 25,844 67,513 -- 1,656,837
Securities Held-for-Trading ............. 1,027,841 -- -- -- -- 1,027,841
Securities Available for Sale ........... 79,081 -- -- 274,390 -- 353,471
Securities Held-to-Maturity ............. 42,289 14,000 49,698 1,445,315 -- 1,551,302
FHLB Stock .............................. -- -- -- 31,945 -- 31,945
Other Assets ............................ -- -- -- -- 419,431 419,431
---------- --------- --------- ---------- ----------- ----------
TOTAL ASSETS ............................ $3,050,550 $ 25,041 $ 75,542 $1,819,163 $ 419,431 $5,389,727
========== ========= ========= ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans Payable ........................... $ 483,603 $ -- $ -- $ -- $ -- $ 483,603
Repurchase Agreements ................... 1,765,820 -- 55,000 554,146 -- 2,374,966
Deposits ................................ 826,135 157,965 61,832 730 134,234 1,180,896
Other Borrowed Funds .................... 240,998 38,480 218,440 214,115 -- 712,033
Other Liabilities ....................... -- -- -- -- 223,589 223,589
Stockholders' Equity .................... -- -- -- -- 414,640 414,640
---------- --------- --------- ---------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................ $3,316,556 $ 196,445 $ 335,272 $ 768,991 $ 772,463 $5,389,727
========== ========= ========= ========== =========== ==========
Off Balance Sheet Instruments - Interest
Rate Swaps .............................. $ 105,000 $ (5,000) $(100,000) $ -- $ -- $ --
Interest Rate Sensitivity Gap ............... (161,006) (176,404) (359,730) 1,050,172 (353,032) --
Cumulative Interest Rate Sensitivity ........ (161,006) (337,410) (697,140) 353,032 -- --
Cumulative Gap to Interest-Earning Asset .... (3.24)% (6.79)% (14.03)% 7.10% -- --
<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. As of June 30, 2000 and December 31, 1999, Doral Financial had a one
year negative gap of approximately $161.0 million and $30.9 million,
respectively. Doral Financial's negative gap within one year is due primarily
to its large portfolio of FHLB notes and other U.S. agency securities which have
call features but are not likely to be exercised by such agencies due to the
actual interest rate environment. 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 six months ended June 30, 2000, average assets and
liabilities related to derivatives were both $6.6 million. The notional amounts
of assets and liabilities related to derivatives which are not recorded on Doral
Financial's statement of condition totaled $1.7 billion and $396 million,
respectively, as of June 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.
36
<PAGE> 37
CHANGES IN ACCOUNTING STANDARDS
Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative and Similar Financial
Instruments and for Hedging Activities" ("SFAS No. 133"). This new standard, as
amended, will become effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, but with earlier application permitted as of the
beginning of any fiscal quarter subsequent to June 15, 1998. SFAS No. 133
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities, and requires all derivatives to be
measured at fair value and to be recognized as either assets or liabilities in
the statement of financial position. Under this Standard, derivatives used in
hedging activities are to be designated into one of the following categories:
(a) fair value hedge; (b) cash flow hedge; and (c) foreign currency exposure
hedge. The changes in fair value (that is, gains and losses) will be either
recognized as part of earnings in the period when the change occurs, or as a
component of other comprehensive income (outside earnings) depending on their
intended use and resulting designation. Management has determined to adopt this
Statement during the first quarter of fiscal year 2001 and believes that such
adoption will not have a material effect on the Company's financial position or
results of operations since all derivatives owned by the Company, except $105
million in interest rate swaps, are recorded at their fair value.
EXPANDED POWERS UNDER NEW MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act"), which became effective in most significant
respects on March 11, 2000. Under the Act, bank holding companies, such as Doral
Financial, all of whose subsidiary depository institutions are
"well-capitalized" and "well-managed," as defined in the Bank Holding Company
Act of 1956 (the "BHCA"), and which obtain satisfactory Community Reinvestment
Act ratings, may elect to be treated as financial holding companies ("FHCs").
