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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
[x] THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
[ ] THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-17224
DORAL FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PUERTO RICO 66-0312162
(STATE OR OTHER JURISDICTION OF (I.R.S. employer
INCORPORATION OR ORGANIZATION) identification no.)
1159 Franklin D. Roosevelt Avenue
San Juan, Puerto Rico 00920
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (787) 749-7100.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1 PAR VALUE
7% NONCUMULATIVE MONTHLY INCOME PREFERRED STOCK, SERIES A
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
$339,788,000, approximately, based on the last sale price of $10 3/4 per
share on the NASDAQ National Market System on March 27, 2000. For the
purposes of the foregoing calculation only, all directors and executive
officers of the registrant and certain related parties of such persons have
been deemed affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock: 40,428,920 shares as of March 27, 2000. (continued)
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DOCUMENTS INCORPORATED BY REFERENCE
PART II
<TABLE>
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Item 5 Market for Registrant's Common Equity Information in respect to this Item is
and Related Stockholder Matters incorporated into this Annual Report on Form
10-K by reference to the section entitled
"Stock Prices and Dividend Policy" in the
Company's Annual Report to Shareholders
for the year ended December 31, 1999 (the
"Annual Report to Shareholders").
Item 6 Selected Financial Data. Information in response to this Item is
incorporated by reference to the section
entitled "Selected Financial Data" in the
Company's Annual Report to Shareholders.
Item 7 Management's Discussion and Analysis Information in response to this Item is
of Financial Condition and Results of incorporated by reference to the section
Operations. entitled "Management's Discussion and
Analysis of Financial Condition and Results
of Operations" in the Company's Annual
Report to Shareholders.
Item 7A Quantitative and Qualitative Disclosures Information in response to this Item is
About Market Risk. incorporated by reference to the section
entitled "Management's Discussion and
Analysis of Financial Condition and Results
of Operations - Interest Rate Management"
in the Company's Annual Report to
Shareholders.
Item 8 Financial Statements and Supplementary The financial statements and other
Data. information in response to this Item are
incorporated by reference to the Company's
consolidated financial statements included in
the Company's Annual Report to
Shareholders.
</TABLE>
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PART III
<TABLE>
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Item 10 Directors and Executive Officers of the Information in response to this Item is
Registrant. incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Election of Directors and Related
Matters" in the Company's definitive Proxy
Statement for use in connection with its 2000
Annual Meeting of stockholders (the "Proxy
Statement").
Item 11 Executive Compensation. Information in response to this Item is
incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Executive Compensation" in the
Company's Proxy Statement.
Item 12 Security Ownership of Certain Beneficial Information in response to this Item is
Owners and Management. incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Security Ownership of Management
and Principal Holders" in the Company's
Proxy Statement.
Item 13 Certain Relationships and Related Information in response to this Item is
Transactions. incorporated into this Annual Report on
Form 10-K by reference to the section
entitled "Election of Directors and Related
Matters-Certain Relationships and Related
Transactions" in the Company's Proxy
Statement.
</TABLE>
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DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C> <C> <C>
PART I
Item 1. Business..................................................................................................1
Item 2. Properties...............................................................................................20
Item 3. Legal Proceedings........................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders......................................................20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................21
Item 6. Selected Financial Data..................................................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............................................21
Item 8. Financial Statements and Supplementary Data..............................................................21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................22
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................22
Item 11. Executive Compensation..................................................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................22
Item 13. Certain Relationships and Related Transactions..........................................................22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................22
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Doral Financial Corporation ("Doral Financial" or the "Company"), is a
bank holding company which is engaged in a wide range of mortgage banking,
banking, investment and broker-dealer activities. Doral Financial was founded
in 1972 under the laws of the Commonwealth of Puerto Rico, and is the leading
mortgage banking institution in Puerto Rico in volume of origination of
mortgage loans on single-family residences and in the volume of mortgage loans
serviced. The total volume of loan production for the year ended December 31,
1999 for Doral Financial was $2.72 billion, while the Company had a total
servicing portfolio of approximately $7.6 billion as of the same date.
Doral Financial's mortgage banking business is principally conducted
through five operating units: Doral Mortgage Corporation ("Doral Mortgage"),
Centro Hipotecario de Puerto Rico, Inc. ("Centro"), both wholly-owned
subsidiaries of Doral Financial, SANA Investment Mortgage Bankers, Inc.
("SANA"), a wholly-owned subsidiary of Doral Mortgage, Doral Money, Inc.
("Doral Money"), a wholly-owned subsidiary of Doral Bank ("Doral Bank PR") and
HF Mortgage Bankers Division ("HF Division"), an operating division within
Doral Financial. Doral Financial is engaged in the banking business through
Doral Bank PR, a Puerto Rico commercial bank and through Doral Bank, FSB
("Doral Bank NY"), the Company's newly chartered federal savings bank which
opened for business on October 14, 1999. The Company is also involved in the
securities business through Doral Securities, Inc. ("Doral Securities").
During the second quarter of 1998, Doral Financial established Doral Money
as a vehicle for the Company's expansion into the mainland United States. Doral
Money operates a multi-family and commercial real estate lending unit in the
New York City metropolitan area. During the third quarter of 1999, the Company
phased-out the Chicago residential wholesale operation.
Doral Financial's principal strategy is to increase its volume of loan
originations and its servicing portfolio, maximize net interest income, and
further develop its banking operations. The Company seeks to increase its
volume of loan originations by emphasizing quality customer service and
maintaining the most extensive system of branch offices of any mortgage banking
institution in Puerto Rico. The Company strives to increase the size of its
servicing portfolio by relying primarily on internal loan originations and
supplementing such originations with purchases of loans and mortgage servicing
rights from third parties. The Company seeks to maximize net interest income by
holding mortgage-backed securities, primarily Puerto Rico tax-exempt GNMA
securities backed by Puerto Rico FHA/VA mortgages, for longer periods prior to
sale than most mortgage banking companies. This strategy has the effect of
reducing the Company's overall effective tax rate. The Company also seeks to
increase net interest income by funding, and holding for investment, loans and
investment securities, consisting primarily of residential mortgage loans,
mortgage-backed securities and United States government and agency obligations,
the interest on which is tax-exempt to the Company for Puerto Rico income tax
purposes.
The Company's strategy is to offer a wide range of financial products
within its mortgage banking, banking and securities units. The Company also
intends to pursue opportunities to expand geographically within the mainland
United States, particularly within the New York City metropolitan area and
other areas with large Hispanic populations, through acquisitions, the
establishment of new operations or a combination of both.
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MORTGAGE BANKING BUSINESS
MORTGAGE LOAN ORIGINATION
Mortgage Loan Products. The Company is an approved seller/servicer for the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Association ("FNMA"), an approved issuer for the Government National
Mortgage Association ("GNMA") and an approved servicer under the GNMA, FNMA and
FHLMC mortgage-backed securities programs. Doral Financial is also qualified to
originate mortgage loans insured by the Federal Housing Administration ("FHA")
or guaranteed by the Veterans Administration ("VA") or by the Rural Housing
Service ("RHS").
The Company makes available a wide variety of mortgage loan products that
are designed to meet consumer needs and competitive conditions. Doral Financial
has traditionally emphasized 15 to 30 year first mortgage loans secured by
single family residences. The Company generally classifies mortgage loans
between those that are guaranteed or insured by the FHA, VA or RHS and those
that are not. The latter type of loans are referred to as conventional loans.
Conventional loans that meet the underwriting requirements for sale or exchange
with FNMA or FHLMC are referred to as conforming loans, while those that do not
are referred to as non-conforming loans.
The Company's current mortgage loan products can be summarized as follows:
FHA and VA loans. These are 15 to 30 year first mortgage loans that
qualify for the insurance program of FHA or the guarantee programs of VA. As of
December 31, 1999, the maximum loan amount for a VA loan was $203,000 and for
FHA loans the maximum ranged from $121,296 to $154,850, depending on the
location of the mortgaged property.
RHS loans. These are 30 year first mortgage loans made to low income
individuals that qualify for the guarantee program of RHS. As of December 31,
1999, the maximum loan amount for an RHS loan was based on an income table
which is revised periodically.
Conforming conventional loans. These are loans that satisfy the
underwriting criteria for sale or exchange through FNMA or FHLMC. As of
December 31, 1999, the maximum loan amount for conforming conventional loans
was $252,700.
Non-conforming loans. These are conventional mortgage loans that do not
qualify for sale or exchange under the standard programs of FNMA or FHLMC. The
principal deviations that do not permit non-conforming loans to qualify for
such programs are relaxed requirements for income verification or credit
history, or a loan amount in excess of those permitted by FNMA or FHLMC. The
Company uses its own credit system to evaluate these loans and generally
requires lower loan-to-value ratios and higher borrower equity. The Company is
not actively involved in originating "sub-prime" mortgage loans to individuals
who are deemed to be a relatively high credit risk.
Second mortgage loans. Included within the Company's non-conforming loan
products are loans secured by second mortgage liens on single family
residences.
Home equity mortgage loans. These loans are generally up to $40,000 and
are secured by first or second mortgages on single family residences. They are
generally made for debt consolidation, home improvements or other individual
credit needs.
Other mortgage loans. The Company also originates construction loans for
owner occupied single family residences and real estate development projects,
as well as land loans and loans secured by income producing residential,
multi-family and commercial properties.
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For additional information on the Company's mortgage loan originations,
refer to Table B included in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section incorporated by
reference in this report.
MORTGAGE ORIGINATION CHANNELS
Doral Financial's strategy is to increase the size of its mortgage serving
portfolio primarily by originations through its retail branch network. The
Company supplements retail originations with wholesale originations that
encompass purchases of loans from third parties and referrals from mortgage
brokers. In Puerto Rico, the Company maintains specialized units for the
origination of construction loans and loans to finance purchases of residences
in new housing developments. The Company's principal origination channels are
summarized below.
Retail branch network. The Company operates 44 mortgage banking offices on
the Island and one branch office each in Miami, Florida and New York City.
Customers are sought through aggressive advertising campaigns in local
newspapers, as well as direct mail and telemarketing campaigns. The Company
emphasizes quality customer service and offers extended operating hours to
accommodate the needs of customers.
Puerto Rico wholesale activities. Doral Financial purchases primarily FHA
loans and VA loans from other mortgage bankers for securitization and resale to
institutional investors in the form of GNMA securities, and, to a lesser
extent, purchases conventional mortgage loans for sale. The Company purchased
approximately $529 million and $354 million of mortgage loans during the years
ended December 31, 1999 and 1998, respectively. In addition, the Company also
originates mortgage loans referred to it by mortgage brokers. At the closing of
the loan, the borrower is required to pay the mortgage broker a fee for the
services it provided.
New housing unit. In Puerto Rico, the Company maintains a special unit
that works closely with residential housing developers and specializes in
originating mortgage loans to finance the acquisition of homes in newly
developed housing projects. The Company originated approximately $225 million
of mortgage loans to finance the purchase of homes within new housing projects
during the year ended December 31, 1999, compared to $190 million for the year
ended December 31, 1998.
U.S. wholesale operation. During the third quarter of 1999, the Company
made a strategic decision to phase-out the wholesale operation conducted
through Doral Money's Chicago unit. This decision was made because management
felt that realized and anticipated returns from this operation did not justify
the investment of additional managerial and financial resources. This wholesale
operation originated mortgage loans through a network of approximately 50
independent mortgage brokers approved by the Company. Most of these mortgage
loans were principally originated in the states of Illinois, Indiana, Ohio,
Kansas, Michigan, Kentucky and Missouri. The mortgage loans originated by the
wholesale unit generally consisted of single family mortgage loans for sale
under the guarantee programs of FNMA or FHLMC. However, to a lesser extent,
this unit also originated adjustable rate non-conforming mortgage loans. During
the years ended December 31, 1999 and 1998, this wholesale unit originated
approximately $172 million and $143 million, respectively, in mortgage loans,
of which approximately 75% and 80%, respectively, were mortgage loans that
qualified for the sale or exchange programs of FNMA or FHLMC.
New York multi-family and commercial real estate lending unit. The
Company's lending operation established in the New York City metropolitan area
during 1998, specializes in originating mortgage loans secured by income
producing multi-family residential and commercial properties. During the years
ended December 31, 1999 and 1998, this unit originated approximately $133
million and $106 million, respectively.
Construction Loans. Construction loans on residential housing
developments are originated by a specialized unit within the Company.
For more information on the Company's loan origination channels, refer to
Table C in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section incorporated by reference in this report.
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LOAN UNDERWRITING
All loan originations, regardless of whether originated through the retail
network, obtained through mortgage brokers or purchased from third parties,
must be underwritten in accordance with the Company's underwriting criteria,
including loan-to-value ratios, borrower income qualifications, debt ratios and
credit history, investor requirements, and title insurance and property
appraisal requirements. Doral Financial's underwriting standards also comply
with the relevant guidelines set forth by HUD, VA, FNMA, FHLMC, federal and
Puerto Rico banking regulatory authorities, private mortgage investment
conduits and private mortgage insurers, as applicable. The Company's
underwriting personnel, while operating within the Company's loan offices, make
underwriting decisions independent of the Company's mortgage loan origination
personnel. Under the Company's quality control plan, Doral Financial reverifies
a portion of the mortgage loans funded each month, to provide reasonable
assurance that the Company's underwriting standards have been satisfied. The
selection of mortgage loans for reverification is done on a sampling basis to
provide quality control coverage for all mortgage loan programs and appraisers.
In addition, Doral Financial reconfirms employment status, the source of down
payment and other key items.
Conventional mortgage loans generally (i) do not exceed 80% (85% for
certain qualifying home purchase transactions through Doral Bank PR) of the
appraised value of the mortgaged property or (ii) are insured by private
mortgage insurance. The maximum loan-to-value ratio on second mortgages
generally does not exceed 80% (including the amount of any first mortgage).
Non-conforming loans, other than jumbo loans to finance home purchases,
generally have a loan-to-value ratio below 70%.
LOAN SERVICING
When the Company sells originated or purchased mortgage loans, it
generally retains the right to service such loans and to receive the related
servicing fees. Doral Financial's principal source of servicing rights has
traditionally been its mortgage loan production. The Company also seeks to
purchase servicing rights in bulk when it can identify attractive
opportunities.
Servicing rights represent a contractual right and not a beneficial
ownership interest in the underlying mortgage loans. Failure to service the
loans in accordance with contract requirements may lead to a termination of the
servicing rights and the loss of future servicing fees. In general, the
Company's servicing agreements are terminable by the investors for cause. There
has been no termination of servicing rights by any mortgage loan owners because
of the failure by the Company to service loans in accordance with its
contractual obligations.
Doral Financial's mortgage loan servicing portfolio is subject to
reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, the Company may sell mortgage loan
servicing rights from time to time to other institutions if market conditions
are favorable. Refer to Table D in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section incorporated by
reference in this report for detailed information on the composition and
movement of the Company's mortgage servicing portfolio.
The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share credit risk with the owner of the
mortgage loans such as FNMA or FHLMC or with a private investor, insurer or
guarantor. Losses on recourse servicing occur primarily when foreclosure sale
proceeds of the property underlying a defaulted mortgage loan are less than the
outstanding principal balance and accrued interest of such mortgage loan and
the cost of holding and disposing of the underlying property. The Company often
sells non-conforming loans on a recourse or partial recourse basis. For
additional information regarding recourse obligations, see "--Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Credit Risks Related to Loan Activities."
In the ordinary course of business, Doral Financial makes certain
representations and warranties to purchasers and insurers of mortgage loans and
to the purchasers of servicing rights. In connection with any purchases of
certain
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servicing rights, the Company may have a liability exposure as a guarantor to
the representations and warranties of third party originators. If a loan
defaults and there has been a breach of representations and warranties, the
Company may become liable for the unpaid principal and interest on defaulted
loans. In such a case, the Company may be required to repurchase the mortgage
loan and bear any subsequent loss related to the loan. To date, the impact in
earnings of loans repurchased as a result of borrower misrepresentations has
not been material.
The Company's servicing rights provide a significant continuing source of
income. There is a market in Puerto Rico for servicing rights, which are
generally valued in relation to the present value of the expected cash income
stream generated by the servicing rights. Among the factors which influence the
value of a servicing portfolio are servicing fee rates, loan balances, loan
types, loan interest rates, expected average life of underlying loans (which
may be reduced through foreclosure or prepayment), the value of escrow
balances, delinquency and foreclosure experience, servicing costs, servicing
termination rights of permanent investors, and any recourse provisions.
The market value of, and earnings from, Doral Financial's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates
decline and mortgage loan prepayments increase. In a period of declining
interest rates and accelerated prepayments, servicing income generated from the
Company's mortgage loan servicing portfolio may also decline through increased
amortization and the recognition of impairment of servicing rights. Conversely,
as mortgage interest rates increase, the market value of the Company's mortgage
loan servicing portfolio may be positively affected. Increases in the rate of
delinquencies and foreclosures on mortgage loans tend to increase the costs
associated with administering mortgage loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Interest Rate
Management."
HRU, Inc., an entity in which Doral Financial owns a 33% equity interest,
provides electronic data processing and mailing services for the Company's
mortgage servicing operations and earns fees from the Company based on the
volume of mortgage loans serviced. Such fees are determined at fair market
value and amounted to approximately $1,319,000, $946,000 and $1,012,000, for
the years ended December 31, 1999, 1998 and 1997, respectively.
SALE OF LOANS AND SECURITIZATION ACTIVITIES
Residential Mortgage Loans. Doral Financial customarily sells or
securitizes most of the loans that it originates, except for certain loans
originated primarily by the banking subsidiaries and other specialized units of
the Company, which are usually held-to-maturity and classified as loans
receivable. As described below, the Company utilizes various channels to sell
its mortgage products. The Company issues GNMA-guaranteed mortgage-backed
securities, which involve the packaging of FHA loans, RHS loans or VA loans
into pools of $1 million or more ($2.5 million to $5 million for serial notes)
for sale primarily to broker-dealers and other institutional investors. During
the years ended December 31, 1999, 1998 and 1997, the Company issued
approximately $697 million, $543 million and $497 million, respectively, in
GNMA-guaranteed mortgage-backed securities.
Certain GNMA-guaranteed mortgage-backed securities sold by the Company are
in the form of GNMA serial notes. Such pools are composed solely of FHA loans,
RHS loans or VA loans secured by properties located in Puerto Rico. GNMA
securities issued under the serial note program are structured into packages
consisting of notes of different yields and estimated maturities, which range
from 1 to 30 years and have a weighted-average maturity of approximately 12
years, taking into account historical experience with prepayments of the
underlying mortgages. The rates on the serial notes or GNMA pools must be 1/2
of 1% less than the rates on the mortgages comprising the pool. Upon completion
of the necessary processing, the GNMA-guaranteed mortgage-backed securities are
offered for sale to the public through broker-dealers. During years ended
December 31, 1999, 1998 and 1997, Doral Financial issued GNMA serial notes
totaling approximately $186 million, $143 million and $269 million,
respectively.
Conforming conventional loans are generally either sold directly to FNMA,
FHLMC or private investors for cash, or are grouped into pools of $1 million or
more in aggregate principal balance and exchanged for FNMA or FHLMC-issued
mortgage-backed securities, which the Company sells to broker-dealers. In
connection with such
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exchanges, Doral Financial pays guarantee fees to FNMA and FHLMC. The issuance
of mortgage-backed securities provides the Company with flexibility in selling
the mortgage loans that it originates or purchases and also provides income by
increasing the value and marketability of such loans. For the year ended
December 31, 1999, Doral Financial securitized approximately $628 million of
loans into FNMA and FHLMC mortgage-backed securities.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(non-conforming loans) are sold in bulk to financial institutions or other
private investors, or are securitized into "private label" mortgage-backed
securities through grantor trusts or REMICs that either are organized by the
Company or third parties and sold through broker-dealers. Most bulk sales of
non-conforming loans are made to local financial institutions. Doral
Financial's bulk sales generally operate very similar to securitization
transactions because when the Company sells the loans it retains the servicing
rights and agrees to pay the purchaser a specified pass-through rate for the
entire pool being purchased. Any amounts received on the mortgages above the
pass-through rate are retained by the Company. The present value of the future
cash flow retained by the Company above standard servicing fees for FNMA or
FHLMC are recognized on the Company's Financial Statements as interest only
strips ("IOs") and recognized currently as income. See "Management's Discussion
Analysis of Financial Condition and Results of Operations Amortization of IOs
and Servicing Assets."
The securitization of non-conforming loans involves the creation of a
grantor trust or REMIC which issues mortgage-backed securities to investors.
These mortgage-backed securities normally consist of several classes of senior,
subordinate and residual certificates. The residual certificates evidence a
right to receive payments on the mortgage loans after payment of all required
amounts on the senior and subordinate certificates are made. To date, credit
enhancement, in the form of an insurance policy and subordination, has
generally been used to improve the credit rating of the senior certificates and
thereby increase their marketability. The Company did not engage in
securitizations on non-conforming loans during the years ended December 31,
1999, 1998 and 1997, because it has been able to obtain greater revenues
through the creation of IOs by bulk sales of whole loans to local financial
institutions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations for the Three Years Ended
December 31, 1999, 1998 and 1997 - Amortization of IOs and Servicing Assets."
Subject to market conditions, the Company may enter into similar securitization
transactions in the future.
Financial Security Assurance, Inc. ("FSA") has insured senior certificates
issued in connection with non-conforming loans securitization transactions. As
part of its arrangement with FSA, Doral Financial has agreed to retain and
pledge to FSA the residual certificates issued by the respective trusts. The
Company also generally retains the subordinate certificates issued in such
transactions. As of December 31, 1999 and 1998, the Company held approximately
$18.0 million and $18.4 million, respectively, in subordinate certificates and
$7.9 million and $2.8 million, respectively, in residual certificates issued in
securitization transactions involving the Company. Currently, a liquid
secondary market for subordinate or residual certificates does not exist in
Puerto Rico. The value of residual certificates represents the present value of
expected future distributions on such certificates over the life of the trusts
and is subject to substantial fluctuations as a result of changes in prevailing
interest rates.
The decision whether to sell non-conforming loans in bulk to local
financial institutions or to securitize such loans through mortgage conduits
depends on market conditions and the relative pricing and other terms of such
alternative sales channels. Similarly, the relative emphasis on the origination
of FHLMC and FNMA conforming loans versus FHA, RHS and VA loans and
non-conforming loans depends on market conditions, including the needs of
borrowers, the relative pricing and return on origination of the different
types of mortgage loans and the maximum loans amounts for the various types of
loans.
While Doral Financial generally sells loans on a non-recourse basis, the
Company at times also engages in the sale or exchange of mortgage loans on a
recourse basis. The sale of non-conforming loans to local financial
institutions are often made on a full or partial recourse basis. Prior to 1997,
recourse obligations had decreased, in part, due to the securitization of
non-conforming loans into private label mortgage-backed securities that were
sold on a non-recourse basis. Since the Company has shifted from selling
non-conforming loans through securitizations to bulk sales of whole loans to
local financial institutions, recourse obligations have increased. However,
during 1999 most non-conforming loans were sold on a partial rather than full
recourse basis. As of December 31, 1999, Doral Financial was servicing mortgage
loans with an aggregate principal amount of $1.0 billion on a full or partial
recourse basis. As of
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December 31, 1999, 1998 and 1997, the Company's maximum aggregate recourse
obligation relating to its mortgage servicing portfolio was approximately
$608.9 million, $489.1 million and $265.5 million, respectively.
From time to time, Doral Financial sells mortgage-backed securities and
mortgage loans subject to put arrangements. Pursuant to these arrangements, the
Company grants the purchaser of the mortgage-backed securities or loans a put
option that grants the buyer the right to sell, and obligates the Company to
buy, the securities or loans at a future date at a negotiated price. Pursuant
to SFAS No. 125, sales of securities or loans with puts are accounted for as
sales or borrowings based on a financial components approach that focuses on
whether control of the asset has been surrendered. As of December 31, 1999 and
1998, the Company had outstanding $53.6 million and $91.5 million,
respectively, in mortgage-backed securities and mortgage loans sold subject to
put arrangements, which expire in varying amounts during 2002. During the years
ended December 31, 1999 and 1998, no loans or mortgage-backed securities were
sold with put options by the Company.
Multi-family Residential and Commercial Loans. The multi-family
residential and commercial mortgage loans originated by the Company's New York
City operation are generally originated with the intent of selling them to
other financial institutions. To date, most sales have been on a partial
recourse basis (up to 10% of the principal amount of the loan sold), with the
recourse provision being eliminated in its entirety 18 to 24 months after sale.
PUERTO RICO SECONDARY MORTGAGE MARKET AND FAVORABLE TAX TREATMENT
In general, the Puerto Rico market for mortgage-backed securities is an
extension of the United States market with respect to pricing, rating of
investment instruments, and other matters. However, Doral Financial has
benefitted historically from certain tax incentives provided to Puerto Rico
residents to invest in FHA and VA loans and GNMA securities backed by such
loans.
Prior to August 1, 1997, the interest received on FHA and VA loans secured
by real property located in Puerto Rico and on GNMA mortgage-backed securities
backed by these loans was exempt from Puerto Rico income taxes. This favorable
tax treatment has historically permitted the Company to sell tax-exempt Puerto
Rico GNMA mortgage-backed securities to local investors at higher prices than
those at which comparable instruments trade in the mainland United States, and
also to reduce its effective tax rate through the receipt of tax-exempt
interest.
On July 22, 1997, the Puerto Rico Internal Revenue Code was amended to
modify the tax-exempt treatment of FHA and VA loans secured by real property in
Puerto Rico and GNMA mortgage-backed securities backed by such loans. Under the
terms of the amendment, effective August 1, 1997, only FHA and VA loans used to
finance the original acquisition of newly constructed housing in Puerto Rico
and mortgage-backed securities backed by such loans qualify for tax-exempt
treatment. The amendment, however, provides a preferential tax rate of 17% for
individuals to be withheld at source with respect to interest received on FHA
and VA loans not qualifying for tax exemption. In addition, the amendment
grandfathered the tax-exempt status of FHA and VA loans originated on or prior
to July 31, 1997 and mortgage-backed securities backed by such loans.
BANKING ACTIVITIES
As of December 31, 1999, Doral Financial's commercial banking subsidiary,
Doral Bank PR, operated through 16 branches in Puerto Rico. Similar to the
Company's mortgage banking units, Doral Bank PR's lending activities are
concentrated primarily on the origination of residential mortgage loans. Most
of such loans are classified as held- for-sale because Doral Bank PR originates
these loans with the intent of selling them in the near future. Mortgage loans
originated by Doral Bank PR are usually sold through the Company's mortgage
banking units. As of December 31, 1999, Doral Bank PR had a portfolio of
mortgage loans held-for-sale of approximately $552.4 million, which includes
mortgage loans held-for-sale by Doral Bank PR's wholly-owned subsidiary, Doral
Money.
Doral Bank PR is a party to a Master Loan Production Agreement with the
Company's mortgage banking units whereby these units are obligated to help
Doral Bank PR meet its stated mortgage loan production goals by, among
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other things, (i) advertising, promoting and marketing to the general public;
(ii) interviewing prospective borrowers and conducting the initial processing
of loan applications, consistent with Doral Bank PR's underwriting guidelines;
and (iii) providing personnel and facilities with respect to the execution of
loan agreements. In the future, Doral Bank PR may determine to engage in direct
mortgage loan originations through its branch network.
Doral Bank PR is also a party to a Master Servicing and Collection
Agreement (the "Master Servicing Agreement") with the Company's mortgage
banking units, whereby these units have agreed to service all of Doral Bank
PR's loans originated after the date of the Master Servicing Agreement. Under
the Master Servicing Agreement, Doral Financial does not, however, purchase the
intangible right to service these loans. The Company is entitled to receive a
servicing fee ranging from 25 to 50 basis points of the outstanding principal
amount of the loans being serviced. Doral Bank PR retains the right to
terminate the Company's servicing rights, without cause, upon notice to the
Company.
In addition to residential mortgage loans held-for-sale, Doral Bank PR
also originates residential mortgage loans, construction loans and commercial
loans for investment which are classified as loans receivable. To a lesser
extent, Doral Bank PR also originates consumer loans. Most commercial and
consumer loans are originated directly by Doral Bank PR. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Loans - Receivable" - for detailed information regarding the Company's portfolio
of loans receivable.
In addition to its lending activities, Doral Bank PR also earns fee income
by collecting service charges for deposit accounts and other traditional
banking services.
On October 14, 1999, Doral Financial entered the retail banking business
in the New York city metropolitan area through a newly-chartered subsidiary,
Doral Bank NY. Doral Bank NY offers retail banking services and products and
currently operates out of a single branch location in the New York City
metropolitan area, and is exploring the possibility of opening other branch
offices in the area.
Doral Bank NY is a party to Master Loan Production and Master Servicing
and Collection Agreements with Doral Financial's mortgage banking units similar
to those in effect for Doral Bank PR.
BROKER-DEALER ACTIVITIES
Doral Financial is involved in the securities business through Doral
Securities, a broker-dealer firm registered with the Securities and Exchange
Commission (the "SEC") and a member of the National Association of Securities
Dealers, Inc. (the "NASD"). Doral Securities provides retail and institutional
brokerage, financial advisory and investment banking services.
Doral Securities' business is generally organized into two units:
institutional and retail. The institutional unit handles the institutional
trading and investment banking activities of the firm. The retail unit, which
employed 24 registered representatives as of December 31, 1999, is responsible
for handling the needs of individual retail clients. Doral Securities is an
introducing broker-dealer for retail transactions with all transactions cleared
through the Pershing Division of Donaldson, Lufkin and Jenrette Securities
Corporation. As of December 31, 1999, Doral Securities had more than 2,000
customer accounts with assets of approximately $226.8 million in such accounts.
Doral Securities also earns interest revenues by acting as an intermediary
between borrowers, including the Company, and lenders of funds utilizing
repurchase and reverse repurchase agreements. As of December 31, 1999, Doral
Securities had $478.8 million in outstanding reverse repurchase agreements, of
which approximately $457.5 million consisted of funds loaned to the Company and
its subsidiaries and which are eliminated in the preparation of Doral
Financial's Consolidated Financial Statements.
Under Regulation K of the Federal Reserve, Doral Securities may only
conduct securities activities "outside the United States." For purposes of
Regulation K, Puerto Rico is considered to be outside the United States. In
addition, under Regulation K, Doral Securities may not engage in underwriting
or dealing in equity securities without the prior approval of the Federal
Reserve, which Doral Securities intends to seek.
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OTHER INVESTMENT ACTIVITIES
As a result of Doral Financial's mortgage securitization activities, the
Company maintains a substantial portfolio of mortgage-backed securities
held-for-trading. As a way of earning interest income, the Company also invests
in investment securities that are classified either as available-for-sale or
held-to-maturity.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Investment Activities" and to Notes 6, 7 and 8 to the
Company's Consolidated Financial Statements for more detailed information on
the Company's investment activities.
PUERTO RICO INCOME TAXES
Doral Financial is subject to a maximum marginal statutory corporation
income tax rate of 39% pursuant to the Puerto Rico Internal Revenue Code of
1994 (the "PR Code").
The Company is also subject to an alternative minimum tax of 22% on its
alternative minimum taxable income. In computing the Company's alternative
minimum taxable income, its interest expense deduction will be reduced in the
same proportion that its exempt obligations (including FHA and VA loans and
GNMA securities) bear to its total assets. Therefore, to the extent that the
Company holds FHA loans or VA loans and other exempt obligations, it may be
subject to the payment of the 22% alternative minimum tax.
Under the PR Code, corporations are not permitted to file consolidated
returns with their subsidiaries and affiliates. Effective for taxable year
commencing after June 30, 1995, the Company is entitled to a 100% dividend
received deduction on dividends received from Doral Bank PR, Doral Mortgage or
any other Puerto Rico subsidiary subject to tax under the PR Code. Effective
July 1, 1995, the PR Code also provided for the elimination of the existing 29%
withholding tax applicable on interest paid to non-resident corporations and
individuals as well as a reduction of the withholding tax applicable to
dividends payable to non-resident corporations and individuals from 25% to 10%.
UNITED STATES INCOME TAXES
Doral Financial and its subsidiaries (other than Doral Bank NY and Doral
Money) are corporations organized under the laws of Puerto Rico. Accordingly,
the Company and its subsidiaries are subject generally to United States income
tax only on their income, if any, from sources within the United States
(excluding Puerto Rico). Prior to 1992, the Company did not earn any income
that was subject to United States income tax. Doral Mortgage operates a branch
in the State of Florida and, accordingly, is subject to both Florida income and
franchise taxes and federal income tax on income effectively connected with the
conduct of the trade or business of this branch. In addition, the United States
may impose a branch profits tax of 30% in the event that profits from the
Florida branch are repatriated to Puerto Rico. Both the federal tax as well as
the branch profit tax may be claimed as a tax credit in Puerto Rico, subject to
certain limitations. Doral Bank NY and Doral Money are subject to both federal
and state income taxes on the income derived from their operations.
Prior to October 1, 1997, Doral Bank PR, as a federal savings association,
was also subject to United States income taxes. It was entitled to a foreign
tax credit for a portion of income taxes paid to the Puerto Rico Treasury
Department. Doral Bank PR had elected to qualify for the benefits provided
under Section 936 of the Internal Revenue Code which allows an income tax
credit for a portion of the United States income taxes attributable to the
earnings derived from sources within Puerto Rico. Following the conversion of
Doral Bank PR to a Puerto Rico commercial bank on October 1, 1997, it became
subject to taxation in substantially the same manner as Doral Financial and the
other Puerto Rico subsidiaries of Doral Financial.
EMPLOYEES
At December 31, 1999, Doral Financial employed 1,444 persons. Of these,
1,094 were employed in the mortgage banking units with 510 involved in loan
production activities and 227 involved in loan servicing activities.
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As of such date, the Company's banking and broker-dealer operations employed
305 and 45 employees, respectively. None of Doral Financial's employees are
represented by a labor union and Doral Financial considers its employee
relations to be good.
REGULATION--MORTGAGE BANKING BUSINESS
The Company's mortgage banking business is subject to the rules and
regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA with respect to
originating, processing, selling and servicing mortgage loans and the issuance
and sale of mortgage-backed securities. Those rules and regulations, among
other things, prohibit discrimination and establish underwriting guidelines
which include provisions for inspections and appraisals, require credit reports
on prospective borrowers and fix maximum loan amounts, and with respect to VA
loans, fix maximum interest rates. Moreover, lenders such as Doral Financial
are required annually to submit to FHA, VA, RHS, FNMA, FHLMC, GNMA and HUD
audited financial statements, and each regulatory entity has its own financial
requirements. The Company's affairs are also subject to supervision and
examination by FHA, VA, RHS, FNMA, FHLMC, GNMA and HUD at all times to assure
compliance with the applicable regulations, policies and procedures. Mortgage
origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination and require the disclosure of certain basic
information to mortgagors concerning credit terms and settlement costs. The
Company is also subject to regulation by the Office of the Commissioner of
Financial Institutions of Puerto Rico (the "Office of the Commissioner"), with
respect to, among other things, licensing requirements and establishment of
maximum origination fees on certain types of mortgage loan products. Although
Doral Financial believes that it is in compliance in all material respects with
applicable Federal and Puerto Rico laws, rules and regulations, there can be no
assurance that more restrictive laws or rules will not be adopted in the
future, which could make compliance more difficult or expensive, restrict the
Company's ability to originate or sell mortgage loans or sell mortgage-backed
securities, further limit or restrict the amount of interest and other fees
earned from the origination of loans, or otherwise adversely affect the
business or prospects of the Company.
Each of the Company's mortgage banking subsidiaries that operate in Puerto
Rico is licensed by the Office of the Commissioner as a mortgage banking
institution. Such authorization to act as a mortgage banking institution must
be renewed as of January 1 of each year. In the past, the Company has not had
any difficulty in renewing its authorization to act as a mortgage banking
institution and management is unaware of any existing practices, conditions or
violations which would result in the Company being unable to receive such
authorization in the future. The Company's operations in the mainland United
States are subject to regulation by various state regulators in those states in
which it conducts business.
Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the
"Mortgage Banking Law") requires the prior approval of the Office of the
Commissioner for the acquisition of control of any mortgage banking institution
licensed under the Mortgage Banking Law. For purposes of the Mortgage Banking
Law, the term "control" means the power to direct or influence decisively,
directly or indirectly, the management or policies of a mortgage banking
institution. The Mortgage Banking Law provides that a transaction that results
in the holding of less than 10% of the outstanding voting securities of a
mortgage banking institution shall not be considered a change of control.
Pursuant to Section 5 of the Mortgage Banking Law, upon receipt of notice of a
proposed transaction that may result in change of control, the Office of the
Commissioner is obligated to make such inquiries as it deems necessary to
review the transaction. Under the Mortgage Banking Law, the determination of
the Office of the Commissioner whether or not to authorize a proposed change of
control is final and non-appealable.
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REGULATION-BANKING OPERATIONS
FEDERAL REGULATION
General
Doral Financial is a bank holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve (the "Federal
Reserve") under the Bank Holding Company Act of 1956 (the "BHC Act"), as
recently amended by the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley
Act"). As a bank holding company that has elected to be treated as a financial
holding company under the Gramm-Leach-Bliley Act, Doral Financial's activities
and those of its banking and nonbanking subsidiaries are limited to activities
that are financial in nature. See "Financial Modernization Legislation" for a
description of recent legislation expanding the powers of financial holding
companies. Under the BHC Act, Doral Financial may not, directly or indirectly,
acquire the ownership or control of more than 5% of any class of voting shares
of a bank or another bank holding company, without the prior approval of the
Federal Reserve. In addition, bank holding companies are generally prohibited
under the BHC Act from engaging in nonbanking activities, subject to certain
exceptions.
Doral Bank PR is subject to supervision and examination by applicable
federal and state banking agencies, including the FDIC and the Office of the
Commissioner. Doral Bank NY is subject to supervision and examination by the
Office of Thrift Supervision ("OTS") and the FDIC. The banking subsidiaries are
subject to requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of other investments that may be made and
the types of services that may be offered. Various consumer laws and
regulations also affect the operations of the Company's banking subsidiaries.
In addition to the impact of regulation, commercial and savings banks are
affected significantly by the actions of the Federal Reserve as it attempts to
control the money supply and credit availability in order to influence the
economy.
As a creditor and financial institution, Doral Financial's banking
subsidiaries are subject to certain regulations promulgated by the Federal
Reserve Board including, without limitations, Regulation B (Equal Credit
Opportunity Act), Regulation DD (The Truth in Savings Act), Regulation E
(Electronic Funds Transfer Act), Regulation F (Limits on Exposure to Other
Banks), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act), Regulation X (Real Estate Settlement Procedures Act),
Regulation BB (Community Reinvestment Act) and Regulation C (Home Mortgage
Disclosure Act).
Holding Company Structure
Doral Bank PR, Doral Bank NY and any other insured depository institution
subsidiaries organized by Doral Financial in the future, are subject to
restrictions under Federal law that govern certain transactions between the
Company or other nonbanking subsidiaries of the Company, whether in the form of
loans, other extensions of credit, investments or asset purchases and sales.
Such transactions by any depository institution subsidiary to the Company, or
to any one nonbanking subsidiary of the Company, are limited in amount to 10%
of the depository institution's capital stock and surplus and, with respect to
all of its nonbanking subsidiaries, to an aggregate of 20% of the transferring
institution's capital stock and surplus. Furthermore, such loans and extensions
of credit by the depository institution subsidiary are required to be secured
in specified amounts and must be at market rates and on terms and conditions
that are consistent with safe and sound banking practices. All other
transactions between the Company or any of its nonbanking subsidiaries and any
of the depository institution subsidiaries, while not subject to quantitative
or collateral requirements, are subject to the requirement that they be on
terms and conditions no less favorable to the banking subsidiary than would be
available to unaffiliated third parties.
Under Federal Reserve policy, a bank holding company such as Doral
Financial is expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such subsidiary bank.
This support may be required at times when, absent such policy, the bank
holding company might not otherwise provide such support. In addition, any
capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness
of such subsidiary bank. In connection
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with the organization of Doral Bank NY, Doral Financial entered into a
commitment with the FDIC to maintain Doral Bank NY's ratio of Tier 1 capital to
total assets at a level of not less than 8% throughout its first three years of
operation. In the event of a bank holding company's bankruptcy, any commitment
by the bank holding company to a Federal bank regulatory agency to maintain the
capital of a subsidiary depository institution will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Because the Company is a bank holding company, its right to participate in
the assets of any subsidiary upon the latter's liquidation or reorganization
will be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of depository institution subsidiaries) except to the
extent that the Company may itself be a creditor with recognized claims against
the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution (which term includes both commercial banks and savings banks), the
deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or a
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. In some circumstances (depending upon the amount of
the loss or anticipated loss suffered by the FDIC), cross-guarantee liability
may result in the ultimate failure or insolvency of one or more insured
depository institutions in a holding company structure. Any obligation or
liability owned by a subsidiary depository institution to its parent company is
subordinated to the subsidiary bank's cross-guarantee liability with respect to
commonly controlled insured depository institutions.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley 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 depository institutions are "well capitalized" and "well managed",
as defined in the BHC Act, 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
previously 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 are
also permitted 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 applicable to bank holding companies that are not FHCs.
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.
Under the Gramm-Leach-Bliley Act, if Doral Financial 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.
Capital Adequacy
Under the Federal Reserve's risk-based capital guidelines for bank holding
companies, the minimum guidelines for the ratio of qualifying total capital
("Total Capital") to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of credit) is 8%. At least half of the Total
Capital is to be comprised of common
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equity, retained earnings, minority interests in unconsolidated subsidiaries,
noncumulative perpetual preferred stock and a limited amount of cumulative
perpetual preferred stock, in the case of a bank holding company, less goodwill
and certain other intangible assets discussed below ("Tier 1 Capital"). The
remainder may consist of a limited amount of subordinated debt, other preferred
stock, certain other instruments and a limited amount of loan and lease loss
reserves ("Tier 2 Capital").
The Federal Reserve has adopted regulations that require most intangibles,
including core deposit intangibles, to be deducted from Tier l Capital. The
regulations, however, permit the inclusion of a limited amount of intangibles
related to readily marketable mortgage servicing rights and purchased credit
card relationships and include a "grandfather" provision permitting the
continued inclusion of certain existing intangibles.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to total assets, less goodwill and certain other
intangible assets discussed below (the "Leverage Ratio") of 3% for bank holding
companies that meet certain specified criteria, including that they meet the
highest regulatory rating. All other bank holding companies will be required to
maintain a Leverage Ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The guidelines also provide that banking organizations
experiencing significant internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve will continue to
consider a "tangible Tier 1 Leverage Ratio" and other indicia of capital
strength in evaluating proposals for expansion or new activities. The tangible
Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital,
less all intangibles, to average total assets, less all intangibles.
In 1996, the Federal Reserve and other U.S. Federal bank regulatory
agencies jointly issued a final rule that amended the risk-based capital
guidelines to incorporate a measure for market risk (the "market risk
amendment"). Although compliance is mandatory in 1998 for banking organizations
with extensive trading activities, the market risk amendment permits the bank
regulatory agencies to exclude institutions from the application of the
amendment if certain criteria are met. Doral Financial has requested the
Federal Reserve to be excluded from the application of the market risk
amendment on the basis that the Company's trading activities are primarily
related to its mortgage securitization activities and that they are not the
type of activities contemplated by the market risk amendment. To date, the
Federal Reserve had not acted on the Company's request.
The FDIC and the OTS have established regulatory capital requirements for
state non-member insured banks and savings banks, such as Doral Bank PR and
Doral Bank NY, that are substantially similar to those adopted by the Federal
Reserve for bank holding companies. In addition to the regulatory capital
requirements set forth in the table below, as condition for insurance of
accounts, the FDIC required that Doral Bank NY's Tier 1 capital ratio be
maintained at not less than 8% throughout the first three years of operations
and 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.
Set forth below are the Company's, Doral Bank PR's and Doral Bank NY's
capital ratios at December 31, 1999, based on existing Federal Reserve, OTS and
FDIC guidelines.
<TABLE>
<CAPTION>
THE COMPANY DORAL BANK PR DORAL BANK NY
----------- ------------- -------------
<S> <C> <C> <C>
Tier 1 capital ratio 18.1% 16.3% 155.3%
Total capital ratio 18.4% 16.7% 155.3%
Leverage ratio 8.8% 9.6% 79.5%
</TABLE>
Failure to meet capital guidelines could subject a bank holding company or
an insured bank to a variety of enforcement remedies, including, with respect
to an insured bank or savings bank, the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "FDICIA" below.
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Bank regulators have in the past indicated their desire to raise capital
requirements applicable to banking organizations beyond current levels.
However, management is unable to predict whether and when higher capital
requirements would be imposed and, if so, at what levels or on what schedule.
FDICIA
Under FDICIA, federal banking regulators must take prompt corrective
action with respect to depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder, establish five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution is deemed to be well capitalized if it maintains a
Leverage Ratio of at least 5%, a risk-based Tier 1 capital ratio of at least 6%
and a risk-based Total Capital ratio of at least 10%, and is not subject to any
written agreement or regulatory directive to meet a specific capital level. A
depository institution is deemed to be adequately capitalized if it is not well
capitalized but maintains a Leverage Ratio of at least 4% (or at least 3% if
given the highest regulatory rating and not experiencing or anticipating
significant growth), a risk based Tier l capital ratio of at least 4% and a
risk-based Total Capital ratio of at least 8%. A depository institution is
deemed to be undercapitalized if it fails to meet the standards for adequately
capitalized institutions (unless it is deemed to be significantly or critically
undercapitalized). An institution is deemed to be significantly
undercapitalized if it has a Leverage Ratio of less than 3%, a risk-based Tier
1 capital ratio of less than 3% or a risk-based Total Capital ratio of less
than 6%. An institution is deemed to be critically undercapitalized if it has
tangible equity equal to 2% or less of total assets. A depository institution
may be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.
At December 31, 1999, the Company's banking subsidiaries were both well
capitalized. An institution's capital category, as determined by applying the
prompt corrective action provisions of law, may not constitute an accurate
representation of the overall financial condition or prospects of the Company,
Doral Bank PR or Doral Bank NY, and should be considered in conjunction with
other available information regarding the institution's financial condition and
results of operations.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The Federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it were significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
The capital-based prompt corrective action provisions of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions such as
Doral Bank PR and Doral Bank NY, but they are not directly applicable to bank
holding companies, such as the Company, which control such institutions.
However, Federal banking agencies have indicated that, in regulating holding
companies, they may take appropriate action at the holding company level based
on their assessment of the effectiveness of supervisory actions imposed upon
subsidiary insured depository institutions pursuant to such provisions and
regulations.
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Interstate Banking Legislation
Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle- Neat Act") amended the FDIA and certain
other statutes to permit state and national banks with different home state of
a participating bank had passed legislation prior to May 31, 1997, expressly
prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a
state or national bank has established branches in a state, that bank may
establish and acquire additional branches at any location in the state at which
any bank involved in the interstate merger transaction could have established
or acquired branches under applicable Federal or state law. If a state opts out
of interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo.
For purposes of the Riegle-Neal Act's amendments to the FDIA, Doral Bank
PR is treated as a state bank and is subject to the same restrictions on
interstate branching as other state banks. However, for purposes of the
International Banking Act, Doral Bank PR is considered to be a foreign bank and
may branch interstate by merger or de novo to the same extent as a domestic
bank in Doral Bank PR's home state. Because Doral Bank PR does not currently
operate in the mainland United States, it has not designated a "home state" for
purposes of the IBA. It is not yet possible to determine how these statutes
will be harmonized, with respect to which federal agency will approve
interstate transactions or with respect to which "home state" determination
rules will apply.