FHCs are permitted to engage in a broader spectrum of activities than those
currently permitted to bank holding companies. FHCs can engage in any activities
that are "financial" in nature, including insurance underwriting and brokerage,
and underwriting and dealing in securities without a revenue limit or a limit on
underwriting and dealing in equity securities applicable to foreign securities
affiliates (which include Puerto Rico securities affiliates for these purposes).
Subject to certain limitations, under new merchant banking rules, FHCs
will also be allowed to make investments in companies that engage in activities
that are not financial in nature without regard to the existing 5% limit for
domestic investments and 20% limit for overseas (including Puerto Rico)
investments.
On February 18, 2000, Doral Financial filed an election with the Board
of Governors of the Federal Reserve System (the "Board") to become an FHC, which
became effective on March 11, 2000. As an FHC, Doral Financial's broker-dealer
subsidiary has already commenced limited equity underwriting and dealing
activities and Doral Financial is actively pursuing the possibility of engaging
in various other activities permitted to FHC's, including insurance agency and
underwriting related activities.
Under the Act, if after Doral Financial becomes an FHC, it later fails
to meet the requirements for being an FHC and is unable to correct such
deficiencies within certain prescribed time periods, the Board could require
Doral Financial to divest control of its depository institution subsidiaries or
alternatively to cease conducting activities that are not permissible to bank
holding companies that are not FHCs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Company is exposed,
see the information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Management."
37
<PAGE> 38
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The matters voted upon at Doral Financial the annual stockholders
meeting held on April 13, 2000, and the results of the voting thereon were
previously reported on Doral Financial's Quarterly Report on Form 10Q for the
quarter ended March 31, 2000.
ITEM 5 - OTHER INFORMATION
On August 4, 2000, the Board of Directors authorized a quarterly $0.10
per share cash dividend to be paid on September 1, 2000 to shareholders of
record as of August 11, 2000 of 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. While Doral Financial is still investigating this
matter, it appears the representatives misinterpreted important information
regarding the value of the options when executing the transactions. Accordingly,
Doral Financial voluntarily agreed to absorb all losses incurred by its clients
(other than the representatives and their related parties). While the Company
believes that it will be able to recover all or a substantial portion of such
losses from the representatives or its insurance company, such anticipated
recoveries have not been recognized by the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.101 - Second Amendment, dated as of June 23, 2000,
to Amended and Restated Credit Agreement (Warehouse Facility),
dated as of June 25, 1999, between Doral Financial
Corporation, Doral Mortgage Corporation, the lenders party
thereto and Bankers Trust Company, as agent and lender.
Exhibit 10.102 - Second Amendment, dated as of June 23, 2000,
to Amended and Restated Credit Agreement (Servicing Facility),
dated as of June 25, 1999, between Doral Financial
Corporation, Doral Mortgage Corporation, the lenders party
thereto and Bankers Trust Company, as agent and lender.
Exhibit 12(a) - Computation of Ratio of Earnings to Fixed
Charges.
38
<PAGE> 39
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
None.
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: August 14, 2000 /s/ Salomon Levis
------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: August 14, 2000 /s/ Richard F. Bonini
-------------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: August 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>
10.101 - Second Amendment, dated as of June 23, 2000, to Amended and
Restated Credit Agreement (Warehouse Facility), dated as of
June 25, 1999, between Doral Financial Corporation, Doral
Mortgage Corporation, the lenders party thereto and Bankers
Trust Company, as agent and lender.
10.102 - Second Amendment, dated as of June 23, 2000, to Amended and
Restated Credit Agreement (Servicing Facility), dated as of
June 25, 1999, between Doral Financial Corporation, Doral
Mortgage Corporation, the lenders party thereto and Bankers
Trust Company, as agent and lender.
12(a) - Computation of Ratio of Earnings to Fixed Charges.
12(b) - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends.
27 - Financial Data Schedule (for SEC use only).
</TABLE>