As a Federal savings bank, Doral NY is subject to the branching
regulations promulgated by the OTS. Such regulations allow Doral Bank NY to
branch on an interstate basis without geographic limitations.
Federal Legislative Proposals
Various other legislation affecting depository institutions and bank
holding companies is from time to time introduced in Congress. Doral Financial
cannot determine the ultimate effect that such potential legislation, if
enacted, or implementing regulations, would have upon the Company's financial
condition or results of operations.
Dividend Restrictions
The payment of dividends by the banking subsidiaries to Doral Financial
may be affected by regulatory requirements and policies, such as the
maintenance of adequate capital. If, in the opinion of the applicable
regulatory authority, a depository institution under its jurisdiction is
engaged in, or is about to engage in, an unsafe or unsound practice (that,
depending on the financial condition of the depository institution, could
include the payment of dividends), such authority may require, after notice and
hearing, that such depository institution cease and desist from such practice.
The Federal Reserve has issued a policy statement that provides that insured
banks and bank holding companies should generally pay dividends only out of
current operating earnings. In addition, all insured depository institutions
are subject to the capital-based limitations required by FDICIA. See "-FDICIA."
See "-Regulation-Banking Operations-Puerto Rico Regulation" for a
description of certain restrictions on Doral Bank PR's ability to pay dividends
under Puerto Rico law. See - "Regulation - Banking Operations - Savings Bank
Regulation", for a description on Doral Bank NY's ability to pay dividends
under OTS regulations.
FDIC Insurance Assessments
The deposits of Doral Bank PR and Doral Bank NY are insured by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC and, accordingly,
the banking subsidiaries are subject to FDIC deposit insurance assessments.
Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to the level of risk incurred in its activities. An institution's
risk category is based partly upon whether the institution is well capitalized,
adequately capitalized or less than adequately capitalized. Each insured
depository institution is also assigned to one of the following "supervisory
subgroups": "A", "B" or "C". Group "A" institutions are financially sound
institutions with only a few minor
15
<PAGE> 20
weaknesses; group "B" institutions are those that demonstrate weaknesses that,
if not corrected, could result in significant deterioration; and group "C"
institutions are those for which there is a substantial probability that the
FDIC will suffer a loss in connection with the institution, unless effective
action is taken to correct the areas of weakness.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA")
was enacted and signed into law. DIFA repealed the statutory minimum premium,
and currently premiums related to deposits assessed by both the Bank Insurance
Fund ("BIF") and the SAIF are to be assessed at a rate of between 0 cents and
27 cents per $100.00 of deposits.
DIFA also separated, effective January 1, 1997, the Financing Corporation
("FICO") assessment to service the interest on its bond obligations from the
BIF and SAIF assessments. The amount assessed on individual institutions by the
FICO is in addition to the amount, if any, paid for deposit insurance according
to the FDIC's risk-related assessment rate schedules. FICO assessment rates for
1999 were set at basis points annually for BIF-assessable deposits and basis
points annually for SAIF-assessable deposits. These rates may be adjusted
quarterly to reflect changes in assessment bases for the BIF and the SAIF. By
law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the insurance funds are merged or until January
1, 2000, whichever occurs first. As of December 31, 1999, Doral Bank PR and
Doral Bank NY had a deposit base of approximately $829.2 million and $17.8
million, respectively, (consisting entirely of SAIF assessment deposits).
Brokered Deposits
FDIC regulations adopted under FDICIA govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it
is well capitalized or (ii) it is adequately capitalized and receives a waiver
from the FDIC. A bank that is adequately capitalized may not pay an interest
rate on any deposits in excess of 75 basis points over certain prevailing
market rates specified by regulation. There are no such restrictions on a bank
that is well capitalized. Doral Financial does not believe the brokered
deposits regulation has had or will have a material effect on the funding or
liquidity of its banking subsidiaries, which are currently well capitalized
institutions.
As of December 31, 1999 and 1998, Doral Bank PR had approximately $295.4
million and $96.8 million, respectively, of brokered deposits. As of December
31, 1999, Doral Bank NY had no brokered deposits. Doral Bank PR uses brokered
deposits as a source of long-term funding.
PUERTO RICO REGULATION
General
As a commercial bank organized under the laws of the Commonwealth of
Puerto Rico, Doral Bank PR is subject to supervision, examination and
regulation by the Office of the Commissioner, pursuant to the Puerto Rico
Banking Act of 1933, as amended (the "Banking Law").
Section 27 of the Banking Law requires that at least 10% of the yearly net
income of Doral Bank PR be credited annually to a reserve fund until such fund
equals 100% of total paid-in capital (preferred and common). As of December 31,
1999, Doral Bank PR had an adequate reserve fund established.
Section 27 of the Banking Law also provides that when a bank suffers a
loss, it must first be charged against retained earnings, and the balance, if
any, must be charged against the reserve fund. If the balance of the reserve
fund is not sufficient to cover the loss, the difference shall be charged
against the capital account of the bank and no dividend may be declared until
the capital has been restored to its original amount and the reserve fund to
20% of the original capital of the institution.
16
<PAGE> 21
Section 16 of the Banking Law requires every bank to maintain a legal
reserve which shall not be less than 20% of its demand liabilities, other than
government deposits (federal, state and municipal) secured by actual
collateral. The Office of the Commissioner can, by regulation, increase the
reserve requirement to 30% of demand deposits.
Section 17 of the Banking Law generally permits Doral Bank PR to make
loans on an unsecured basis to any one person, firm, partnership or
corporation, up to an aggregate amount of 15% of the paid-in capital and
reserve fund of the bank and of such other components as the Office of
Commissioner may permit from time to time. As of December 31, 1999, the legal
lending limit for Doral Bank PR under this provision based solely on its
paid-in capital and reserve fund was approximately $15.4 million. If such loans
are secured by collateral worth at least 25% more than the amount of the loan,
the aggregate maximum amount may reach one third of the paid-in capital of the
bank, plus its reserve fund and such other components as the Office of
Commissioner may permit from time to time. As of December 31, 1999, the lending
limit for loans secured by collateral worth at least 25% more than the amount
of the loan was $19.2 million. There are no restrictions under Section 17 on
the amount of loans that are wholly secured by bonds, securities and other
evidences of indebtedness of the Government of the United States or the
Commonwealth, or by current debt bonds, not in default, of municipalities or
instrumentalities of the Commonwealth.
Section 14 of the Banking Law authorizes Doral Bank PR to conduct certain
financial and related activities directly or through subsidiaries, including
finance leasing of personal property, making and servicing mortgage loans and
operating a small-loan company. Doral Bank PR currently operates one
subsidiary, Doral Money, Inc., which engages in mortgage banking activities in
the mainland United States.
The Finance Board, which is a part of the Office of the Commissioner, but
also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico,
has the authority to regulate the maximum interest rates and finance charges
that may be charged on loans to individuals and unincorporated businesses in
the Commonwealth. The current regulations of the Finance Board provide that the
applicable interest rate on loans to individuals and unincorporated businesses
is to be determined by free competition. The Finance Board also has authority
to regulate the maximum finance charges on retail installment sales contracts,
which are currently set at 21%, and for credit card purchases, which are
currently set at 26%. There is no maximum rate set for installment sales
contracts involving motor vehicles, commercial, agricultural and industrial
equipment, commercial electric appliances and insurance premiums.
SAVINGS BANK REGULATION
As a Federal savings bank, Doral Bank NY's investments, borrowings,
lending, issuance of securities, establishment of branch offices and all other
aspects of its operation are subject to the jurisdiction of the OTS.
Doral Bank NY's payment of dividends is subject to the limitations of the
capital distribution regulation promulgated by the OTS. The OTS' regulation
determines a savings bank's ability to pay dividends, make stock repurchases,
or make other types of capital distributions, according to the institution's
capital position. The rule establishes "safe-harbor" amounts of capital
distributions that institutions can make after providing notice to the OTS,
without constituting an unsafe or unsound practice. Institutions that do not
meet their capital requirements can make distributions with the prior approval
of the OTS.
For savings banks such as Doral Bank NY that meet all applicable capital
requirements, the safe-harbor amount is the greater of (a) 75% of net income
for the prior four quarters, or (b) the sum of (i) the current year's net
income and (ii) the amount that causes the excess of any component of the
association's total capital to be less than only one-half of such excess at the
beginning of the year; so long as the association continues to satisfy
applicable capital requirements after the distribution.
OTS regulations generally permit Doral Bank NY to make total loans and
extensions of credit to one borrower up to 15% of its unimpaired capital and
surplus. As of December 31, 1999, the legal lending limit for Doral Bank NY
under this regulation was approximately $3.7 million. Doral Bank NY's legal
lending limit may be increased
17
<PAGE> 22
by an additional 10% of its unimpaired capital and surplus if such additional
extension of credit is fully secured by readily marketable collateral having a
market value as determined by reliable and continuously available price
quotations. Doral Bank NY's expanded aggregate legal lending limit under this
provision was approximately $6.2 million as of December 31, 1999.
CERTAIN REGULATORY RESTRICTIONS ON INVESTMENTS IN COMPANY COMMON STOCK
Because of Doral Financial's status as a bank holding company, owners of
the Company's Common Stock are subject to certain restrictions and disclosure
obligations under various federal laws, including the BHC Act. Regulations
pursuant to the BHC Act generally require prior Federal Reserve approval for an
acquisition of control of an insured institution (as defined) or holding
company thereof by any person (or persons acting in concert). Control is deemed
to exist if, among other things, a person (or persons acting in concert)
acquires more than 25% of any class of voting stock of an insured institution
or holding company thereof. Control is presumed to exist subject to rebuttal,
if a person (or persons acting in concert) acquires more than 10% of any class
of voting stock and either (i) the Company has registered securities under
Section 12 of the Securities Exchange Act of 1934, or (ii) no person will own,
control or hold the power to vote a greater percentage of that class of voting
securities immediately after the transaction. The concept of acting in concert
is very broad and also is subject to certain rebuttable presumptions, including
among others, that relatives, business partners, management officials,
affiliates and others are presumed to be acting in concert with each other and
their businesses.
Section 12 of the Puerto Rico Banking Act requires the prior approval of
the Office of the Commissioner with respect to a transfer of voting stock of a
bank that results in a change of control of the bank. Under Section 12, a
change of control is presumed to occur if a person or group of persons acting
in concert, directly or indirectly, acquire more than 5% of the outstanding
voting capital stock of the bank. The Office of the Commissioner has
interpreted the restrictions of Section 12 as applying to acquisitions of
voting securities of entities controlling a bank, such as a bank holding
company. Under the Puerto Rico Banking Act, the determination of the Office of
the Commissioner whether to approve a change of control filing is final and
non-appealable.
The provisions of the Mortgage Banking Law also only require regulatory
approval for the acquisition of more than 10% of the Company's outstanding
voting securities. See "--Regulation--Mortgage Banking Business."
The above regulatory restrictions relating to investment in the Company
may have the effect of discouraging takeover attempts against the Company and
may limit the ability of persons, other than Company directors duly authorized
by the Company's board of directors, to solicit or exercise proxies, or
otherwise exercise voting rights, in connection with matters submitted to a
vote of the Company's stockholders.
REGULATION-BROKER-DEALER OPERATIONS
Doral Securities is registered as a broker-dealer with the SEC and the
Office of the Commissioner, and is also a member of the NASD. As a registered
broker-dealer, it is subject to regulation by the SEC, the NASD and the Office
of the Commissioner in matters relating to the conduct of its securities
business, including record keeping and reporting requirements, supervision and
licensing of employees and obligations to customers. In particular, Doral
Securities is subject to the SEC's net capital rules, which specify minimum net
capital requirements for registered broker-dealers and are designed to ensure
that broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business.
MARKET AREA AND COMPETITION
Prior to March 1992, Puerto Rico was Doral Financial's exclusive service
area. Although Doral Financial has opened offices in Miami, Florida and New
York, Puerto Rico remains Doral Financial's predominant service area.
The following table sets forth the Company's loan origination composition:
18
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C> <C>
Puerto Rico:
Metropolitan Area................................................. 50% 47% 52%
Outside the Metropolitan Area..................................... 39% 42% 47%
United States:
Illinois and adjoining states..................................... 6% 6% ---
New York/New Jersey............................................... 5% 5% ---
Florida........................................................... (1) (1) 1%
</TABLE>
- --------------------------
(1) Less than one percent.
The competition in Puerto Rico for the origination of mortgages is
substantial. Competition comes not only from other mortgage bankers but also
from major commercial banks. There are approximately 55 mortgage banks and 19
commercial banks operating in Puerto Rico, including affiliates of banks
headquartered in the United States, Canada and Spain. Doral Financial competes
principally by offering loans with competitive features, by emphasizing the
quality of its service and pricing its range of products at competitive rates.
THE COMMONWEALTH OF PUERTO RICO, USA
General. Puerto Rico, the fourth largest and most economically developed
of the Caribbean islands, is located approximately 1,600 miles southeast of New
York, New York and 1,000 miles southeast of Miami, Florida. The average flying
time from New York City is approximately 3 1/2 hours and from Miami, Florida 2
1/2 hours. Puerto Rico is approximately 100 miles long and 35 miles wide.
According to estimates of the Puerto Rico Planning Board, the population of
Puerto Rico is approximately to 3.8 million. The Puerto Rico Planning Board
estimates that the San Juan metropolitan area has a population in excess of 1.0
million. The Caribbean region has a population of over 30 million located in
more than 25 principal islands.
Relationship of Puerto Rico with the United States. Puerto Rico has been
under the jurisdiction of the United States since 1898. The United States and
Puerto Rico share a common defense, market and currency. As a U.S.
commonwealth, Puerto Rico exercises virtually the same control over its
internal affairs as a state government does. There is a federal district court
in Puerto Rico and most federal laws are applicable to Puerto Rico. The U.S.
mail system operates in Puerto Rico in the same manner as in the mainland
United States. The people of Puerto Rico are citizens of the United States, but
do not vote in national elections and are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives but only limited
voting rights. Most federal taxes, except those such as social security taxes
which are imposed by mutual consent, are not levied in Puerto Rico. No federal
income tax is collected from Puerto Rico residents on ordinary income earned
from sources within Puerto Rico, except for federal employees who are subject
to taxes on their salaries.
The Economy. The economy of Puerto Rico is closely integrated with that of
the mainland United States. During the fiscal year ended June 30, 1999,
approximately 87% of Puerto Rico's exports went to the United States mainland,
which was also the source of approximately 60% of Puerto Rico's imports. For
the fiscal year ended June 30, 1999, Puerto Rico experienced a positive
merchandise trade balance of $9.6 billion.
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals and electronics. The service sector also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth.
Gross product increased from $28.5 billion ($26.0 billion in 1992 prices)
for fiscal 1995 to $38.2 billion ($29.8 billion in 1992 prices) for fiscal
1999, an increase of 34.4% (14.8% in real terms). Since fiscal 1985, personal
19
<PAGE> 24
income per capita has increased consistently each fiscal year. In fiscal 1999,
personal income per capita was $9,674 ($8,571 in 1992 prices). Average
employment increased from 1,051,000 in fiscal 1995 to 1,147,000 in fiscal 1999.
Average unemployment decreased from 13.8% in fiscal 1995 to 12.5% in fiscal
1999. The seasonally adjusted unemployment rate for January 2000 was 11.9%.
Future growth in the Puerto Rico economy will depend on several factors
including the condition of the United States economy, the relative stability in
the price of oil imports, the exchange value of the U.S. dollars and the level
of interest rates and changes to existing tax incentive legislation as
discussed below.
The Small Business Job Protection Act, which was signed into law on August
20, 1996, provided for the repeal of Section 936 of the Internal Revenue Code
over a ten year phase-out period for corporations with operations in Puerto
Rico as of August 1995. Section 936 has traditionally provided tax incentives
for U.S. corporations to invest in Puerto Rico. In addition, the Act eliminated
the tax credit for corporations that established operations in Puerto Rico
after October 1995. The elimination of the benefits of Section 936, without the
substitution of another fiscal incentive to attract investment to Puerto Rico,
could have an adverse effect on the future growth of the Puerto Rico economy.
At this point, the Company cannot predict the long-term impact of the repeal of
Section 936 on the economy of Puerto Rico.
ITEM 2. PROPERTIES
The executive and administrative offices of Doral Financial are located
at 1159 Franklin D. Roosevelt Avenue, Puerto Nuevo, San Juan, Puerto Rico and
consist of approximately 11,136 square feet of office space. Doral Mortgage's
executive and administrative offices are located at 650 Munoz Rivera Avenue,
San Juan, Puerto Rico and consist of approximately 33,000 square feet of
office space. Both of these facilities are leased. The Company also leases
additional office space of approximately 170,500 square feet throughout
Puerto Rico. In the mainland United States, the Company leases approximately
9,200 square feet of office space as follows: Florida 1,000 square feet and
New York 8,200 square feet. The Company's leases are for various terms
expiring through 2005 and thereafter. Annual aggregate rental payments made
during the years ended December 31, 1999, 1998 and 1997 were $4,467,000,
$3,273,000 and $2,518,000, respectively. Doral Financial owns a two-acre
parcel of land located in the San Juan metropolitan area on which the Company
is currently constructing a new headquarters building. Adjacent to this
property, Doral Financial also owns two parcels of land with 3,143 square
feet on which two buildings are located. Doral Financial purchased these
parcels and buildings for $2,223,284 in 1999. Doral Financial also owns a
2,000 square foot building and underlying real property where a bank branch
is located. Except for the properties previously described, Doral Financial
does not own any real property other than OREO acquired in the ordinary
course of business. The site for the new headquarters building was purchased
for $3.0 million. Construction costs are estimated at approximately $40.0
million, including the $3.0 million cost of the land.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of Doral Financial's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is included under the caption "Stock
Prices and Dividend Policy" in Doral Financial's Annual Report to Shareholders
for the year ended December 31, 1999 (the "Annual Report to Shareholders") and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
information included in Table A commencing on page 20 of the Management's
Discussion and Analysis of Financial Condition and Results of Operations
section of the Company's Annual Report to Shareholders.
The Company's ratios of earnings to fixed charges and earnings to fixed
charges and preferred stock dividends on a consolidated basis for each of the
last five years is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined Fixed Charges
Including Interest on Deposits........................................ 1.46x 1.51x 1.61x 1.66x 1.50x
Excluding Interest on Deposits........................................ 1.59 1.61 1.72 1.75 1.54
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Including Interest on Deposits........................................ 1.41x 1.50x 1.60x 1.66x 1.49x
Excluding Interest on Deposits........................................ 1.52 1.59 1.72 1.75 1.53
</TABLE>
For purposes of computing these consolidated ratios, earnings consist of
pre-tax income from continuing operations plus fixed charges and amortization
of capitalized interest, less interest capitalized. Fixed charges consist of
interest expenses and capitalized, amortization of debt issuance costs, and the
Company's estimate of the interest component of rental expense. Ratios are
presented both including and excluding interest on deposits. The term
"preferred stock dividends" is the amount of pre-tax earnings that is required
to pay dividends on the Company's outstanding preferred stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to the
information included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of the Company's Annual Report to
Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated by reference to the
information included under the subcaption "Interest Rate Management" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Doral Financial, together with
the report thereon of the Company's independent auditors PricewaterhouseCoopers
LLP dated February 25, 2000, included as part of the Annual Report to
Shareholders are incorporated herein by reference.
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<PAGE> 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters" contained
in Company's definitive Proxy Statement for its 2000 Annual Meeting of
stockholders (the "Proxy Statement") filed with the Securities and Exchange
Commission on March 16, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
to the section entitled "Executive Compensation" in the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference
to the section entitled "Security Ownership of Management and Principal
Holders" of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters -- Certain
Relationships and Related Transactions" of the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The consolidated financial statements of Doral Financial and its
subsidiaries, together with the report thereon of the Company's
independent auditors PricewaterhouseCoopers dated February 25, 2000,
appearing in the Annual Report to Shareholders, are incorporated
herein by reference.
(2) Financial Statement Schedules.
All financial schedules have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) Exhibits.
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<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description
- ------- ------------
<S> <C>
1.1 Distribution Agreement, dated May 14, 1999, among Doral Financial
Corporation, Merrill Lynch & Co. and Bear, Stearns & Co., Inc.
(Incorporated by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated May 14, 1999.)
1.2 Terms Agreement, dated July 1, 1999, among Doral Financial,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Bear, Stearns & Co. Inc., relating to the offer
and sale of Doral Financial's Medium-Term Senior Notes, Series A
due July 8, 2004. (Incorporated by reference to exhibit number
1.1 of the Company's Current Report on Form 8-K dated July 7,
1999.)
3.1(b) Certificate of Designation creating the 8% Convertible Cumulative
Preferred Stock (Liquidation Preference $1,000 per Share.)
(Incorporated herein by reference to the same exhibit number of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.)
3.1(c) Second Restated Certificate of Incorporation of Doral Financial.
(Incorporated herein by reference to the same exhibit number of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.)
3.1(d) Certificate of Designation creating the 7% Noncumulative Monthly
Income Preferred Stock, Series A (Incorporated herein by
reference to exhibit number 3.4 of the Company's Registration
Statement on Form 8-A filed with the Commission on February 17,
1999.)
3.1(e) Certificate of Incorporation of Doral Financial as currently in
effect. (Filed herewith.)
3.1(f) Certificate of Amendment, dated May 13, 1999, to Restated
Certificate of Incorporation. (Incorporated herein by reference
to the same exhibit number of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.)
3.2 By-laws of Doral Financial, as amended as of October 19, 1998.
(Incorporated herein by reference to the same exhibit number of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.)
4.1 Common Stock Certificate. (Incorporated herein by reference to
the same exhibit number of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.)
4.2 1997 Employee Stock Option Plan (Incorporated herein by reference
to the same exhibit number of the Company's Registration
Statement on Form S-8 (No. 333-31283) filed with the Commission
on July 15, 1997.)
4.3 Loan and Guaranty Agreement among Puerto Rico Industrial,
Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority ("AFICA"), Doral Properties, Inc.
and Doral Financial. (Incorporated herein by reference to exhibit
number 4.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.)
4.4 Trust Agreement between AFICA and Citibank, N.A. (Incorporated
herein by reference to exhibit number 4.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999.)
4.5 Form of Serial and Term Bond (included in Exhibit 4.4 hereof).
4.6 Deed of Constitution of First Mortgage. (Incorporated herein by
reference to exhibit number 4.4 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999.)
4.7 Mortgage Note (included in Exhibit 4.6 hereof).
4.8 Pledge and Security Agreement. (Incorporated herein by reference
to exhibit number 4.6 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.)
4.9 Indenture, dated May 14, 1999, between Doral Financial and
Bankers Trust Company, as trustee, pertaining to senior debt
securities. (Incorporated by reference to exhibit 4.1 of the
Company's Current Report on Form 8-K dated May 14, 1999.)
</TABLE>
23
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description
- ------- ------------
<S> <C>
4.10 Indenture, dated May 14, 1999, between Doral Financial and
Bankers Trust Company, as trustee, pertaining to subordinated
debt securities (Incorporated by reference to exhibit number 4.3
of the Company's Current Report on Form 8-K dated May 14, 1999.)
4.11 Form of Note for Doral Financial's 8.5% Medium-Term Senior Notes,
Series A due July 8, 2004. (Incorporated by reference to exhibit
number 4.1 of the Company's Current Report on Form 8-K dated July
7, 1999.)
10.14 Doral Restricted Stock Plan. (Incorporated herein by reference to
the same exhibit number of the Company's Form 10 filed with the
Commission on October 7, 1988, as amended by Form 8 amendments
thereto.)
10.30 Loan Agreement between Doral and Puerto Rico Island Rental
Limited Dividend Partnership S.E., dated December 27, 1990.
(Incorporated herein by reference to the same exhibit number of
the Company's Registration Statement on Form S-1 (No. 33-39651)
filed with the Commission on March 29, 1991.)
10.32 Warehousing Loan Agreement dated September 8, 1995 between Doral
and Banco Santander Puerto Rico. (Incorporated herein by
reference to the same exhibit number of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.)
10.33 Loan Agreement dated November 25, 1987 between Doral and
Scotiabank de Puerto Rico. (Incorporated herein by reference to
the same exhibit number of the Company's Registration Statement
on Form S-1 (No. 33-39651) filed with the Commission on March 29,
1991.)
10.37 Third Amendment to Loan Agreement dated June 5, 1991 between
Doral and Scotiabank de Puerto Rico. (Incorporated herein by
reference to the same exhibit number of the Company's Annual
Report on From 10-K for the year ended December 31, 1991 (File
No. 0-17224).)
10.40 Insurance and Indemnity Agreement dated as of May 28, 1992,
between Doral and Financial Security Assurance Inc. (Incorporated
herein by reference to the same exhibit number of the Company's
Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de
Puerto Rico and Doral confirming the renewal of the Loan
Agreement dated November 25, 1987. (Incorporated herein by
reference to the same exhibit number of the Company's
Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.)
10.42 Financing Agreement dated May 14, 1992, between Doral and Banco
Popular de Puerto Rico. (Incorporated herein by reference to the
same exhibit number of the Company's Registration Statement on
Form S-2 (No. 33-52292) filed with the Commission on September
23, 1992.)
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991,
between Doral and Banco Santander Puerto Rico. (Incorporated
herein by reference to the same exhibit number of the Company's
Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992,
between Doral and Banco Santander Puerto Rico. (Incorporated
herein by reference to the same exhibit number of the Company's
Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.)
10.46 Letter Agreement dated November 28, 1988 amending the Loan
Agreement between Doral and Scotiabank de Puerto Rico dated
November 25, 1987. (Incorporated herein by reference to the same
exhibit number of the Company's Registration Statement on Form
S-2 (No. 33-52292) filed with the Commission on September 23,
1992.)
10.47 Amendment dated June 29, 1989 to the Loan Agreement between Doral
and Scotiabank de Puerto Rico dated November 25, 1987.
(Incorporated herein by reference to the same exhibit number of
the Company's Registration Statement on Form S-2 (No. 33-52292)
filed with the Commission on September 23, 1992.)
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description
- ------- ------------
<S> <C>
10.51 Master Repurchase Agreement, dated March 24, 1993, between Doral
and Bear Sterns Mortgage Capital Corporation. (ncorporated by
reference to exhibit number 19.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993 (File
No. 0-17224).)
10.52 Amended and Restated Master Production Agreement, dated as of
October 1, 1995, between Doral, Doral Mortgage and Doral Bank,
Master Production Agreement, dated as of October 1, 1995, between
Doral, Doral Mortgage and Doral Bank. (Incorporated by reference
to exhibit number 19.3 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993 (File No.
0-17224).)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of
September 15, 1993, between Doral and Doral Bank. (Incorporated
by reference to exhibit number 19.4 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993
(File No. 0-17224).)
10.57 Master Repurchase Agreement among Merrill Lynch Mortgage Capital,
Inc., Doral and Doral Mortgage together with Supplemental Terms
to Master Repurchase Agreement, each dated as of January 12,
1995. (Incorporated herein by reference to the same exhibit
number of the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.)
10.59 Demand Note dated December 9, 1994. (Incorporated herein by
reference to the same exhibit number of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.)
10.60 Form of Medium Term Note, 1994 Series Puerto Rico-A.
(Incorporated herein by reference to the same exhibit number of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.)
10.62 Exchange Agreement dated July 9, 1997, between Doral and Popular,
Inc. (Incorporated herein by reference to the same exhibit
number of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.)
10.63 Financing Agreement dated October 10, 1995, between Doral and
Banco Santander together with related Assignment and Pledge
Agreements. (Incorporated herein by reference to the same exhibit
number of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995.)
10.64 Master Servicing and Collection Agreement dated October 1, 1995,
between Doral and Doral Bank. (Incorporated herein by reference
to the same exhibit number of the Company's Annual Report on Form
10-K for the year ended December 31, 1995.)
10.65 Employment Agreement, dated as of February 25, 1998, between
Doral and Frederick C. Teed. (Incorporated herein by reference to
the same exhibit number of the Company's Annual Report on Form
10-K for the year ended December 31, 1998.)
10.66 First Amendment to Master Servicing and Collection Agreement,
dated as of March 1, 1996, between Doral and Doral Bank.
(Incorporated herein by reference to the same exhibit number of
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.)
10.67 First Amendment to Amended and Restated Master Production
Agreement, dated as of March 1, 1996, between Doral, Doral
Mortgage Corporation and Doral Bank, respectively. (Incorporated
herein by reference to the same exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.)
10.69 Indenture, dated as of October 10, 1996, between the Company and
Bankers Trust Company, as trustee, including form of Senior Note.
(Incorporated herein by reference to the same exhibit number of
the Company's Quarterly Report For 8-K, dated October 10, 1996.)
10.72 Employment Agreement, dated May 1, 1997 between Doral Bank and
Jose G. Vigoreaux. (Incorporated herein by reference to the same
exhibit number of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.)
10.73 Credit Agreement dated November 5, 1997, between Doral, Doral
Mortgage, the lender party thereto and Bankers Trust Company as
Agent. (Incorporated herein by reference to the same exhibit
number of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.)
</TABLE>
25
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description
- ------- ------------
<S> <C>
10.78 Form of Stock Option Agreement for use under 1997 Employee Stock
Option Plan. (Incorporated herein by reference to the same
exhibit number of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.)
10.79 First Supplemental Indenture, dated as of October 19, 1998,
between the Company and Bankers Trust Company. (Incorporated
herein by reference to the same exhibit number of the Company's
Current Report on Form 8-K dated October 19, 1998.)
10.83 Employment Agreement with Francisco Rivero dated June 29, 1998.
(Incorporated by reference to the same exhibit number of the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.)
10.85(a) Credit Agreement, dated as of April 9, 1999, between FirstBank
Puerto Rico and the Company. (Incorporated herein by reference to
the same exhibit number of the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.)
10.85(b) First Amendment, dated as of May 13, 1999, to Credit Agreement,
dated as of April 9, 1999, between FirstBank Puerto Rico and the
Company. (Incorporated herein by reference to the same exhibit
number of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.)
10.86 Warehousing Loan Agreement, dated as of April 29, 1999, among
Doral Financial, Doral Mortgage Corporation and Citibank, N.A.
(Incorporated herein by reference to the same exhibit number of
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.)
10.87 Purchase Contract, dated as of August 3, 1999, among Doral
Mortgage Corporation, Nancy Hernandez and Salomon Levis.
(Incorporated by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated August 3, 1999.)
10.88 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. (Incorporated herein by reference
to the same exhibit number of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.)
10.89 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. (Incorporated herein by reference
to the same exhibit number of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.)
10.90 Employment Agreement, dated as of December 22, 1999, between the
Company and Salomon Levis. (Incorporated by reference to the same
exhibit number of the Company's Current Report on Form 8-K dated
December 22, 1999.)
10.91 Employment Agreement, dated as of December 22, 1999, between the
Company and Zoila Levis. (Incorporated by reference to the same
exhibit number of the Company's Current Report on Form 8-K dated
December 22, 1999.)
10.92 Employment Agreement, dated as of December 22, 1999, between the
Company and Richard F. Bonini. (Incorporated by reference to the
same exhibit number of the Company's Current Report on Form 8-K
dated December 22, 1999.)
10.93 Employment Agreement, dated as of December 22, 1999, between the
Company and Mario S. Levis. (Incorporated by reference to the
same exhibit number of the Company's Current Report on Form 8-K
dated December 22, 1999.)
10.94 Note Purchase Agreement, dated September 17, 1999 (including form
of Senior Note). (Incorporated by reference to exhibit number
10.88 of the Company's Current Report on Form 8-K dated October
7, 1999.)
10.95 Master Repurchase Agreement, dated as of June 4, 1999, between
Doral Financial and Bear Stearns Mortgage Capital Corporation.
(Incorporated by reference to exhibit number 10.89 of the
Company's Current Report on Form 8-K dated October 7, 1999.)
10.96 First Amendment, dated as of November 30, 1999, 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. (Filed herewith.)
</TABLE>
26
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description
- ------- ------------
<S> <C>
10.97 First Amendment, dated as of November 30, 1999, 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. (Filed herewith.)
10.98 First Amendment, dated as of December 23, 1999, to Warehousing
Loan Agreement, dated as of April 29, 1999, among Doral
Financial, Doral Mortgage Corporation and Citibank, N.A. (Filed
herewith.)
10.99 Master Loan and Security Agreement, dated as of December 30,
1999, between Doral Financial and Morgan Stanley Mortgage Capital
Inc. (Filed herewith.)
12(a) Computation of Ratio of Earnings to Fixed Charges. (Filed
herewith.)
12(b) Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends. (Filed herewith.)
13 Annual Report to Shareholders for the year ended December 31,
1999. (Filed herewith.)
21 List of Doral's subsidiaries. (Filed herewith.)
23 Consent of PricewaterhouseCoopers LLP. (Filed herewith.)
27 Financial Data Schedule (Edgar version only). (Filed herewith.)
99 Administrative Procedures governing Fixed and Floating Rate
Medium-Term Notes, Series A, dated as of May 14, 1999.
(Incorporated by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated May 14, 1999.)
</TABLE>
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K ("Form 8-K"), dated October 7, 1999,
reporting under Item 5 "Other Events" the Company's unaudited results for the
quarter and nine months ended September 30, 1999 and the issuance on September
19, 1999 of $29 million of the Company's unsecured senior notes.
(2) Form 8K, dated December 22, 1999, reporting under Item 5 - "Other
Events" the execution of new employment agreements with Salomon Levis, the
Chairman of the Board and Chief Executive Officer of the Company, as well as
with Zoila Levis, its President, Richard F. Bonini, its Senior Executive Vice
President and Chief Financial Officer, and Mario S. Levis, its Executive Vice
President and Treasurer.
27
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, Doral Financial Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DORAL FINANCIAL CORPORATION
By: /s/ SALOMON LEVIS
-------------------------------
Salomon Levis
Chairman of the Board and
Chief Executive Officer
Date: March 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ SALOMON LEVIS Chairman of the Board and
- -------------------------------------------- Chief Executive Officer March 27, 2000
Salomon Levis
/s/ RICHARD F. BONINI Director and
- -------------------------------------------- Chief Financial Officer March 27, 2000
Richard F. Bonini
/s/ EDGAR M. CULLMAN, JR.
- -------------------------------------------- Director March 27, 2000
Edgar M. Cullman, Jr.
/s/ JOHN L. ERNST
- -------------------------------------------- Director March 27, 2000
John L. Ernst
/s/ EFRAIM KIER
- -------------------------------------------- Director March 27, 2000
Efraim Kier
/s/ ZOILA LEVIS
- -------------------------------------------- Director March 27, 2000
Zoila Levis
/s/ A. BREAN MURRAY
- -------------------------------------------- Director March 27, 2000
A. Brean Murray
/s/ HAROLD D. VICENTE
- -------------------------------------------- Director March 27, 2000
Harold D. Vicente
/s/ RICARDO MELENDEZ Vice President and
- -------------------------------------------- Principal Accounting Officer March 27, 2000
Ricardo Melendez
</TABLE>
28
<PAGE> 1
EXHIBIT 3.1(e)
CERTIFICATE OF INCORPORATION
OF
DORAL FINANCIAL CORPORATION
AS IN EFFECT ON MARCH 29, 2000
Doral Financial Corporation, a corporation organized under the laws of
the Commonwealth of Puerto Rico, does hereby certify pursuant to Article 8.05 of
the Puerto Rico General Corporation Law, that
FIRST: The name under which it was originally incorporated was HF, Inc.
The name was subsequently amended to First Financial Caribbean Corporation and
on September 22, 1997 was amended to Doral Financial Corporation.
SECOND: Its original Certificate of Incorporation was filed
in the Office of the Secretary of State of the Commonwealth of Puerto
Rico on October 23, 1972, Reg. No. 29,324. The original Certificate
of Incorporation as amended to such date was restated on March 26,
1997.
THIRD: This Second Restated Certificate of Incorporation was approved
by the Board of Directors of Doral Financial Corporation at a meeting duly
called and held on October 6, 1997 and does not further amend the provisions of
Doral Financial Corporation's Restated Certificate of Incorporation as
heretofore amended, and there are no discrepancies between those provisions and
of this Second Restated Certificate of Incorporation.
FOURTH: The text of the Restated Certificate of Incorporation of Doral
Financial Corporation, as amended, is hereby restated without further amendment
or change, effective as of the date of filing of this instrument with the
Secretary of State of the Commonwealth of Puerto Rico, to read as follows:
FIRST: The name of the corporation (hereinafter called
the Corporation) is DORAL FINANCIAL CORPORATION.
SECOND: The principal office of the Corporation in
the Commonwealth of Puerto Rico is located at Avenida F.D.
Roosevelt 1159, Puerto Nuevo, Puerto Rico 00920, in the
Municipality of San Juan. The name of the resident agent
of the Corporation is David Levis, the mailing address of
such resident agent is Avenida F.D. Roosevelt 1159, Puerto
Nuevo, Puerto Rico 00920.
<PAGE> 2
2
THIRD: The nature of the business of the Corporation
and the objects or purposes to be transacted, promoted or
carried on by it are as follows:
1. To engage in the business of mortgage banking, including
but not limited to the origination, servicing and resale of first and
second mortgages, both conventional and Veterans Administration
guaranteed and Federal Housing Administration insured, and the issuance
and brokerage of mortgage-backed certificates.
2. To make, manufacture, produce, prepare, process, purchase
or otherwise acquire, and to hold, own, use, sell, import, export,
dispose of or otherwise trade or deal in and with, machines, machinery,
appliances, apparatus, goods, wares, products and merchandise of every
kind, nature and description; and, in general, to engage or participate
in any manufacturing or other business of any kind or character
whatsoever, whether or not related to, conducive to, incidental to or
in any way connected with the above business.
3. To engage in research, exploration, laboratory and
development work relating to any material, substance, compound or
mixture now known or which may hereafter be known, discovered or
developed, and to perfect, develop, manufacture, use, apply and
generally to deal in and with any such material, substance, compound or
mixture.
4. To adopt, apply for, obtain, register, purchase, lease,
take licenses in respect of or otherwise acquire, and to maintain,
protect, hold, use, own, exercise, develop, manufacture under, operate
and introduce, and to sell and grant licenses or other rights in
respect of, assign or otherwise dispose of, turn to account, or in any
manner deal with and contract with reference to, any trademarks, trade
names, patents, patent rights, concessions, franchises, designs,
copyrights and distinctive marks and rights analogous thereto, and
inventions, devices, processes, recipes, formulae and improvements and
modifications thereof.
5. To act as agent or broker for any person, firm or
corporation including, but not limited to, acting as agent for any
local, municipal, state or Commonwealth agency or instrumentality.
6. To purchase, lease or otherwise acquire, to hold, own, use,
develop, maintain, manage and operate, and to sell, transfer, lease,
assign, convey, exchange or otherwise turn to account or dispose of,
and otherwise deal in and with such real property, whether located
within the
<PAGE> 3
3
Commonwealth of Puerto Rico or elsewhere, as may be necessary or
convenient in connection with the business of the Corporation, and
personal property, tangible or intangible, without limitation;
provided, however, that the Corporation shall not be authorized, as
respects real property located within the Commonwealth of Puerto Rico,
to conduct the business of buying and selling real estate, and shall in
all other respects be subject to the provisions of Section 14 of
Article VI of the Constitution of the Commonwealth of Puerto Rico.
7. To enter into any joint ventures, agreements and any other
lawful arrangements for sharing profits, union of interest, reciprocal
concession or cooperation, with any corporation, association,
partnership, syndicate, entity, person or governmental, municipal or
public authority, domestic or foreign, in the carrying on of any
business that the Corporation is authorized to carry on or any business
or transaction deemed necessary, convenient or incidental to carrying
out any of the purposes of the Corporation.
8. To enter into, make, perform and carry out contracts of
every kind and description, not prohibited by law, with any person,
firm, association, corporation or governmental body; and to guarantee
the contracts or obligations, and the payment of interest or dividends
on securities of any other person, firm, association, corporation or
governmental body.
9. To lend its uninvested funds from time to time to such
extent, to such persons, firms, associations, corporations or
governments or subdivisions, agencies or instrumentalities thereof, and
on such terms and on such security, if any, as the Board of Directors
of the Corporation may determine.
10. To acquire and undertake all or any part of the business
assets and liabilities of any person, firm, association or corporation
on such terms and conditions as may be agreed upon, and to pay for the
same in cash, property or securities of the Corporation, or otherwise,
and to conduct the whole or any part of any business thus acquired,
subject only to the provisions of the laws of the Commonwealth of
Puerto Rico.
11. To merge into, merge into itself or consolidate with, and
to enter into agreements and cooperative relations, not in
contravention of law, with any person, firm, association or
corporation.
<PAGE> 4
4
12. To purchase, lease, construct or otherwise acquire, and to
hold, own, use, maintain, manage and operate, buildings, factories,
plants, laboratories, installations, equipment, machinery, pipelines,
rolling stocks, and other structures, facilities and apparatus of every
kind and description, used or useful in the conduct of the business of
the Corporation.
13. To purchase, lease, construct, or otherwise acquire, and
to hold, own, use, maintain, manage and operate dwelling houses and
other buildings at or near any place of business of the Corporation for
the purpose of furnishing housing and other conveniences to employees
of the Corporation, and others, and to carry on a general mercantile
business at or near any such place of business for the convenience of
those residing in the vicinity thereof, and others.
14. To purchase or otherwise acquire, and to hold, pledge,
sell, exchange, or otherwise dispose of securities (which term, for the
purpose of this Article THIRD, shall include any shares of stock,
bonds, debentures, notes, mortgages or other obligations and any
certificates, receipts or other instruments representing rights to
receive, purchase or subscribe for the same, or representing any other
rights or interests therein or in any property or assets) created or
issued by any person, firm, association, corporation or governmental
body, and while the holder thereof to exercise all the rights, powers
and privileges in respect thereof, including the right to vote, to the
same extent as a natural person might or could do.
15. To borrow money for any of the purposes of the
Corporation, from time to time, and without limit as to amount; from
time to time to issue and sell its own securities in such amounts, on
such terms and conditions, for such purposes and for such
consideration, as may now be or hereafter shall be permitted by the
laws of the Commonwealth of Puerto Rico; and to secure the same by
mortgage upon, or the pledge of, or the conveyance or assignment in
trust of, the whole or any part of the properties, assets, business and
goodwill of the Corporation, then owned or thereafter acquired.
16. To purchase, or otherwise acquire and to hold, cancel,
reissue, sell, exchange, transfer or otherwise deal in its own
securities from time to time to such extent and upon such terms as
shall be permitted by the laws of the Commonwealth of Puerto Rico;
provided, however, that shares of its own capital stock so purchased or
held shall not be directly or indirectly voted, nor shall they be
entitled
<PAGE> 5
5
to dividends during such period or periods as they shall be held by the
Corporation.
17. To such extent as a corporation organized under the laws
of the Commonwealth of Puerto Rico may now or hereafter lawfully do, to
do, either as principal or agent and either alone or through
subsidiaries or in connection with other persons, firms, associations
or corporations, all and everything necessary, suitable, convenient or
proper for, or in connection with, or incident to, the accomplishment
of any of the purposes or the attainment of any one or more of the
objects herein enumerated, or designed directly or indirectly to
promote the interests of the Corporation or to enhance the value of its
properties; and in general to do any and all things and exercise any
and all powers, rights, and privileges which a corporation may now or
hereafter be organized to do or to exercise under the laws of the
Commonwealth of Puerto Rico.
The foregoing provisions of this Article THIRD shall be
construed both as purposes and powers and each as an independent
purpose and power. The foregoing enumeration of specific purposes and
powers shall not be held to limit or restrict in any manner the
purposes and powers of the Corporation, and the purposes and powers
herein specified shall, except when otherwise provided in this Article
THIRD, be in no wise limited or restricted by reference to, or
inference from, the terms of any provisions of this or any other
Article of this Certificate of Incorporation.
The Corporation is to be carried on for pecuniary profit.
FOURTH: The total number of shares of all classes of stock
which the Corporation is authorized to issue is 210,000,000 shares,
consisting of 200,000,000 shares of Common Stock, $1.00 par value and
10,000,000 shares of Serial Preferred Stock, $1.00 par value.
The minimum amount of capital with which the Corporation will
commence business is $10,000.00.
The Board of Directors is authorized at any time, and from
time to time, to provide for the issuance of shares of Serial Preferred
Stock in one or more series, and to determine the designations,
preferences, limitations and relative or other rights of the Serial
Preferred Stock or any series thereof. For each series, the Board of
Directors shall determine, by resolution or resolutions adopted prior
to the issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights
<PAGE> 6
6
thereof, including but not limited to the following relative rights and
preferences, as to which there may be variations among different
series:
(a) The rates or rates (which may be floating,
variable or adjustable), or the method of determining such
rate or rates and the times and manner of payment of
dividends, if any (and whether such payment should be in cash
or securities);
(b) Whether shares may be redeemed or purchased, in
whole or in part, at the option of the holder or the
Corporation and, if so, the price or prices and the terms and
conditions of such redemption or purchase;
(c) The amount payable upon shares in the event of
voluntary or involuntary liquidation, dissolution or other
winding up of the Corporation;
(d) Sinking fund provisions, if any, for the
redemption or purchase of shares;
(e) The terms and conditions, if any, on which shares
may be converted or exchanged into shares of Common Stock or
other capital stock or securities of the Corporation;
(f) Voting rights, if any; and
(g) Any other rights and preferences of such shares,
to the full extent now or hereafter permitted by the laws of
the Commonwealth of Puerto Rico.
All shares of Serial Preferred Stock (i) shall rank senior to
the Common Stock in respect of the right to receive dividends and the
right to receive payments out of the assets of the Corporation upon
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, (ii) shall be of equal rank, regardless of series, and
(iii) shall be identical in all respects except as provided in (a)
through (g) above. The shares of any series of the Serial Preferred
Stock shall be identical with each other in all respects except as to
the dates from and after which dividends thereof shall be cumulative.
In case the stated dividends or the amounts payable on liquidation are
not paid in full, the shares of all series of the Serial Preferred
Stock shall share ratably in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be
payable on said shares if all dividends were declared and paid in full,
and in any distribution of assets other than by way of
<PAGE> 7
7
dividends in accordance with the sums which would be payable on such
distribution if all sums payable were discharged in full.
The Board of Directors shall have the authority to determine
the number of shares that will comprise each series. Unless otherwise
provided in the resolution establishing such series, all shares of
Serial Preferred Stock redeemed, retired by sinking fund payment,
repurchased by the Corporation or converted into Common Stock shall
have the status of authorized but unissued shares of Serial Preferred
Stock undesignated as to series.
Prior to the issuance of any shares of a series, but after
adoption by the Board of Directors of the resolution establishing such
series, the appropriate officers of the Corporation shall file such
documents with the Commonwealth of Puerto Rico as may be required by
law.
No holder of shares of Common Stock or Serial Preferred Stock
shall be entitled as a matter right to subscribe for or purchase, or
have any preemptive right with respect to, any part of any new or
additional issue of stock of any class whatsoever, or of securities
convertible into any stock of any class whatsoever, whether now or
hereafter authorized and whether issued for cash or other consideration
or by way of dividend.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: For the management of the business and for the conduct
of the affairs of the Corporation, and in further creation, definition,
limitation and regulation of the powers of the Corporation and of its
directors and stockholders, it is further provided:
1. The number of directors of the Corporation shall be fixed
by, or in the manner provided in, the By-laws, but in no case shall the
number be less than three. The directors need not be stockholders.
Election of directors need not be by ballot unless the By-laws so
require. Meetings of the Board of Directors may be held at such place
or places within or without the Commonwealth of Puerto Rico as shall be
specified in the respective notices thereof or in the respective
waivers of notice thereof signed by all the directors of the
Corporation at the time in office
2. In furtherance and not in limitation of the powers
conferred by the laws of the Commonwealth of Puerto Rico, and subject
at all times to the provisions thereof, the Board of Directors is
expressly authorized and empowered:
<PAGE> 8
8
(a) To make, alter and repeal the By-laws of the
Corporation, subject to the power of the stockholders to alter
or repeal the By-laws made by the Board of Directors.
(b) To determine, from time to time, whether and to
what extent and at what times and places and under what
conditions and regulations the accounts and books and
documents of the Corporation (other than the stock ledger), or
any of them, shall be open to inspection by the stockholders;
and no stockholder shall have any right to inspect any account
or book or document of the Corporation, except as conferred by
the laws of the Commonwealth of Puerto Rico, unless and until
duly authorized to do so by resolution of the Board of
Directors.
(c) To authorize and issue obligations of the
Corporation, secured or unsecured, to include therein such
provisions as to redeemability, convertibility or otherwise,
as the Board cf Directors in its sole discretion may
determine, and to authorize the mortgaging or pledging of, and
to authorize and cause to be executed mortgages and liens
upon, any property of the Corporation, real or personal,
including after-acquired property.
(d) To determine whether any, and, if any, what part,
of the net profits of the Corporation or of its net assets in
excess of its capital shall be declared in dividends and paid
to the stockholders, and to direct and determine the use and
disposition thereof.
(e) To set apart a reserve or reserves, and to
abolish any such reserve or reserves, or to make such other
provisions, if any, as the Board of Directors may deem
necessary or advisable for working capital, for additions,
improvements and betterments to plant and equipment, for
expansion of the business of the Corporation (including the
acquisition of real and personal property for that purpose)
and for any other purpose of the Corporation.
(f) To establish bonus, profit-sharing, pension,
thrift, and other types of incentive, compensation or
retirement plans for the officers and employees (including
officers and employees who are also directors) of the
Corporation and to fix the amounts of profits to be
distributed or shared or contributed and the amounts of the
Corporation's funds otherwise to be devoted thereto and to
determine the persons
<PAGE> 9
9
to participate in any such plans and the amounts of
their respective participations.
(g) To issue, or grant options for the purchase of,
shares of stock of the Corporation to officers and employees
(including officers and employees who are also directors) of
the Corporation and its subsidiaries for such consideration
and on such terms and conditions as the Board of Directors may
from time to time determine.
(h) To enter into contracts for the management of the
business of the Corporation for terms not exceeding three
years.
(i) By resolution or resolutions passed by a majority
of the whole Board, to designate one or more committees, each
committee to consist of two or more of the directors of the
Corporation, which to the extent provided in such resolution
or resolutions or in the Bylaws, shall have and may exercise
the powers of the Board of Directors (other than to remove or
elect officers) in the management of the business and affairs
of the Corporation and may have power to authorize the seal of
the Corporation to be affixed to all papers which may require
it, such committee or committees to have such name or names as
may be stated in the By-laws or as may be determined from time
to time by resolution adopted by the Board of Directors.
(j) To exercise all the powers of the Corporation,
except such as are conferred by law, or by this Certificate of
Incorporation or by the By-laws of the Corporation, upon the
stockholders.
3. Any one or all of the directors may be removed, with or
without cause, at any time, by either (a) the vote of the holders of a
majority of the stock of the Corporation issued and outstanding and
entitled to vote and present in person or by proxy at any meeting of
the stockholders called for the purpose, or (b) an instrument or
instruments in writing addressed to the Board of Directors directing
such removal and signed by the holders of a majority of the stock of
the Corporation issued and outstanding and entitled to vote; and
thereupon the term of each such director who shall be so removed shall
terminate.
4. No contract or other transaction between the Corporation
and any other corporation, whether or not such other corporation is
related to the Corporation through the direct or indirect ownership by
such other corporation
<PAGE> 10
10
of a majority of the shares of the capital stock of the Corporation or
by the Corporation of a majority of the shares of the capital stock of
such other corporation, and no other act of the Corporation shall, in
the absence of fraud, in any way be affected or invalidated by the fact
that any of the directors of the Corporation are pecuniarily or
otherwise interested in, or are directors or officers of, such other
corporation or by the fact that such other corporation is so related to
the Corporation. Any director of the Corporation individually, or any
firm or association of which any director may be a member, may be a
party to, or may be pecuniarily or otherwise interested in, any
contract or transaction of the Corporation, provided that the fact that
he individually or such firm or association is so interested shall be
disclosed or shall have been known to the Board of Directors or a
majority of such members thereof as shall be present at any meeting of
the Board of Directors at which action upon any such contract or
transaction shall be taken. Any director of the Corporation who is also
a director or officer of such other corporation or who is so interested
may be counted in determining the existence of a quorum at any meeting
of the Board of Directors which shall authorize any such contract or
transaction, with like force and effect as if he were not such director
or officer of such other corporation or not so interested.
5. Any person made or threatened to be made a party to any
action or proceeding, whether civil or criminal, by reason of the fact
that he, his testator or intestate is or was a Director, officer or
employee of the Corporation or serve or served any other corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprises in any capacity at the request of the Corporation shall be
indemnified by the Corporation, and the Corporation may advance his
related expenses, to the fullest extent permitted by law. The
Corporation may purchase and maintain insurance on behalf of any person
who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such.
SEVENTH: A director of this Corporation shall not be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not
permitted under the Puerto Rico General Corporation Law of 1995 as the
same exists
<PAGE> 11
11
or may hereafter be amended. Any repeal or modification of the
foregoing provisions of this Article SEVENTH shall not adversely affect
any right or protection of a director of the Corporation existing
hereunder with respect to any act or omission occurring prior to or at
the time of such repeal or modification.
EIGHTH: The Corporation reserves the right to amend, alter or
repeal any of the provisions of this Certificate of Incorporation and
to add other provisions authorized by the laws of the Commonwealth of
Puerto Rico at the time in force in the manner and at the time
prescribed by said laws, and all rights, powers and privileges at any
time conferred upon the Board of Directors and the stockholders are
granted subject to the provisions of this Article."
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation in accordance
with the provisions of its Restated Certificate of Incorporation, a
series of Serial Preferred Stock of the Corporation be and it hereby is
created.
FURTHER RESOLVED, that the directors have determined that the
preferences and relative, participating, optional or other special
rights of the shares of such series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, as stated and
expressed herein, are under the circumstances prevailing on the date
hereof fair and equitable to all the existing shareholders of the
Corporation.
FURTHER RESOLVED, that the designation and amount of such
series and the voting powers, preferences and relative, participating,
optional or other special rights of the shares of such series of
Preferred Stock, and the qualifications, limitations or restrictions
thereof are as follows:
A. DESIGNATION AND AMOUNT
The shares of such series of Preferred Stock shall be
designated as the "8% Convertible Cumulative Preferred Stock
(Liquidation Preference $1,000 per share)" (herein after called the "8%
Preferred Stock"), and the number of authorized shares constituting
such series shall be 20,000.
B. DIVIDENDS
(i) Holders of record of the 8% Preferred Stock
("Holders") will be entitled to receive, when, as and
<PAGE> 12
12
if declared by the Board of Directors of the Corporation, out
of funds of the Corporation legally available therefor,
cumulative cash dividends at the annual rate per share of 8%
of their liquidation preferences, or $6.66 2/3 per share per
month.
(ii) Dividends on the 8% Preferred Stock will accrue
from their date of original issuance and will be payable
(when, as and if declared by the Board of Directors of the
Corporation out of funds of the Corporation legally available
therefor) monthly in arrears in United States dollars
commencing on the last day of the month in which the 8%
Preferred Stock is issued, and on the last day of each
calendar month of each year thereafter to the holders of
record of the 8% Preferred Stock as they appear on the books
of the Corporation on the Business Day (as defined below)
immediately preceding the relevant date of payment. In the
case of the dividend payable in the month in which the 8%
Preferred Stock is issued, such dividend shall cover the
period from the date of issuance of the 8% Preferred Stock to
the end of such month. In the event that any date on which
dividends are payable is not a Business Day, then payment of
the dividend payable on such date will be made on the next
succeeding Business Day without any interest or other payment
in respect of any such delay, except that, if such Business
Day is in the next succeeding calendar year, such payment will
be made on the Business Day immediately preceding the relevant
date of payment, in each case with the same force and effect
as if made on such date. A "Business Day" is a day other than
a Saturday, Sunday or bank holiday in San Juan, Puerto Rico.
(iii) Dividends on the 8% Preferred Stock will be
cumulative from their date of issuance, and will accrue, to
the extent not paid, on the last day of each month.
(iv) The amount of dividends payable for any monthly
dividend period will be computed on the basis of twelve 30-day
months and a 360-day year. The amount of dividends payable for
any period shorter than a full monthly dividend period will be
computed on the basis of the actual number of days elapsed in
such period.
(v) Subject to any applicable fiscal or other laws
and regulations, each dividend payment will be made by dollar
check drawn on a bank in New York, New York or San Juan,
Puerto Rico and mailed to the record
<PAGE> 13
13
holder thereof at such holder's address as it appears on the
register for such 8% Preferred Stock or, in the case of
holders of $1,000,000 or more in aggregate liquidation
preference of the 8% Preferred Stock, by wire transfer of
immediately available funds to the account of such holders as
notified by such holders to the Corporation.
(vi) So long as any shares of the 8% Preferred Stock
remain outstanding, the Corporation shall not declare, set
apart or pay any dividend or make any other distribution of
assets (other than dividends paid or other distributions made
in stock of the Cor poration ranking junior to the 8%
Preferred Stock as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or
winding up of the Corporation) on, or redeem, purchase, set
apart or otherwise acquire (except upon conversion or exchange
for stock of the Corporation ranking junior to the 8%
Preferred Stock as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or
winding up of the Corpora tion), shares of common stock or of
any other class of stock of the Corporation ranking junior to
the 8% Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation, dissolution or
winding up of the Corporation, unless all accrued and unpaid
dividends on the 8% Preferred Stock shall have been paid or
are paid contemporaneously and the full monthly dividend on
the 8% Preferred Stock for the then current month has been or
is contemporaneously declared and paid or declared and set
apart for payment and unless the Corporation has not defaulted
in the payment of the redemption price of any shares of 8%
Preferred Stock called for redemption.
(vii) When dividends are not paid in full on the 8%
Preferred Stock and any other shares of stock of the
Corporation ranking on a parity as to the payment of dividends
with the 8% Preferred Stock, all dividends declared upon the
8% Preferred Stock and any such other shares of stock of the
Corporation will be declared pro rata so that the amount of
dividends declared per share on the 8% Preferred Stock and any
such other shares of stock will in all cases bear to each
other the same ratio that the liquidation preference per share
of the 8% Preferred Stock and any such other shares of stock
bear to each other.
(viii) Holders of record of the 8% Preferred Stock
will not be entitled to any dividend, whether payable in cash,
property or stock, in excess of the
<PAGE> 14
14
dividends provided for herein on the shares of 8% Preferred
Stock. The Corporation may, however, at its discretion,
declare a special dividend in an amount sufficient to allow
the Corporation to pay dividends on any stock of the
Corporation ranking junior to the 8% Preferred Stock in
compliance with the provisions of Section B.6 above.
C. CONVERSION
(i) A holder of a share of 8% Preferred Stock may
convert it into common stock of the Corporation at any time
before the close of business on December 1, 2005 (the
"Expiration Date"). If a share of 8% Preferred Stock is called
for redemption, the holder may convert it at any time before
the close of business on the day preceding the redemption
date. The initial conversion price is $8.75 per share of
common stock of the Corporation, subject to adjustment in
certain events as provided in subsection 4 below (as so
adjusted from time to time, the "Conversion Price"). To
determine the number of shares of common stock of the
Corporation issuable upon conversion of a share of 8%
Preferred Stock, divide (a) the aggregate liquidation
preference of the shares of 8% Preferred Stock to be converted
by (b) the Conversion Price in effect on the conversion date.
The Corporation will deliver a check for an amount equal to
the value of any fractional share plus the total amount of
accrued but unpaid dividends on such shares to the date of
conversion.
(ii) To convert a share of 8% Preferred Stock a
Holder must (1) complete and sign the conversion election on
the back of the certificate, (2) surrender the certificate to
the Corporation, (3) furnish appropriate endorsements and
transfer documents if required by the Corporation, and (4) pay
any transfer or similar tax if required.
(iii) Reservation, Listing and Issuance of Shares.
The Corporation will at all times have authorized, and reserve
and keep available, free from preemptive rights, for the
purpose of enabling it to satisfy any obligation to issue
shares of common stock of the Corporation upon the conversion
of shares of 8% Preferred Stock, the number of shares of
common stock of the Corporation deliverable upon conversion of
the outstanding shares of 8% Preferred Stock. The Corporation
will, at its expense, cause the shares of common stock of the
Corporation deliverable upon conversion of the 8% Preferred
Stock to be listed
<PAGE> 15
15
(subject to issuance or notice of issuance of such shares) on
all stock exchanges on which the common stock is listed not
later than the date such common stock is so listed. The
Corporation agrees to list such shares (subject to issuance or
notice of issuance) on NASDAQ-NMS, to the extent not already
listed, promptly after the date of this Certificate of
Designation.
Before taking any action which could cause an
adjustment pursuant to subsection 4 below reducing the
Conversion Price below the then par value (if any) of the
shares of common stock of the Corporation, the Corporation
will take any corporate action which may be necessary in order
that the Corporation may validly and legally issue at the
Conversion Price as so adjusted shares of common stock of the
Corporation that are fully paid and non-assessable.
The Corporation covenants that all shares of common
stock of the Corporation deliverable upon conversion of the 8%
Preferred Stock will, upon issuance in accordance with the
terms hereof, be (i) duly authorized, fully paid and
non-assessable, and (ii) free from all taxes with respect to
the issuance thereof and from all liens, charges and security
interests created by the Corporation.
(iv) Adjustments of Conversion Price and Number of
Shares of Common Stock Issuable upon Conversion of the 8%
Preferred Stock. Adjustment of Conversion Price upon Issuance
of Common Stock. If and whenever, after September 25, 1995,
the Corporation shall issue or sell any shares of common stock
(except upon conversion of one or more of the 8.25%
convertible subordinated debentures due January 1, 2006 or of
one or more shares of the 8% Preferred Stock or upon exercise
by Popular, Inc. of certain rights to purchase shares of
common stock of the Corporation set forth in Article 5 of the
Exchange Agreement dated July 9, 1997, between the Corporation
and Popular, Inc.) for a consideration per share less than the
Market Price (as hereinafter defined) at the time of such
issue or sale, then, forthwith upon such issue or sale, the
Conversion Price shall be reduced to the price (calculated to
the nearest cent) determined by multiplying the Conversion
Price in effect immediately prior to the time of such issue or
sale by a fraction, the numerator of which shall be the sum of
(a) the number of shares of common stock of the Corporation
outstanding immediately prior to such issue or sale multiplied
by the Market Price immediately prior to
<PAGE> 16
16
such issue or sale plus (b) the consideration received by the
Corporation upon such issue or sale, and the denominator of
which shall be the product of (c) the total number of shares
of common stock outstanding immediately after such issue or
sale, multiplied by (d) the Market Price immediately prior to
such issue or sale. No adjustment of any Conversion Price,
however, shall be made in an amount less than $0.01 per share,
but any such lesser adjustment shall be carried forward and
shall be made at the time of, and together with, the next
subsequent adjustment which together with any adjustments so
carried forward shall amount to $0.01 per share or more.
(i) For the purposes of this subsection 4,
the following provisions shall also be
applicable:
1) Issuance of Rights or Options. In
case at any time the Corporation shall grant
(whether directly or by assumption in a merger
or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of,
common stock or any stock or securities
convertible into or exchangeable for common stock
(such convertible or exchangeable stock or
securities being herein called "Convertible
Securities") whether or not such rights or
options or the right to convert or exchange any
such Convertible Securities are immediately
exercisable, and the price per share for which
common stock is issuable upon the conversion of
such rights or options or upon conversion or
exchange of such Convertible Securities
(determined as provided below) shall be less than
the Market Price determined as of the date of
granting such rights or options, then the total
maximum number of shares of common stock issuable
upon the conversion of such rights or options
or upon conversion or exchange of the total
maximum amount of such Convertible Securities
issuable upon the conversion of such rights or
options shall (as of the date of granting of such
rights or options) be deemed to be outstanding
and to have been issued for such price per share.
Except as provided in clause (iii) of this
subsection, no further adjustments of any
Conversion Price shall be made upon the actual
issue of such common stock or of such Convertible
Securities upon conversion of such rights or
options or upon the actual issue of such common
stock upon conversion or exchange of such
<PAGE> 17
17
Convertible Securities. For the purposes of this
clause (i), the price per share for which common
stock is issuable upon the conversion of any such
rights or options or upon conversion or exchange of
any such Convertible Securities shall be determined
by dividing (A) the total amount, if any, received or
receivable by the Corporation as consideration for
the granting of such rights or options, plus the
minimum aggregate amount of additional consideration
payable to the Corporation upon the conversion of all
such rights or options, plus, in the case of such
rights or options which relate to Convertible
Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon
the conversion or exchange thereof, by (B) the total
maximum number of shares of common stock issuable
upon the conversion of such rights or options or upon
the conversion or exchange of all such Convertible
Securities issuable upon the conversion of such
rights or options.
2) Issuance of Convertible Securi
ties. In case the Corporation shall issue (whether
directly or by assumption in a merger or otherwise)
or sell any Convertible Securities, whether or not
the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for
which common stock is issuable upon conversion or
exchange of such Convertible Securities (determined
as provided below) shall be less than the Market
Price, determined as of the date of such issue or
sale of such Convertible Securities, then the total
maximum number of shares of common stock issuable
upon conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be
outstanding and to have been issued for such price
per share, provided that (1) except as provided in
clause (iii) of this subsection, no further
adjustments of any Conversion Price shall be made
upon the actual issue of such common stock upon
conversion or exchange of such Convertible
Securities, and (2) if any such issue or sale of such
Convertible Securities is made upon conversion of any
rights to subscribe for or to purchase or any option
to purchase any such Convertible Securities for which
adjustments of any Conversion Price have been or are
to be made pursuant to other
<PAGE> 18
18
provisions of this subsection (b), no further
adjustment of any Conversion Price shall be made by
reason of such issue or sale. For the purposes of
this clause (ii), the price per share for which
common stock is issuable upon conversion or exchange
of Convertible Securities shall be determined by
dividing (A) the total amount received or receivable
by the Corporation as consideration for the issue or
sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or
exchange thereof, by (B) the total maximum number of
shares of common stock issuable upon the conversion
or exchange of all such Convertible Securities.
3) Change in Option Price or
Conversion Rate. If the purchase price provided for
in any rights or options referred to in clause (i)
above, or the additional consideration, if any,
payable upon the conversion or exchange of
Convertible Securities referred to in clause (i) or
(ii) above, or the rate at which any Convertible
Securities referred to in clause (i) or (ii) above
are convertible into or exchangeable for common
stock, shall change (other than under or by reason of
provisions designed to protect against dilution),
then the Conversion Price in effect at the time of
such event shall forthwith be readjusted to the
Conversion Price which would have been in effect at
such time had such rights, options or Convertible
Securities still outstanding provided for such
changed purchase price, additional consideration or
conversion rate, as the case may be, at the time
initially granted, issued or sold.
4) Expiration of Options, Rights and
Other Similar Conversion Privileges. On the
expiration of any such option or right or the
termination of any such right to convert or exchange
such Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be increased
to the Conversion Price which would have been in
effect at the time of such expiration or termination
had such right, option or Convertible Security, to
the extent outstanding immediately prior to such
expiration or termination, never been issued, and the
common stock issuable thereunder shall no longer be
<PAGE> 19
19
deemed to be outstanding. If the purchase price
provided for in any such right or option referred to
in clause (i) above or the rate at which any
Convertible Securities referred to in clause (i) or
(ii) above are convertible into or exchangeable for
common stock, shall decrease at any time under or by
reason of provisions with respect thereto designed to
protect against dilution, then in case of the
delivery of common stock upon the conversion of any
such right or option or upon conversion or exchange
of any such Convertible Security, the Conversion
Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have
obtained had such right, option or Convertible
Security never been issued as to such common stock
and had adjustments been made upon the issuance of
the shares of common stock delivered as aforesaid,
but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby
decreased.
5) Stock Dividends. In case the
Corporation shall declare a dividend or make any
other distribution upon any stock of the Corporation
payable in common stock or Convertible Securities,
any common stock or Convertible Securities, as the
case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or
sold without consideration.
6) Consideration for Stock. In case
any shares of common stock or Convertible
Securities or any rights or options to purchase
any such common stock or Convertible Securities
shall be issued or sold for cash, the
consideration received therefor shall be deemed
to be the amount received by the Corporation
therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions
or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of
common stock or Convertible Securities or any
rights or options to purchase any such common
stock or Convertible Securities shall be issued
or sold for a consideration other than cash, the
amount of the consideration other than cash
received by the Corporation shall be deemed to
be the fair value of such consideration as
determined, in good faith and in the exercise
of reasonable business judgment, by the board
<PAGE> 20
20
of directors of the Corporation, without deduction of
any expenses incurred or any underwriting commissions
or concessions paid or allowed by the Corporation in
connection therewith. In case any shares of common
stock or Convertible Securities or any rights or
options to purchase such shares of common stock or
Convertible Securities shall be issued in connection
with any merger or consolidation in which the
Corporation is the surviving corporation (other than
any consolidation or merger in which the previously
outstanding shares of common stock of the Corporation
shall be changed into or exchanged for the stock or
other securities of another corporation), the amount
of consideration therefor shall be deemed to be the
fair value as determined reasonably and in good faith
by the board of directors of the Corporation of such
portion of the assets and business of the
non-surviving corporation as such board may determine
to be attributable to such shares of common stock,
Convertible Securities, rights or options, as the
case may be. In the event of any consolidation or
merger of the Corporation in which the Corporation is
not the surviving corporation or in which the
previously outstanding shares of common stock of the
Corporation shall be changed into or exchanged for
the stock or other securities of another corporation
or in the event of any sale of all or substantially
all of the assets of the Corporation for stock or
other securities of any corporation, the Corporation
shall be deemed to have issued a number of shares of
its common stock for stock or securities or other
property of the other corporation computed on the
basis of the actual exchange ratio on which the
transaction was predicated and for a consideration
equal to the fair market value on the date of such
transaction of all such stock or securities or other
property of the other corporation, and if any such
calculation results in adjustment of the Conversion
Price, the determination of the number of shares of
common stock issuable upon conversion of the
Securities immediately prior to such merger,
consolidation or sale, for purposes of subsection (e)
below, shall be made after giving effect to such
adjustment of the Conversion Price.
7) Record Date. In case the Corpora
tion shall take a record of the holders of its
<PAGE> 21
21
common stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in
common stock or in Convertible Securities, or (B) to
subscribe for or purchase common stock or Convertible
Securities, then such record date shall be deemed to
be the date of the issue or sale of the shares of
common stock deemed to have been issued or sold upon
the declaration of such dividend or the making of
such other distribution or the date of the granting
of such right of subscription or purchase, as the
case may be.
8) Treasury Shares. The number of
shares of common stock outstanding at any given time
shall not include shares owned or held by or for the
account of the Corporation, and the disposition of
any such shares shall be considered an issue or sale
of common stock for the purposes of this subsection
(b).
9) Definition of Market Price.
"Market Price" shall mean the average of the daily
closing prices per share of the common stock for the
ten consecutive trading days immediately preceding
the day as of which "Market Price" is being
determined, except that, in the case of an
underwritten bona fide public offering, "Market
Price" shall mean the initial public offering price.
The closing price for each day shall be the last sale
price regular way or, in case no such sale takes
place on such day, the average of the closing bid and
asked prices regular way, in either case on the New
York Stock Exchange, or, if shares of the common
stock are not listed or admitted to trading on the
New York Stock Exchange, on the principal national
securities exchange (including for this purpose the
NASDAQ-NMS) on which the shares are listed or
admitted to trading, or if the shares are not so
listed or admitted to trading, the average of the
highest reported bid and lowest reported asked prices
as furnished by the National Association of
Securities Dealers, Inc. through NASDAQ or through a
similar organization if NASDAQ is no longer reporting
such information. If shares of the common stock are
not listed or admitted to trading on any exchange or
quoted through NASDAQ or any similar organization,
the "Market Price" shall be deemed to be the higher
of (A) the book value of a share of the common stock
as determined by any firm
<PAGE> 22
22
of independent public accountants of recognized
standing, selected by the board of directors of the
Corporation, as at the last day of any month ending
within sixty days preceding the date as of which the
determination is to be made or (B) the fair value
thereof determined in good faith by an independent
brokerage firm or Standard & Poor's Corporation as of
a date which is within fifteen days of the date as of
which the determination is to be made (the fees and
expenses of any such independent public accountants,
independent brokerage firm or other firm engaged
pursuant to subclauses (A) and (B) of this clause
(ix) to be paid by the Corporation).
10) Determination of Market Price
under Certain Circumstances. Anything herein to the
contrary notwithstanding, in case the Corporation
shall issue any shares of common stock or Convertible
Securities in connection with the acquisition by the
Corporation of the stock or assets of any other
corporation or the merger of any other corporation
into the Corporation, the Market Price shall be
determined as of the date the number of shares of
common stock or Convertible Securities (or in the
case of Convertible Securities other than stock, the
aggregate principal amount of Convertible Securities)
was determined (as set forth in a written agreement
between the Corporation and the other party to the
transaction) rather than on the date of issuance of
such shares of common stock or Convertible
Securities.
11) Certain Issues Excepted.
Anything herein to the contrary notwithstanding, the
Corporation shall not be required to make any
adjustment of any Conversion Price in case of the
issuance of shares of common stock (1) upon the
conversion of options or rights relating to up to
500,000 shares (subject to adjustment for stock
splits, stock combinations, stock dividends and
similar events) of the Corporation's common stock
granted or provided or to be granted or provided
under the Corporation's stock option plan, as in
effect on July 9, 1997, or (2) under the
Corporation's restricted stock plan, as in effect on
July 9, 1997, up to a maximum of 250,000 shares
(subject to adjustment for stock splits, stock
combinations, stock dividends and similar events),
and shall not be required to
<PAGE> 23
23
make any such adjustment upon the granting of any
options or rights referred to above if and to the
extent that issuance of the shares covered thereby is
excepted by this clause.
(ii) Adjustment for Certain Special
Dividends. In case the Corporation shall declare a
dividend upon the common stock payable otherwise than
out of earnings or earned surplus, determined in
accordance with Generally Accepted Accounting
Principles, and otherwise than in common stock or
Convertible Securities, the Conversion Price in
effect immediately prior to the declaration of such
dividend shall be reduced by an amount equal, in the
case of a dividend in cash, to the amount per share
of the common stock so declared as payable otherwise
than out of earnings or earned surplus or, in the
case of any other dividend, to the fair value per
share of the common stock of the property so declared
as payable otherwise than out of earnings or earned
surplus, as determined, reasonably and in good faith,
by the board of directors of the Corporation. For the
purposes of the foregoing a dividend other than in
cash shall be considered payable out of earnings or
earned surplus (other than revaluation or
paid-in-surplus) only to the extent that such
earnings or earned surplus are charged an amount
equal to the fair value of such dividend, as
determined, reasonably and in good faith, by the
board of directors of the Corporation. Such
reductions shall take effect as of the date on which
a record is taken for the purpose of such dividend,
or, if a record is not taken, the date as of which
the holders of common stock of record entitled to
such dividend are determined.
(iii) Subdivision or Combination of Stock.
In case the Corporation shall at any time subdivide
the outstanding shares of common stock into a greater
number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the
outstanding shares of common stock shall be combined
into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination shall
be proportionately increased.
<PAGE> 24
24
(iv) Adjustments for Consolidation, Merger,
Sale of Assets, Reorganization, etc. In case the
Corporation (a) consolidates with or merges into any
other corporation and is not the continuing or
surviving corporation of such consolidation or
merger, or (b) permits any other corporation to
consolidate with or merge into the Corporation and
the Corporation is the continuing or surviving
corporation but, in connection with such
consolidation or merger, the common stock is changed
into or exchanged for stock or other securities of
any other corporation or cash or any other assets, or
(c) transfers all or substantially all of its
properties and assets to any other corporation, or
(d) effects a capital reorganization or
reclassification of the capital stock of the
Corporation in such a way that holders of common
stock shall be entitled to receive stock, securities,
cash or assets with respect to or in exchange for
common stock, then, and in each such case, proper
provision shall be made so that, upon the basis and
upon the terms and in the manner provided in this
subsection (e), the Holders, upon the conversion of
each Security at any time after the consummation of
such consolidation, merger, transfer, reorganization
or reclassification, shall be entitled to receive (at
the aggregate Conversion Price in effect for all
shares of common stock issuable upon such conversion
immediately prior to such consummation as adjusted to
the time of such transaction), in lieu of shares of
common stock issuable upon such conversion prior to
such consummation, the stock and other securities,
cash and assets to which such Holder would have been
entitled upon such consummation if such Holder had so
converted such Security immediately prior thereto
(subject to adjustments subsequent to such corporate
action as nearly equivalent as possible to the
adjustments provided for in this subsection 4).
(v) Notice of Adjustment. Upon any adjust
ment of the Conversion Price, then and in each such
case the Corporation shall promptly deliver a notice
to the registered holder of the Secur ities, which
notice shall state the Conversion Price resulting
from such adjustment, setting forth in reasonable
detail the method of calculation and the facts upon
which such calculation is based.
<PAGE> 25
25
(vi) Other Notices. In case at any time:
(1) the Corporation shall declare or
pay any dividend on or make any distribution with
respect to its common stock, other than quarterly
cash dividends consistent with past practice;
(2) the Corporation shall offer for
subscription pro rata to the holders of its common
stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital
reorganization, or reclassification of the capital
stock of the Corporation, or consolida tion or merger
of the Corporation with another corporation (other
than a Subsidiary of the Corporation in which the
Corporation is the surviving or continuing
corporation and no change occurs in the Corporation's
common stock), or sale of all or substantially all of
its assets to, another corporation;
(4) there shall be a voluntary or
involuntary dissolution, liquidation, bankruptcy,
assignment for the benefit of creditors, or winding
up of the Corporation; or
(5) the Corporation proposes to take
any other action or an event occurs which would
require an adjustment of the Conversion Price
pursuant to subsection (h) below;
then, in any one or more of said cases, the
Corporation shall give written notice, addressed to
each Holder at the address of such Holder as shown on
the books of the Corporation, of (1) the date on
which the books of the Corporation shall close or a
record shall be taken for such dividend, distribution
or subscription rights, or (2) the date (or, if not
then known, a reasonable approximation thereof by the
Corporation) on which such reorganization,
reclassification, consolidation, merger, sale,
dissolution, liquidation, bankruptcy, assignment for
the benefit of creditors, winding up or other action,
as the case may be, shall take place. Such notice
shall also specify (or, if not then known, reasonably
approximate) the date as of which the holders of
common stock of record shall participate in such
dividend, distribution or subscription rights, or
shall be entitled to
<PAGE> 26
26
exchange their common stock for securities or other
property deliverable upon such reorganization,
reclassification, consolidation, merger, sale,
dissolution, liquidation, bankruptcy, assignment for
the benefit of creditors, winding up, or other
action, as the case may be. Such written notice shall
be given at least twenty days prior to the action in
question and not less than twenty days prior to the
record date or the date on which the Corporation's
transfer books are closed in respect thereto.
(vii) Certain Events. If any event occurs as
to which in the reasonable opinion of the
Corporation, in good faith, the other provisions of
this subsection 4 are not strictly applicable but the
lack of any adjustment would not in the opinion of
the Corporation fairly protect the conversion rights
of the Holders in accordance with the basic intent
and principles hereof, or if strictly applicable
would not fairly protect the conversion rights of the
Holders in accordance with the basic intent and
principles hereof, then the Corporation shall appoint
a firm of independent certified public accountants
(which may be the regular auditors of the
Corporation) of recognized national standing, which
shall give their opinion upon the adjustment, if any,
on a basis consistent with the basic intent and
principles established in the other provisions of
this subsection 4, necessary to preserve, without
dilution, the conversion rights of the Holders. Upon
receipt of such opinion, the Corporation shall
forthwith make the adjustments described therein.
(vii) All calculations under this sub
section 4 shall be made to the nearest cent or to the
nearest one hundredth (1/100) of a share, as the case
may be.
(viii) In any case in which the provisions
hereof require that an adjustment shall become
effective immediately after a record date for an
event, the Corporation may defer until the occurrence
of such event (i) issuing to the Holder of any
Security converted after such record date and before
the occurrence of such event the additional shares of
common stock issuable upon such conversion by reason
of the adjustments required by such event over and
above
<PAGE> 27
27
the shares of common stock issuable upon such
conversion before giving effect to such adjustment
and (ii) paying to such Holder any amount in cash in
lieu of a fractional share of common stock; provided,
however, that the Corporation shall deliver to such
Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such
additional shares and such cash upon the occurrence
of the event requiring such adjustment.
D. REDEMPTION AT THE OPTION OF THE CORPORATION
(i) The shares of the 8% Preferred Stock are
not redeemable prior to January 1, 2001. On and after
that date, the shares of the 8% Preferred Stock will
be redeemable in whole or in part from time to time
at the option of the Corporation, with the consent of
the Board of Governors of the Federal Reserve System,
upon not less than thirty nor more than sixty days'
notice by mail, at the redemption prices set forth
below, during the twelve-month periods beginning on
January 1 of the years set forth below, plus accrued
and unpaid dividends to the date fixed for
redemption.
REDEMPTION
YEAR PRICE
---- ---------
2001......................... $1,020.00
2002......................... $1,015.00
2003......................... $1,010.00
2004......................... $1,005.00
2005 and thereafter ......... $1,000.00
(ii) In the event that less than all of the
out standing shares of the 8% Preferred Stock are to
be redeemed in any redemption at the option of the
Corporation, the total number of shares to be
redeemed in such redemption shall be determined by
the Board of Directors and the shares to be redeemed
shall be allocated pro rata or by lot as may be
determined by the Board of Directors or by such other
method as the Board of Directors may approve and deem
equitable, including any method to conform to any
rule or regula tion of any national or regional stock
exchange or automated quotation system upon which the
shares of the 8% Preferred Stock may at the time be
listed or eligible for quotation.
(iii) Notice of any proposed redemption
shall be given by the Corporation by mailing a copy
of such
<PAGE> 28
28
notice to the holders of record of the shares of 8% Preferred
Stock to be redeemed, at their address of record, not more
than sixty nor less than thirty days prior to the redemption
date. The notice of redemption to each holder of shares of 8%
Preferred Stock shall specify the number of shares of 8%
Preferred Stock to be redeemed, the redemption date and the
redemption price payable to such holder upon redemption, and
shall state that from and after said date dividends thereon
will cease to accrue. If less than all the shares owned by a
holder are then to be redeemed at the option of the
Corporation, the notice shall also specify the number of
shares of 8% Preferred Stock which are to be redeemed and the
numbers of the certificates representing such shares. Any
notice which is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not
the stockholder receives such notice; and failure duly to give
such notice by mail, or any defect in such notice, to the
holders of any stock designated for redemption shall not
affect the validity of the proceedings for the redemption of
any other shares of 8% Preferred Stock.
(iv) Notice having been mailed as aforesaid, from and
after the redemption date (unless default be made in the
payment of the redemption price for any shares to be
redeemed), all dividends on the shares of 8% Preferred Stock
called for redemption shall cease to accrue and all rights of
the holders of such shares as stockholders of the Corporation
by reason of the ownership of such shares (except the right to
receive the redemption price, on presentation and surrender of
the respective certificates representing the redeemed shares),
shall cease on the redemption date, and such shares shall not
after the redemption date be deemed to be outstanding. In case
less than all the shares represented by any such certificate
are redeemed, a new certificate shall be issued without cost
to the holder thereof representing the unredeemed shares.
(v) At its option, the Corporation may, on or prior
to the redemption date, irrevocably deposit the aggregate
amount payable upon redemption of the shares of the 8%
Preferred Stock to be redeemed with a bank or trust company
designated by the Board of Directors having its principal
office in New York, New York, San Juan, Puerto Rico, or any
other city in which the Corporation shall at that time
maintain a transfer agency with respect to its capital stock,
and having a combined capital and surplus (as shown by its
latest published statement) of at least $50,000,000 (herein
after referred to as the "Depositary"), to be held
<PAGE> 29
29
in trust by the Depositary for payment to the holders of the
shares of the 8% Preferred Stock then to be redeemed. If such
deposit is made and the funds so deposited are made
immediately available to the holders of the shares of the 8%
Preferred Stock to be redeemed, the Corporation shall
thereupon be released and dis charged (subject to the
provisions of Section D.6) from any obligation to make payment
of the amount payable upon redemption of the shares of the 8%
Preferred Stock to be redeemed, and the holders of such shares
shall look only to the Depositary for such payment.
(vi) Any funds remaining unclaimed at the end of two
years from and after the redemption date in respect of which
such funds were deposited shall be returned to the Corporation
forthwith and thereafter the holders of shares of the 8%
Preferred Stock called for redemption with respect to which
such funds were deposited shall look only to the Corporation
for the payment of the redemption price thereof. Any interest
accrued on any funds deposited with the Depositary shall
belong to the Corporation and shall be paid to it from time to
time on demand.
(vii) Any shares of the 8% Preferred Stock which
shall at any time have been redeemed shall, after such
redemption, have the status of authorized but unissued shares
of Preferred Stock, without designation as to series, until
such shares are once more designated as part of a particular
series by the Board of Directors.
E. LIQUIDATION PREFERENCE
(i) Upon any voluntary or involuntary liquida tion,
dissolution, or winding up of the Corporation, the then record
holders of shares of 8% Preferred Stock will be entitled to
receive out of the assets of the Corporation available for
distribution to shareholders, before any distribution is made
to holders of common stock or any other equity securities of
the Corporation ranking junior upon liquidation to the 8%
Preferred Stock, distributions upon liquidation in the amount
of $1,000 per share plus an amount equal to any accrued and
unpaid dividends to the date of payment. Such amount shall be
paid to the holders of the 8% Preferred Stock prior to any
payment or distribution to the holders of the common stock of
the Corporation or of any other class of stock or series
thereof of the Corporation ranking junior to the 8% Preferred
Stock in respect of dividends or as to the distribution of
assets upon liquidation.
<PAGE> 30
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(ii) If upon any voluntary or involuntary liquida
tion, dissolution or winding up of the Corporation, the
amounts payable with respect to the 8% Preferred Stock and any
other shares of stock of the Corporation ranking as to any
such distribution on a parity with the 8% Preferred Stock are
not paid in full, the holders of the 8% Preferred Stock and of
such other shares will share ratably in any such distribution
of assets of the Corporation in proportion to the full
liquidation preferences to which each is entitled. After
payment of the full amount of the liquidation preference to
which they are entitled, the holders of shares of 8% Preferred
Stock will not be entitled to any further participation in any
distribution of assets of the Corporation.
(iii) Neither the consolidation or merger of the
Corporation with any other corporation, nor any sale, lease or
conveyance of all or any part of the property or business of
the Corporation, shall be deemed to be a liquidation,
dissolution, or winding up of the Corporation.
(iv) If the assets distributable upon any dissolu
tion, liquidation, or winding up of the Corporation shall be
insufficient to permit the payment to the holders of the 8%
Preferred Stock of the full preferential amounts aforesaid,
then such assets or the proceeds thereof shall be distributed
among the holders of the 8% Preferred Stock ratably in
proportion to the respective amounts the holders of such
shares of stock would be entitled to receive if they were paid
the full preferential amounts aforesaid.
F. VOTING RIGHTS
(i) Except as described in this Section F, or except
as required by applicable law, holders of the 8% Preferred
Stock will not be entitled to receive notice of or attend or
vote at any meeting of stockholders of the Corporation.
(ii) Any variation or abrogation of the rights,
preferences and privileges of the 8% Preferred Stock by way of
amendment of the Corporation's Restated Certificate of
Incorporation or otherwise (including, without limitation, the
authorization or issuance of any shares of the Corporation
ranking, as to dividend rights or rights on liquidation,
winding up and dissolution, senior to the 8% Preferred Stock)
shall not be effective (unless otherwise required by
applicable law) except with the consent in writing of the
holders of at least a majority of the
<PAGE> 31
31
outstanding shares of the 8% Preferred Stock or with the
sanction of a special resolution passed at a separate general
meeting by the holders of at least a majority of the
outstanding shares of the 8% Pre ferred Stock. Notwithstanding
the foregoing, the Corporation may, without the consent or
sanction of the holders of the 8% Preferred Stock, authorize
and issue shares of the Corporation ranking, as to dividend
rights and rights on liquidation, winding up and disso lution,
on a parity with or junior to the 8% Preferred Stock.
(iii) No vote of the holders of the 8% Preferred
Stock will be required for the Corporation to redeem or
purchase and cancel the 8% Preferred Stock in accordance with
the Restated Certificate of Incorporation of the Corporation.
(iv) The Corporation will cause a notice of any
meeting at which holders of any series of Preferred Stock are
entitled to vote to be mailed to each record holder of such
series of Preferred Stock. Each such notice will include a
statement setting forth (i) the date of such meeting, (ii) a
description of any resolution to be proposed for adoption at
such meeting on which such holders are entitled to vote and
(iii) instructions for deliveries of proxies.
(v) Except as set forth in this Section F, holders of
8% Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they
are entitled to vote as set forth herein) for taking any
corporate action.
G. RANK
The 8% Preferred Stock will, with respect to dividend
rights and rights on liquidation, winding up and dissolution,
rank (i) senior to all classes of common stock of the
Corporation and to all other equity securities issued by the
Corporation the terms of which specifically provide that such
equity securities will rank junior to the 8% Preferred Stock
(or to a number of series of Preferred Stock which includes
the 8% Preferred Stock); (ii) on a parity with all equity
securities issued by the Corporation the terms of which
specifically provide that such equity securities will rank on
a parity with the 8% Preferred Stock (or with a number of
series of Preferred Stock which includes the 8% Preferred
Stock); and (iii) junior to all equity securities issued by
the Corporation the terms of which specifically provide that
such equity securities will rank senior to the
<PAGE> 32
32
8% Preferred Stock (or to a number of series of Preferred
Stock which includes the 8% Preferred Stock). For this
purpose, the term "equity securities" does not include debt
securities convertible into or exchangeable for equity
securities.
H. FORM OF CERTIFICATE FOR 8% PREFERRED STOCK;
TRANSFER AND REGISTRATION
(i) The 8% Preferred Stock shall be issued in
registered form only. The Corporation may treat the record
holder of a share of 8% Preferred Stock, including the
Depository Trust Company and its nominee and any other holder
that holds such share on behalf of any other person, as such
record holder appears on the books of the registrar for the 8%
Preferred Stock, as the sole owner of such share for all
purposes.
(ii) The transfer of a share of 8% Preferred Stock
may be registered upon the surrender of the certificate
evidencing the share of 8% Preferred Stock to be transferred,
together with the form of transfer endorsed on it duly
completed and executed, at the office of the transfer agent
and registrar.
(iii) Registration of transfers of shares of 8%
Preferred Stock will be effected without charge by or on
behalf of the Corporation, but upon payment (or the giving of
such indemnity as the transfer agent and registrar may
require) in respect of any tax or other governmental charges
which may be imposed in relation to it.
(iv) The Corporation will not be required to register
the transfer of a share of 8% Preferred Stock after such share
has been called for redemption.
I. REPLACEMENT OF LOST CERTIFICATES
If any certificate for a share of 8% Preferred Stock
is mutilated or alleged to have been lost, stolen or
destroyed, a new certificate representing the same share shall
be issued to the holder upon request subject to delivery of
the old certificate or, if alleged to have been lost, stolen
or destroyed, compliance with such conditions as to evidence,
indemnity and the payment of out-of-pocket expenses of the
Corporation in connection with the request as the Board of
Directors of the Corporation may determine.
<PAGE> 33
33
J. NO PREEMPTIVE RIGHTS
Holders of the 8% Preferred Stock will have no
preemptive rights to purchase any securities of the
Corporation.
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation and delegated
to the Preferred Stock Pricing Committee in accordance with the
provisions of its Restated Certificate of Incorporation, a series of
Serial Preferred Stock of the Corporation be and it hereby is created.
FURTHER RESOLVED, that the Preferred Stock Pricing Committee
designated by the Board of Directors has determined that the
preferences and relative, participating, optional or other special
rights of the shares of such series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, as stated and
expressed herein, are under the circumstances prevailing on the date
hereof fair and equitable to all the existing shareholders of the
Corporation.
FURTHER RESOLVED, that the designation and amount of such
series and the voting powers, preferences and relative, participating,
optional or other special rights of the shares of such series of
Preferred Stock, and the qualifications, limitations or restrictions
thereof are as follows:
A. DESIGNATION AND AMOUNT
The shares of such series of Preferred Stock shall be
designated as the "7% Noncumulative Monthly Income Preferred Stock,
Series A" (hereinafter called the "Series A Preferred Stock"), and the
number of authorized shares constituting such series shall be
1,495,000.
B. DIVIDENDS
1. Holders of record of the Series A Preferred Stock
("Holders") will be entitled to receive, when, as and if declared by
the Board of Directors of the Corporation, out of funds of the
Corporation legally available therefor, noncumulative cash dividends at
the annual rate per share of 7% of their liquidation preferences, or
$0.2917 per share per month, with each aggregate payment made to each
record holder of the Series A Preferred Stock being rounded to the next
lowest cent.
2. Dividends on the Series A Preferred Stock will accrue from
their date of original issuance and will be payable (when, as and if
declared by the Board of Directors
<PAGE> 34
34
of the Corporation out of funds of the Corporation legally available
therefor) monthly in arrears in United States dollars commencing on
March 31, 1999, and on the last day of each calendar month of each year
thereafter to the holders of record of the Series A Preferred Stock as
they appear on the books of the Corporation on the second Business Day
(as defined below) immediately preceding the relevant date of payment.
In the case of the dividend payable on March 31, 1999, such dividend
shall cover the period from the date of issuance of the Series A
Preferred Stock to March 31, 1999. In the event that any date on which
dividends are payable is not a Business Day, then payment of the
dividend payable on such date will be made on the next succeeding
Business Day without any interest or other payment in respect of any
such delay, except that, if such Business Day is in the next succeeding
calendar year, such payment will be made on the Business Day
immediately preceding the relevant date of payment, in each case with
the same force and effect as if made on such date. A "Business Day" is
a day other than a Saturday, Sunday or a general bank holiday in San
Juan, Puerto Rico or New York, New York.
3. Dividends on the Series A Preferred Stock will be
noncumulative. The Corporation is not obligated or required to declare
or pay dividends on the Series A Preferred Stock, even if it has funds
available for the payment of such dividends. If the Board of Directors
of the Corporation or an authorized committee thereof does not declare
a dividend payable on a dividend payment date in respect of the Series
A Preferred Stock, then the holders of such Series A Preferred Stock
shall have no right to receive a dividend in respect of the monthly
dividend period ending on such dividend payment date and the Company
will have no obligation to pay the dividend accrued for such monthly
dividend period or to pay any interest thereon, whether or not
dividends on such Series A Preferred Sock are declared for any future
monthly dividend period.
4. The amount of dividends payable for any monthly dividend
period will be computed on the basis of twelve 30-day months and a
360-day year. The amount of dividends payable for any period shorter
than a full monthly dividend period will be computed on the basis of
the actual number of days elapsed in such period.
5. Subject to any applicable fiscal or other laws and
regulations, each dividend payment will be made by dollar check drawn
on a bank in New York, New York or San Juan, Puerto Rico and mailed to
the record holder thereof at such holder's address as it appears on the
register for such Series A Preferred Stock.
<PAGE> 35
35
6. So long as any shares of the Series A Preferred Stock
remain outstanding, the Corporation shall not declare, set apart or pay
any dividend or make any other distribution of assets (other than
dividends paid or other distributions made in stock of the Corporation
ranking junior to the Series A Preferred Stock as to the payment of
dividends and the distribution of assets upon liquidation, dissolution
or winding up of the Corporation) on, or redeem, purchase, set apart or
otherwise acquire (except upon conversion or exchange for stock of the
Corporation ranking junior to the Series A Preferred Stock as to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Corporation), shares of common stock
or of any other class of stock of the Corporation ranking junior to the
Series A Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of
the Corporation, unless (i) all accrued and unpaid dividends on the
Series A Preferred Stock for the twelve monthly dividend periods ending
on the immediately preceding dividend payment date shall have been paid
or are paid contemporaneously and the full monthly dividend on the
Series A Preferred Stock for the then current month has been or is
contemporaneously declared and paid or declared and set apart for
payment, and (ii) the Corporation has not defaulted in the payment of
the redemp tion price of any shares of Series A Preferred Stock called
for redemption.
7. When dividends are not paid in full on the Series A
Preferred Stock and any other shares of stock of the Corporation
ranking on a parity as to the payment of divi dends with the Series A
Preferred Stock, all dividends declared upon the Series A Preferred
Stock and any such other shares of stock of the Corporation will be
declared pro rata so that the amount of dividends declared per share on
the Series A Preferred Stock and any such other shares of stock will in
all cases bear to each other the same ratio that the liquidation
preference per share of the Series A Preferred Stock and any such other
shares of stock bear to each other.
8. Holders of record of the Series A Preferred Stock will not
be entitled to any dividend, whether payable in cash, property or
stock, in excess of the dividends provided for herein on the shares of
Series A Preferred Stock.
C. CONVERSION
1. The Series A Preferred Stock will not be convertible into
or exchangeable for any other securities of the Corporation.
<PAGE> 36
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D. REDEMPTION AT THE OPTION OF THE CORPORATION
1. The shares of the Series A Preferred Stock are not
redeemable prior to February 28, 2004. On and after that date, the
shares of the Series A Preferred Stock will be redeemable in whole or
in part from time to time at the option of the Corporation, with the
consent of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") to the extent required by D. 8 below, upon not
less than thirty nor more than sixty days' notice by mail, at the
redemption prices set forth below, during the twelve-month periods
beginning on February 28, 2004 of the years set forth below, plus
accrued and unpaid dividends to the date fixed for redemption.
YEAR REDEMPTION PRICE
---- ----------------
2004............................... $51.00
2005............................... $50.50
2006 and thereafter................ $50.00
2. In the event that less than all of the outstanding shares
of the Series A Preferred Stock are to be redeemed in any redemption at
the option of the Corporation, the total number of shares to be
redeemed in such redemption shall be determined by the Board of
Directors and the shares to be redeemed shall be allocated pro rata or
by lot as may be determined by the Board of Directors or by such other
method as the Board of Directors may approve and deem equitable,
including any method to conform to any rule or regulation of any
national or regional stock exchange or automated quotation system upon
which the shares of the Series A Preferred Stock may at the time be
listed or eligible for quotation.
3. Notice of any proposed redemption shall be given by the
Corporation by mailing a copy of such notice to the holders of record
of the shares of Series A Preferred Stock to be redeemed, at their
address of record, not more than sixty nor less than thirty days prior
to the redemption date. The notice of redemption to each holder of
shares of Series A Preferred Stock shall specify the number of shares
of Series A Preferred Stock to be redeemed, the redemption date and the
redemption price payable to such holder upon redemption, and shall
state that from and after said date dividends thereon will cease to
accrue. If less than all the shares owned by a holder are then to be
redeemed at the option of the Corporation, the notice shall also
specify the number of shares of Series A Preferred Stock which are to
be redeemed and the numbers of the certificates representing such
shares. Any notice which is mailed as herein provided shall be
conclusively presumed
<PAGE> 37
37
to have been duly given, whether or not the stockholder receives such
notice; and failure duly to give such notice by mail, or any defect in
such notice, to the holders of any stock designated for redemption
shall not affect the validity of the proceedings for the redemption of
any other shares of Series A Preferred Stock.
4. Notice having been mailed as aforesaid, from and after the
redemption date (unless default be made in the payment of the
redemption price for any shares to be re deemed), all dividends on the
shares of Series A Preferred Stock called for redemption shall cease to
accrue and all rights of the holders of such shares as stockholders of
the Corporation by reason of the ownership of such shares (except the
right to receive the redemption price, on presentation and surrender of
the respective certificates representing the redeemed shares), shall
cease on the redemption date, and such shares shall not after the
redemption date be deemed to be outstanding. In case less than all the
shares represented by any such certificate are redeemed, a new
certificate shall be issued without cost to the holder thereof
representing the unredeemed shares.
5. At its option, the Corporation may, on or prior to the
redemption date, irrevocably deposit the aggregate amount payable upon
redemption of the shares of the Series A Preferred Stock to be redeemed
with a bank or trust company designated by the Board of Directors
having its principal office in New York, New York, San Juan, Puerto
Rico, or any other city in which the Corporation shall at that time
maintain a transfer agency with respect to its capital stock, and
having a combined capital and surplus (as shown by its latest published
statement) of at least $50,000,000 (hereinafter referred to as the
"Depositary"), to be held in trust by the Depositary for payment to the
holders of the shares of the Series A Preferred Stock then to be
redeemed. If such deposit is made and the funds so deposited are made
immediately available to the holders of the shares of the Series A
Preferred Stock to be redeemed, the Corporation shall thereupon be
released and discharged (subject to the provisions of Section D.6) from
any obligation to make payment of the amount payable upon redemption of
the shares of the Series A Preferred Stock to be redeemed, and the
holders of such shares shall look only to the Depositary for such
payment.
6. Any funds remaining unclaimed at the end of two years from
and after the redemption date in respect of which such funds were
deposited shall be returned to the Corporation forthwith and thereafter
the holders of shares of the Series A Preferred Stock called for
redemption with respect to which such funds were deposited shall look
only
<PAGE> 38
38
to the Corporation for the payment of the redemption price thereof. Any
interest accrued on any funds deposited with the Depositary shall
belong to the Corporation and shall be paid to it from time to time on
demand.
7. Any shares of the Series A Preferred Stock which shall at
any time have been redeemed shall, after such redemption, have the
status of authorized but unissued shares of Preferred Stock, without
designation as to series, until such shares are once more designated as
part of a particular series by the Board of Directors.
8. To the extent required to have the Series A Preferred Stock
treated as Tier 1 capital for bank regulatory purposes or otherwise
required by applicable regulations of the Federal Reserve Board, the
shares of Series A Preferred Stock may not be redeemed by the
Corporation without the prior consent of the Federal Reserve Board.
E. LIQUIDATION PREFERENCE
1. Upon any voluntary or involuntary liquidation, dissolution,
or winding up of the Corporation, the then record holders of shares of
Series A Preferred Stock will be entitled to receive out of the assets
of the Corporation available for distribution to shareholders, before
any distribution is made to holders of common stock or any other equity
securities of the Corporation ranking junior upon liquidation to the
Series A Preferred Stock, distributions upon liquidation in the amount
of $50 per share plus an amount equal to any accrued and unpaid
dividends for the current monthly dividend period to the date of
payment. Such amount shall be paid to the holders of the Series A
Preferred Stock prior to any payment or distribution to the holders of
the common stock of the Corporation or of any other class of stock or
series thereof of the Corporation ranking junior to the Series A
Preferred Stock in respect of dividends or as to the distribution of
assets upon liquidation.
2. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the amounts payable with
respect to the Series A Preferred Stock and any other shares of stock
of the Corporation ranking as to any such distribution on a parity with
the Series A Preferred Stock are not paid in full, the holders of the
Series A Preferred Stock and of such other shares will share ratably in
any such distribution of assets of the Corporation in proportion to the
full liquidation preferences to which each is entitled. After payment
of the full amount of the liquidation preference to which they
<PAGE> 39
39
would otherwise be entitled, the holders of shares of Series A
Preferred Stock will not be entitled to any further participation in
any distribution of assets of the Corporation.
3. Neither the consolidation or merger of the Corporation with
any other corporation, nor any sale, lease or conveyance of all or any
part of the property or business of the Corporation, shall be deemed to
be a liquidation, dissolution, or winding up of the Corporation.
F. VOTING RIGHTS
1. Except as described in this Section F, or except as
required by applicable law, holders of the Series A Preferred Stock
will not be entitled to receive notice of or attend or vote at any
meeting of stockholders of the Corporation.
2. If the Corporation does not pay dividends in full on the
Series A Preferred Stock for eighteen consecutive monthly dividend
periods, the holders of outstanding shares of the Series A Preferred
Stock, together with the holders of any other shares of stock of the
Corporation having the right to vote for the election of directors
solely in the event of any failure to pay dividends, acting as a single
class without regard to series, will be entitled, by written notice to
the Corporation given by the holders of a majority in liquidation
preference of such shares or by ordinary resolution passed by the
holders of a majority in liquidation preference of such shares present
in person or by proxy at a separate general meeting of such holders
convened for the purpose, to appoint two additional members of the
Board of Directors of the Corporation, to remove any such member from
office and to appoint another person in place of such member. Not later
than 30 days after such entitlement arises, if written notice by a
majority of the holders of such shares has not been given as provided
for in the preceding sentence, the Board of Directors or an authorized
committee thereof will convene a separate general meeting for the above
purpose. If the Board of Directors or such authorized committee fails
to convene such meeting within such 30-day period, the holders of 10%
of the outstanding shares of the Series A Preferred Stock and any such
other stock will be entitled to convene such meeting. The provisions of
the Certificate of Incorporation and Bylaws of the Corporation relating
to the convening and conduct of general meetings of stockholders will
apply with respect to any such separate general meeting. Any member of
the Board of Directors so appointed shall vacate office if, following
the event which gave rise to such appointment, the Corporation shall
have resumed the payment of dividends in full on the Series A Preferred
Stock and each such other
<PAGE> 40
40
series of stock for twelve consecutive monthly dividend periods.
3. Any variation or abrogation of the rights, preferences and
privileges of the Series A Preferred Stock by way of amendment of the
Corporation's Restated Certificate of Incorporation or otherwise
(including, without limitation, the authorization or issuance of any
shares of the Corporation ranking, as to dividend rights or rights on
liquidation, winding up and dissolution, senior to the Series A
Preferred Stock) shall not be effective (unless otherwise required by
applicable law) except with the consent in writing of the holders of at
least two thirds of the outstanding aggregate liquidation preference of
the outstanding shares of the Series A Preferred Stock or with the
sanction of a special resolution passed at a separate general meeting
by the holders of at least two thirds of the aggregate liquidation
preference of the outstanding shares of the Series A Preferred Stock.
Notwithstanding the foregoing, the Corporation may, without the consent
or sanction of the holders of the Series A Preferred Stock, authorize
and issue shares of the Corporation ranking, as to dividend rights and
rights on liquidation, winding up and dissolution, on a parity with or
junior to the Series A Preferred Stock.
4. No vote of the holders of the Series A Preferred Stock will
be required for the Corporation to redeem or purchase and cancel the
Series A Preferred Stock in accord ance with the Restated Certificate
of Incorporation of the Corporation.
5. The Corporation will cause a notice of any meeting at which
holders of any series of Preferred Stock are entitled to vote to be
mailed to each record holder of such series of Preferred Stock. Each
such notice will include a statement setting forth (i) the date of such
meeting, (ii) a description of any resolution to be proposed for
adoption at such meeting on which such holders are entitled to vote and
(iii) instructions for deliveries of proxies.
6. Except as set forth in this Section F, holders of Series A
Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote
as set forth herein) for taking any corporate action.
G. RANK
The Series A Preferred Stock will, with respect to dividend
rights and rights on liquidation, winding up and dissolution, rank (i)
senior to all classes of common stock of the Corporation and to all
other equity securities issued
<PAGE> 41
41
by the Corporation the terms of which specifically provide that such
equity securities will rank junior to the Series A Preferred Stock (or
to a number of series of Preferred Stock which includes the Series A
Preferred Stock); (ii) on a parity with the Corporation's outstanding
8% Convertible Cumulative Preferred Stock (Liquidation Preference
$1,000 per share) and with all other equity securities issued by the
Corporation the terms of which specifically provide that such equity
securities will rank on a parity with the Series A Preferred Stock (or
with a number of series of Preferred Stock which includes the Series A
Preferred Stock); and (iii) junior to all equity securities issued by
the Corporation the terms of which specifically provide that such
equity securities will rank senior to the Series A Preferred Stock (or
to a number of series of Preferred Stock which includes the Series A
Preferred Stock). For this purpose, the term "equity securities" does
not include debt securities convertible into or exchangeable for equity
securities.
H. FORM OF CERTIFICATE FOR SERIES A PREFERRED STOCK;
TRANSFER AND REGISTRATION
1. The Series A Preferred Stock shall be issued in registered
form only. The Corporation may treat the record holder of a share of
Series A Preferred Stock, including the Depository Trust Company and
its nominee and any other holder that holds such share on behalf of any
other person, as such record holder appears on the books of the
registrar for the Series A Preferred Stock, as the sole owner of such
share for all purposes.
2. The transfer of a share of Series A Preferred Stock may be
registered upon the surrender of the certificate evidencing the share
of Series A Preferred Stock to be transferred, together with the form
of transfer endorsed on it duly completed and executed, at the office
of the transfer agent and registrar.
3. Registration of transfers of shares of Series A Preferred
Stock will be effected without charge by or on behalf of the
Corporation, but upon payment (or the giving of such indemnity as the
transfer agent and registrar may require) in respect of any tax or
other governmental charges which may be imposed in relation to it.
4. The Corporation will not be required to register the
transfer of a share of Series A Preferred Stock after such share has
been called for redemption.
<PAGE> 42
42
I. REPLACEMENT OF LOST CERTIFICATES
If any certificate for a share of Series A Preferred Stock is
mutilated or alleged to have been lost, stolen or destroyed, a new
certificate representing the same share shall be issued to the holder
upon request subject to delivery of the old certificate or, if alleged
to have been lost, stolen or destroyed, compliance with such conditions
as to evidence, indemnity and the payment of out-of-pocket expenses of
the Corporation in connection with the request as the Board of
Directors of the Corporation may determine.
J. NO PREEMPTIVE RIGHTS
Holders of the Series A Preferred Stock will have no
preemptive or preferential rights to purchase any securities of the
Corporation.
K. NO REPURCHASE AT THE OPTION OF HOLDERS; MISCELLANEOUS
Holders of Series A Preferred Stock will have no right to
require the Corporation to redeem or repurchase any shares of Series A
Preferred Stock, and the shares of Series A Preferred Stock are not
subject to any sinking fund or similar obligation. The Corporation may,
at its option, purchase shares of the Series A Preferred Stock from
holders thereof from time to time, by tender, in privately negotiated
transactions or otherwise.
<PAGE> 1
EXHIBIT 10.96
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
(WAREHOUSE FACILITY)
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(WAREHOUSE FACILITY) (the "AMENDMENT"), dated as of November 30, 1999, is
entered into between the Lenders party hereto, BANKERS TRUST COMPANY, a New
York banking corporation, as agent for the Lenders (the "AGENT"), DORAL
FINANCIAL CORPORATION, a corporation organized under the laws of the
Commonwealth of Puerto Rico ("DFC"), and DORAL MORTGAGE CORPORATION, a
corporation organized under the laws of the Commonwealth of Puerto Rico and a
wholly-owned subsidiary of DFC ("DMC", and together with DFC, each a "BORROWER"
and collectively, the "BORROWERS"), with reference to the Amended and Restated
Credit Agreement (Warehouse Facility), dated as of June 25, 1999, between the
Borrowers, the Agent and the lenders party thereto (as amended, supplemented or
otherwise modified from time to time, the "CREDIT AGREEMENT"). All capitalized
terms used but not otherwise defined herein shall have the meanings given such
terms in the Credit Agreement.
The Lenders, the Agent and the Borrowers wish to amend the Credit
Agreement as set forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Amendments to Credit Agreement.
(a) The definition of "ADJUSTED TANGIBLE NET WORTH" set forth in
Section 1.1 of the Credit Agreement shall be deleted in its entirety.
(b) The definition of "BOOK NET WORTH" set forth in Section 1.1 of
the Credit Agreement shall be deleted in its entirety, all references to "Book
Net Worth" in the Credit Agreement shall be deemed to be references to "Book
Net Worth" in the Credit Agreement shall be deemed to be references to
"Tangible Book Net Worth", and the following definition shall be added to
Section 1.1 of the Credit Agreement immediately following the definition of
"TAKE-OUT COMMITMENT":
""TANGIBLE BOOK NET WORTH" shall mean (a) the net worth,
determined in accordance with GAAP consistently applied, of DFC on a
consolidated basis, less (b) the sum of (i) all investments in,
advances to and retained earnings of the Non-Mortgage Banking
Subsidiaries, and (ii) all other assets that would be classified as
intangible assets under GAAP, including goodwill (whether representing
the excess cost over book value of assets acquired or otherwise),
patents, trademarks, trade names, copyrights, franchises, deferred
charges (including unamortized debt discount and expense, organization
and acquisition costs and research and product development costs)."
<PAGE> 2
-2-
(c) The following definition shall be added to Section 1.1 of the
Credit Agreement immediately following the definition of
"MULTIEMPLOYER PLAN":
""NON-MORTGAGE BANKING SUBSIDIARIES" shall mean the
following Subsidiaries of DFC: (i) Doral Bank, (ii) Doral
Securities Inc., (iii) Doral Bank FSB, (iv) Doral Capital,
Inc., (v) Doral Properties, Inc., (vi) Doral Money, Inc., and
(vii) any other Subsidiary that is not primarily engaged in
the business of mortgage banking as reasonably determined by
the Agent."
(d) The definition of "TOTAL LIABILITIES" set forth in Section
1.1 of the Credit Agreement shall be amended to read as follows:
""TOTAL LIABILITIES" shall mean (a) the sum of (i) the
aggregate amount of all liabilities of each Borrower and each of its
consolidated Subsidiaries (other than the Non-Mortgage Banking
Subsidiaries) determined in accordance with GAAP, consistently
applied, other than Permitted Subordinated Indebtedness, and (ii) all
indebtedness and liabilities of Non-Mortgage Banking Subsidiaries
assumed or guaranteed by each Borrower and each of its consolidated
Subsidiaries (other than the Non-Mortgage Banking Subsidiaries), or
secured by any Lien upon property owned by any such Person, whether or
not such indebtedness is assumed, or in respect of which such Person
is secondarily or contingently liable (other than by endorsement of
instruments in the course of collection), including contingent
reimbursement obligations of such Person under undrawn letters of
credit, whether by reason of any agreement to acquire such
indebtedness or to supply or advance sums or otherwise, less (b) the
sum of (i) the aggregate amount of intercompany payables owing from
one Borrower to the other Borrower, (ii) the aggregate amount of
intercompany payables owing by either Borrower to Doral Securities,
Inc. and (iii) an amount not exceeding $45,000,000 in indebtedness
owing by Doral Properties, Inc. guaranteed by DFC relating to an
industrial revenue bond financing issued to finance DFC's new
corporate headquarters and related facilities."
(e) Section 4.8 of the Credit Agreement shall be amended to read
as follows:
"SECTION 4.8 SUBSIDIARIES.
As of November 30, 1999, DFC has no
Subsidiaries other than (i) DMC, (ii) Doral Bank, (iii)
Centro Hipotecario de Puerto Rico, Inc., (iv) Doral
Properties, Inc., (v) Doral Securities, Inc., (vi) Doral Bank
FSB, (vii) Doral Money, Inc., (viii) Doral Capital, Inc., and
(ix) SANA Mortgage Bankers. DFC owns, directly or through
another Subsidiary of DFC, one hundred percent (100%) of the
stock of each such Subsidiary, and all of the stock of each
such Subsidiary has been duly issued and is fully paid and
nonassessable. DMC has no Subsidiaries as of November 30,
1999 other than SANA Mortgage Bankers."
(f) Section 5.3(a) of the Credit Agreement shall be deleted in its
entirety.
<PAGE> 3
-3-
(g) Section 5.3(b) of the Credit Agreement shall be amended to
read as follows:
"(b) Tangible Book Net Worth. Permit Tangible Book Net
Worth at any time to be less than $200,000,000."
(h) Section 5.3(c) of the Credit Agreement shall be amended to
read as follows:
"(c) Tangible Book Net Worth Leverage. Permit the ratio of
Total Liabilities to Tangible Book Net Worth at any time to
exceed 11.0:1.0."
(i) Section 5.3 of the Credit Agreement shall be amended by
adding the following paragraph immediately following Section
5.3(d):
"The determination of compliance with all covenants set forth
in this Section 5.3 shall be based upon the quarterly
financial statements delivered to the Agent as contemplated
in Section 5.1(a)(ii) for the mortgage banking operations of
DFC and its consolidated Subsidiaries (which for greater
certainty shall include the financial results of DMC, SANA
Mortgage Bankers, and Centro Hipotecario de Puerto Rico,
Inc., and shall exclude the financial results of the
Non-Mortgage Banking Subsidiaries."
Section 2. Representations and Warranties. The Borrowers represent and
warrant that, on and as of the date hereof, all of the representations and
warranties made by them in the Credit Agreement and the other Loan Documents
are true and correct as if made on and as of the date hereof and no Potential
Default or Event of Default has occurred and is continuing.
Section 3. Effectiveness. This Amendment shall become effective as of
the date hereof upon delivery to the Agent of counterparts of this Amendment,
duly executed and delivered by the parties hereto.
Section 4. Counterparts. This Amendment may be executed in any number
of counterparts, all of which taken together shall constitute one agreement,
and any party hereto may execute this Amendment by signing any such
counterpart.
Section 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6. Miscellaneous. Except as expressly amended hereby, none of
the terms, covenants and conditions contained in the Credit Agreement and the
other Loan Documents shall be amended or waived, and all such terms, covenants
and conditions shall continue to be, and shall remain, in full force and effect
in accordance with their respective terms. Nothing contained herein shall
operate as a waiver of any right, power or remedy of the Agent or the Lenders
under the Credit Agreement or any other Loan Document, nor constitute a waiver
of any provision of the Credit Agreement or any other Loan Document.
<PAGE> 4
-4-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
DORAL FINANCIAL CORPORATION,
as a Borrower
By: /s/ Mario S. Levis
--------------------------------------------------
Name: Mario S. Levis
Title: Executive Vice President and Treasurer
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /s/ Mario S. Levis
--------------------------------------------------
Name: Mario S. Levis
Title: Executive Vice President
BANKERS TRUST COMPANY,
as Agent and as a Lender
By: /s/ Kevin M. McCann
--------------------------------------------------
Name: Kevin M. McCann
Title: Managing Director
FIRST UNION NATIONAL BANK,
as a Lender
By: /s/ R. Steven Hall
--------------------------------------------------
Name: R. Steven Hall
Title: Vice President
BANKBOSTON, N.A., as a Lender
By: /s/ Paul A. Chmielinski
--------------------------------------------------
Name: Paul A. Chmielinski
Title: Vice President
<PAGE> 5
-5-
THE BANK OF NEW YORK,
as a Lender
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
NATIONAL CITY BANK OF KENTUCKY,
as a Lender
By: /s/ Robert J. Ogburn
--------------------------------------------------
Name: Robert J. Ogburn
Title: Senior Vice President
CREDIT LYONNAIS, NEW YORK BRANCH,
as a Lender
By: /s/ W. Jay Buckley
--------------------------------------------------
Name: W. Jay Buckley
Title: Vice President
HIBERNIA NATIONAL BANK,
as a Lender
By: /s/ Stephanie F. Tyner
--------------------------------------------------
Name: Stephanie F. Tyner
Title: Vice President
COLONIAL BANK,
as a Lender
By: /s/ Catherine L. Kissick
--------------------------------------------------
Name: Catherine L. Kissick
Title: Senior Vice President/Director
<PAGE> 1
EXHIBIT 10.97
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
(SERVICING FACILITY)
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(SERVICING FACILITY) (the "AMENDMENT"), dated as of November 30, 1999, is
entered into between the Lenders party hereto, BANKERS TRUST COMPANY, a New
York banking corporation, as agent for the Lenders (the "AGENT"), DORAL
FINANCIAL CORPORATION, a corporation organized under the laws of the
Commonwealth of Puerto Rico ("DFC"), and DORAL MORTGAGE CORPORATION, a
corporation organized under the laws of the Commonwealth of Puerto Rico and a
wholly-owned subsidiary of DFC ("DMC", and together with DFC, each a "BORROWER"
and collectively, the "BORROWERS"), with reference to the Amended and Restated
Credit Agreement (Servicing Facility), dated as of June 25, 1999, between the
Borrowers, the Agent and the lenders party thereto (as amended, supplemented or
otherwise modified from time to time, the "CREDIT AGREEMENT"). All capitalized
terms used but not otherwise defined herein shall have the meanings given such
terms in the Credit Agreement.
The Lenders, the Agent and the Borrowers wish to amend the Credit
Agreement as set forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Amendments to Credit Agreement.
(a) The definition of "ADJUSTED TANGIBLE NET WORTH" set forth in
Section 1.1 of the Credit Agreement shall be deleted in its entirety.
(b) The definition of "BOOK NET WORTH" set forth in Section 1.1 of
the Credit Agreement shall be deleted in its entirety, all references to "Book
Net Worth" in the Credit Agreement shall be deemed to be references to "Book
Net Worth" in the Credit Agreement shall be deemed to be references to
"Tangible Book Net Worth", and the following definition shall be added to
Section 1.1 of the Credit Agreement immediately following the definition of
"SUBSIDIARY":
""TANGIBLE BOOK NET WORTH" shall mean (a) the net worth,
determined in accordance with GAAP consistently applied, of DFC on a
consolidated basis, less (b) the sum of (i) all investments in,
advances to and retained earnings of the Non-Mortgage Banking
Subsidiaries, and (ii) all other assets that would be classified as
intangible assets under GAAP, including goodwill (whether representing
the excess cost over book value of assets acquired or otherwise),
patents, trademarks, trade names, copyrights, franchises, deferred
charges (including unamortized debt discount and expense, organization
and acquisition costs and research and product development costs)."
<PAGE> 2
-2-
(c) The following definition shall be added to Section 1.1 of the
Credit Agreement immediately following the definition of
"MULTIEMPLOYER PLAN":
""NON-MORTGAGE BANKING SUBSIDIARIES" shall mean the
following Subsidiaries of DFC: (i) Doral Bank, (ii) Doral
Securities Inc., (iii) Doral Bank FSB, (iv) Doral Capital,
Inc., (v) Doral Properties, Inc., (vi) Doral Money, Inc., and
(vii) any other Subsidiary that is not primarily engaged in
the business of mortgage banking as reasonably determined by
the Agent."
(d) The definition of "TOTAL LIABILITIES" set forth in Section 1.1
of the Credit Agreement shall be amended to read as follows:
""TOTAL LIABILITIES" shall mean (a) the sum of (i) the
aggregate amount of all liabilities of each Borrower and each of its
consolidated Subsidiaries (other than the Non-Mortgage Banking
Subsidiaries) determined in accordance with GAAP, consistently
applied, other than Permitted Subordinated Indebtedness, and (ii) all
indebtedness and liabilities of Non-Mortgage Banking Subsidiaries
assumed or guaranteed by each Borrower and each of its consolidated
Subsidiaries (other than the Non-Mortgage Banking Subsidiaries), or
secured by any Lien upon property owned by any such Person, whether or
not such indebtedness is assumed, or in respect of which such Person
is secondarily or contingently liable (other than by endorsement of
instruments in the course of collection), including contingent
reimbursement obligations of such Person under undrawn letters of
credit, whether by reason of any agreement to acquire such
indebtedness or to supply or advance sums or otherwise, less (b) the
sum of (i) the aggregate amount of intercompany payables owing from
one Borrower to the other Borrower, (ii) the aggregate amount of
intercompany payables owing by either Borrower to Doral Securities,
Inc. and (iii) an amount not exceeding $45,000,000 in indebtedness
owing by Doral Properties, Inc. guaranteed by DFC relating to an
industrial revenue bond financing issued to finance DFC's new
corporate headquarters and related facilities."
(e) Section 4.8 of the Credit Agreement shall be amended to read
as follows:
"SECTION 4.8 SUBSIDIARIES.
As of November 30, 1999, DFC has no
Subsidiaries other than (i) DMC, (ii) Doral Bank, (iii)
Centro Hipotecario de Puerto Rico, Inc., (iv) Doral
Properties, Inc., (v) Doral Securities, Inc., (vi) Doral Bank
FSB, (vii) Doral Money, Inc., (viii) Doral Capital, Inc., and
(ix) SANA Mortgage Bankers. DFC owns, directly or through
another Subsidiary of DFC, one hundred percent (100%) of the
stock of each such Subsidiary, and all of the stock of each
such Subsidiary has been duly issued and is fully paid and
nonassessable. DMC has no Subsidiaries as of November 30,
1999 other than SANA Mortgage Bankers."
(f) Section 5.3(a) of the Credit Agreement shall be deleted in its
entirety.
<PAGE> 3
-3-
(g) Section 5.3(b) of the Credit Agreement shall be amended to
read as follows:
"(b) Tangible Book Net Worth. Permit Tangible Book Net
Worth at any time to be less than $200,000,000."
(h) Section 5.3(c) of the Credit Agreement shall be amended to
read as follows:
"(c) Tangible Book Net Worth Leverage. Permit the ratio of
Total Liabilities to Tangible Book Net Worth at any time to
exceed 11.0:1.0."
(i) Section 5.3 of the Credit Agreement shall be amended by
adding the following paragraph immediately following Section
5.3(d):
"The determination of compliance with all covenants set forth
in this Section 5.3 shall be based upon the quarterly
financial statements delivered to the Agent as contemplated
in Section 5.1(a)(ii) for the mortgage banking operations of
DFC and its consolidated Subsidiaries (which for greater
certainty shall include the financial results of DMC, SANA
Mortgage Bankers, and Centro Hipotecario de Puerto Rico,
Inc., and shall exclude the financial results of the
Non-Mortgage Banking Subsidiaries."
Section 2. Representations and Warranties. The Borrowers
represent and warrant that, on and as of the date hereof, all of the
representations and warranties made by them in the Credit Agreement and the
other Loan Documents are true and correct as if made on and as of the date
hereof and no Potential Default or Event of Default has occurred and is
continuing.
Section 3. Effectiveness. This Amendment shall become effective
as of the date hereof upon delivery to the Agent of counterparts of this
Amendment, duly executed and delivered by the parties hereto.
Section 4. Counterparts. This Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one
agreement, and any party hereto may execute this Amendment by signing any such
counterpart.
Section 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 6. Miscellaneous. Except as expressly amended hereby,
none of the terms, covenants and conditions contained in the Credit Agreement
and the other Loan Documents shall be amended or waived, and all such terms,
covenants and conditions shall continue to be, and shall remain, in full force
and effect in accordance with their respective terms. Nothing contained herein
shall operate as a waiver of any right, power or remedy of the Agent or the
Lenders under the Credit Agreement or any other Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any other Loan Document.
<PAGE> 4
-4-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
DORAL FINANCIAL CORPORATION,
as a Borrower
By: /s/ Mario S. Levis
------------------------------------------------
Name: Mario S. Levis
Title: Executive Vice President and Treasurer
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /s/ Mario S. Levis
------------------------------------------------
Name: Mario S. Levis
Title: Executive Vice President
BANKERS TRUST COMPANY,
as Agent and as a Lender
By: /s/ Kevin M. McCann
------------------------------------------------
Name: Kevin M. McCann
Title: Managing Director
FIRST UNION NATIONAL BANK,
as a Lender
By: /s/ R. Steven Hall
------------------------------------------------
Name: R. Steven Hall
Title: Vice President
BANKBOSTON, N.A., as a Lender
By: /s/ Paul A. Chmielinski
------------------------------------------------
Name: Paul A. Chmielinski
Title: Vice President
<PAGE> 5
-5-
THE BANK OF NEW YORK,
as a Lender
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
NATIONAL CITY BANK OF KENTUCKY,
as a Lender
By: /s/ Robert J. Ogburn
------------------------------------------------
Name: Robert J. Ogburn
Title: Senior Vice President
CREDIT LYONNAIS, NEW YORK BRANCH,
as a Lender
By: /s/ W. Jay Buckley
------------------------------------------------
Name: W. Jay Buckley
Title: Vice President
HIBERNIA NATIONAL BANK,
as a Lender
By: /s/ Stephanie F. Tyner
------------------------------------------------
Name: Stephanie F. Tyner
Title: Vice President
COLONIAL BANK,
as a Lender
By: /s/ Catherine L. Kissick
------------------------------------------------
Name: Catherine L. Kissick
Title: Senior Vice President and Director
<PAGE> 1
EXHIBIT 10.98
FIRST AMENDMENT TO WAREHOUSING LOAN AGREEMENT
THIS FIRST AMENDMENT dated as of the 23rd day of December, 1999 by and
among DORAL FINANCIAL CORPORATION, a corporation organized and existing under
the laws of the Commonwealth of Puerto Rico (hereinafter referred to as "DFC"),
DORAL MORTGAGE CORPORATION, a corporation organized and existing under the laws
of the Commonwealth of Puerto Rico (hereinafter referred to as "DMC" and,
collectively with DFC, the "Borrowers"), and CITIBANK, N.A., a national banking
association (hereinafter referred to as the "Bank").
WITNESSETH
WHEREAS, the Borrowers and the Bank entered into a Warehousing Loan
Agreement dated as of April 29, 1999 (the "Credit Agreement"; all capitalized
terms used herein which are not otherwise defined shall have the meanings set
forth in the Credit Agreement); and
WHEREAS, the Borrowers and the Bank desire to amend the Credit
Agreement in order to increase the Commitment and to effect certain other
amendments set forth below;
NOW, THEREFORE, the Borrowers and the Bank hereby amend the Credit
Agreement as hereinafter set forth.
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a) Section 2.1 is hereby amended to read, in its entirety,
as follows:
<PAGE> 2
2
"2.1 WAREHOUSING LOAN FACILITY. The Bank agrees, on the
terms and conditions hereinafter set forth, to make revolving credit
advances (each, an "Advance") from time to time to the Borrowers in an
aggregate principal amount not to exceed SEVENTY-FIVE MILLION DOLLARS
($75,000,000) at any time outstanding (the "Warehousing Loan Facility")
for the purpose of (i) warehousing first mortgage loans (hereinafter
referred to as "Mortgage Loans") secured by Mortgages on completed
single-family units (detached houses, townhouses and condominium
units), (each, a "Regular Sub-line Advance") and (ii) financing
Mortgage Loans held by the Borrowers that have been included in a GNMA
Pool with respect to which a GNMA Certificate shall be issued (each, a
"Gestation Sub-line Advance")."
(b) Section 3.1 is hereby amended to modify the Disbursement
Percentage applicable to Uncommitted FHA/VA Mortgage Loans to 97%.
(c) Exhibit A of the Credit Agreement is hereby amended to
include the Allonge attached hereto as Exhibit A.
SECTION 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective when, and only when, the Bank shall have received all of the following
documents, each document (unless otherwise indicated) being dated the date
hereof, in form and substance satisfactory to the Bank:
(a) Certified copies of (i) the resolutions of the Board of
Directors of the Borrowers approving this Amendment and the matters contemplated
herein and (ii) all documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to this Amendment and the matters
contemplated herein.
(b) Allonge to the Promissory Note in the form of Exhibit A
executed by the Borrowers.
<PAGE> 3
3
SECTION 3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS.
(a) Upon the effectiveness of Sections 1 and 2 hereof, on and
after the date hereof each reference in the Credit Agreement to "this
Agreement," "hereunder," "hereof" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents to "the Credit
Agreement," "there under," "thereof" or words of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Each Security Agreement executed on April 29, 1999 is
hereby amended (i) by substituting Schedule II thereto with Schedule II attached
hereto and (ii) to reflect the amendment of the Credit Agreement by this
Amendment, in order that the Credit Agreement, as so amended, shall continue to
be secured by such Agreement as part of the Obligations (as defined therein).
(c) Except as specifically amended above, the Loan Documents
shall remain in full force and effect and such Loan Documents are hereby in all
respects ratified and confirmed.
SECTION 4. WAIVER. The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of the Bank under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
The Borrowers represent and warrant as follows:
<PAGE> 4
4
(a) The execution, delivery and performance by the Borrowers
of this Amendment, and all other Loan Documents, as amended, to which any
Borrower is or will be a party, have been duly authorized by all necessary
corporate action of each Borrower and do not and will not i) contravene the
charter or by-laws of the any Borrower, ii) violate in any material respect any
provision of any applicable law, rule, regulation (including, without
limitation, Regulation X of the Board of Governors of the Federal Reserve
System), order, writ, judgment, injunction, decree, determination or award
presently in effect, iii) result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other agreement, lease or
instrument to which any Borrower or any Subsidiary of the Borrowers is a party
or by which they or their properties may be bound or affected, or iv) result in,
or require, the creation or imposition of any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance of any nature (other than
as required hereunder) upon or with respect to any of the properties now owned
or hereafter acquired by any Borrower; to the best of each Borrower's knowledge
neither Borrower nor any Subsidiary of the Borrowers is in default under any
such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
(b) No authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery and performance by the Borrowers of
this Amendment, or any of the Loan Documents, as amended, to which any Borrower
is or is to be a party.
(c) There is no pending or threatened action or proceeding
affecting any Borrower or any of their Subsidiaries before any court,
governmental agency or arbitrator, which, if
<PAGE> 5
5
adversely determined, would materially affect the financial condition or
operations of the Borrowers or any Subsidiary or which purports to affect the
legality, validity or enforceability of this Amendment or any of the other Loan
Documents, as amended.
(d) This Amendment, and each of the other Loan Documents,
as amended, to which each Borrower is a party constitute the legal, valid and
binding obligations of the respective Borrower enforceable against the
corresponding Borrower in accordance with their respective terms, except as
their enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the rights of creditors in
general.
(e) The representations and warranties contained in the
Credit Agreement are correct on and as of the date hereof as though made on and
as of this date.
(f) No event has occurred and is continuing which
constitutes an Event of Default or would constitute an Event of Default but for
the requirement that notice be given or time elapse or both.
SECTION 6. NO NOVATION. It is not the intention of the parties hereto
to cause a novation of the Obligations. Except as specifically amended hereby,
the Credit Agreement shall remain in full force and effect.
SECTION 7. COSTS, EXPENSES AND TAXES. The Borrowers agree to reimburse
all costs and expenses of the Bank incurred in connection with the preparation,
execution, delivery, administration, modification and amendment of this
Amendment and the other instruments and documents to be delivered hereunder,
including, without limitation, the reasonable fees and out-of-pocket expenses
of counsel for the Bank with respect thereto and
<PAGE> 6
6
with respect to advising the Bank as to its rights and responsibilities
hereunder and thereunder. The Borrowers further agree to reimburse the Bank for
all costs and expenses, if any (including, without limitation, reasonable
counsel fees and expenses), incurred by the Bank in connection with the
enforcement (whether through negotiations, legal proceedings or otherwise) of
this Amendment and the other instruments and documents to be delivered
hereunder, including, without limitation, reasonable counsel fees and expenses
in connection with the enforcement of rights under this Section 7. In addition,
the Borrowers shall pay any and all documentary stamp and other taxes, if any,
payable or determined to be payable in connection with the execution and
delivery of this Amendment and the other instruments and documents to be
delivered hereunder, and agrees to save the Bank harmless from and against any
and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
SECTION 8. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Puerto Rico.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
DORAL FINANCIAL CORPORATION DORAL MORTGAGE CORPORATION
By: /s/ Mario S. Levis By: /S/ Mario S. Levis
----------------------------- -------------------------------
Mario S. Levis Mario S. Levis
Executive Vice President Executive Vice President
and Treasurer
<PAGE> 7
7
Affidavit No. __________
Acknowledged and subscribed to before me in San Juan, Puerto Rico, this
_______________ day of December, 1999, by the following person, who is
personally known to me: Mario S. Levis, of legal age, married, executive and
resident of San Juan, Puerto Rico as Executive Vice President and Treasurer of
Doral Financial Corporation and as Executive Vice President of Doral Mortgage
Corporation.
-----------------------------------------
Notary Public
CITIBANK, N.A.
By: /s/ Elena Manrara
------------------------------
Elena Manrara
Vice President
<PAGE> 8
8
EXHIBIT A
ALLONGE
The terms of that certain "Promissory Note" (hereinafter the "Note") in
the principal amount of $50,000,000 executed on April 29, 1999 under Affidavit
No. 7288 of Notary Silvestre M. Miranda are hereby amended and modified as of
the date hereof, as follows:
1. The principal amount of the Note is hereby increased, as of the date
hereof, to SEVENTY-FIVE MILLION THOUSAND DOLLARS ($75,000,000).
2. The references in the Note to the "Loan Agreement" shall mean and be
to the Warehousing Loan Agreement among Doral Financial Corporation, Doral
Mortgage Corporation and Citibank, N.A. dated as of April 29, 1999, as amended
on December 23, 1999 and as it may be hereafter amended, supplemented or
modified.
3. It is not the intention of the parties to cause a novation of the
indebtedness evidenced by the Note.
4. Except as amended hereby, all other terms and conditions of the Note
shall remain unchanged and in full force and effect.
EXECUTED in San Juan, Puerto Rico, as of the 23rd day of December,
1999.
DORAL FINANCIAL CORPORATION DORAL MORTGAGE CORPORATION
By: /s/ Mario S. Levis By:
---------------------------------- ---------------------------------
Mario S. Levis Mario S. Levis
Executive Vice President Executive Vice President
and Treasurer
Affidavit No. __________
<PAGE> 9
9
Acknowledged and subscribed to before me in San Juan, Puerto Rico, this
__ day of December, 1999, by the following person, who is personally known to
me: Mario S. Levis, of legal age, married, executive and resident of San Juan,
Puerto Rico as Executive Vice President and Treasurer of Doral Financial
Corporation and as Executive Vice President of Doral Mortgage Corporation.
-----------------------------------
Notary Public
ACCEPTED AND AGREED TO,
as of the date above
indicated
CITIBANK, N.A.
By:
-----------------------------
Elena Manrara
Vice President
<PAGE> 10
10
SCHEDULE II
ASSIGNED AGREEMENTS
<TABLE>
<CAPTION>
Party Date Amount
----- ---- ------
<S> <C> <C>
1. Banco Popular December 1, 1999 $175,000,000
de Puerto Rico
2. Westernbank October 8, 1999 $ 50,000,000
</TABLE>
<PAGE> 1
EXHIBIT 10.99
EXECUTION COPY
================================================================================
MASTER LOAN AND SECURITY AGREEMENT
---------------------------
Dated as of December 30, 1999
---------------------------
DORAL FINANCIAL CORPORATION
as Borrower
and
MORGAN STANLEY MORTGAGE CAPITAL INC.
as Lender
================================================================================
<PAGE> 2
TABLE OF CONTENTS
Page
----
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms............................................1
1.02 Accounting Terms and Determinations.............................13
Section 2. Loans, Note and Prepayments.
2.01 Loans...........................................................14
2.02 Notes...........................................................14
2.03 Procedure for Borrowing.........................................14
2.04 Limitation on Types of Loans; Illegality........................15
2.05 Repayment of Loans; Interest....................................16
2.06 Mandatory Prepayments or Pledge.................................16
2.07 Takeout Commitments.............................................16
2.08 Extension of Termination Date...................................17
Section 3. Payments; Computations; Etc.
3.01 Payments........................................................17
3.02 Computations....................................................18
3.03 Requirements of Law.............................................18
3.04 Facility Fee....................................................19
Section 4. Collateral Security.
4.01 Collateral; Security Interest...................................19
4.02 Further Documentation...........................................20
4.03 Changes in Locations, Name, etc.................................20
4.04 Lender's Appointment as Attorney-in-Fact........................20
4.05 Performance by Lender of Borrower's Obligations.................22
4.06 Proceeds........................................................22
4.07 Remedies........................................................22
4.08 Limitation on Duties Regarding Preservation of Collateral.......23
4.09 Powers Coupled with an Interest.................................23
4.10 Release of Security Interest....................................24
Section 5. Conditions Precedent.
5.01 Initial Loan....................................................24
5.02 Initial and Subsequent Loans....................................24
Section 6. Representations and Warranties.
6.01 Existence.......................................................26
6.02 Financial Condition.............................................26
6.03 Litigation......................................................27
6.04 No Breach.......................................................27
-i-
<PAGE> 3
6.05 Action..........................................................27
6.06 Approvals.......................................................27
6.07 Margin Regulations..............................................28
6.08 Taxes...........................................................28
6.09 Investment Company Act..........................................28
6.10 Collateral; Collateral Security.................................28
6.11 Chief Executive Office/Jurisdiction of Organization.............29
6.12 Location of Books and Records...................................29
6.13 Hedging.........................................................29
6.14 True and Complete Disclosure....................................29
6.15 ERISA...........................................................29
6.16 Takeout Commitments.............................................30
6.17 Delivery of Mortgage Loans......................................30
6.18 Well-Capitalized................................................30
Section 7. Covenants of the Borrower.
7.01 Financial Statements............................................30
7.02 Litigation......................................................32
7.03 Existence, etc..................................................32
7.04 Prohibition of Fundamental Changes..............................33
7.05 Borrowing Base Deficiency.......................................33
7.06 Notices.........................................................33
7.07 Hedging; Takeout Commitments....................................33
7.08 Reports.........................................................34
7.09 Underwriting Guidelines.........................................34
7.10 Transactions with Affiliates....................................34
7.11 Limitation on Liens.............................................34
7.12 Limitation on Distributions.....................................34
7.13 Maintenance of Profitability....................................35
7.14 Servicer; Servicing Tape........................................35
7.15 Required Filings................................................35
7.16 No Adverse Selection............................................35
7.17 Computer Systems................................................35
7.18 Approvals; Servicing............................................35
7.19 Downgrade Trigger; Blocked Account..............................35
7.20 Well-Capitalized................................................36
Section 8. Events of Default.
Section 9. Remedies Upon Default.
Section 10. No Duty of Lender.
Section 11. Miscellaneous.
11.01 Waiver..........................................................39
11.02 Notices.........................................................39
-ii-
<PAGE> 4
11.03 Indemnification and Expenses....................................39
11.04 Amendments......................................................40
11.05 Successors and Assigns..........................................40
11.06 Survival........................................................40
11.07 Captions........................................................41
11.08 Counterparts....................................................41
11.09 Loan Agreement Constitutes Security Agreement; Governing Law....41
11.10 Submission To Jurisdiction; Waivers.............................41
11.11 WAIVER OF JURY TRIAL............................................41
11.12 Acknowledgments.................................................42
11.13 Hypothecation or Pledge of Loans................................42
11.14 Servicing.......................................................42
11.15 Periodic Due Diligence Review...................................43
11.16 Set-Off.........................................................44
11.17 Intent..........................................................44
-iii-
<PAGE> 5
SCHEDULES
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to Borrower
EXHIBIT D Form of Request for Borrowing
EXHIBIT E-1 Form of Borrower's Release Letter
EXHIBIT E-2 Form of Warehouse Lender's Release Letter
EXHIBIT F Underwriting Guidelines
EXHIBIT G Form of Blocked Account Agreement
EXHIBIT H Form of Servicer Notice
EXHIBIT I Form of Confirmation of Receipt of Funds
EXHIBIT J Form of True Sale Certification
-i-
<PAGE> 6
MASTER LOAN AND SECURITY AGREEMENT
MASTER LOAN AND SECURITY AGREEMENT, dated as of December 30, 1999,
between DORAL FINANCIAL CORPORATION, a Commonwealth of Puerto Rico corporation
(the "Borrower"), and MORGAN STANLEY MORTGAGE CAPITAL INC., a New York
corporation (the "Lender").
RECITALS
The Borrower has requested that the Lender from time to time make
revolving credit loans to them to finance certain residential mortgage loans
owned by the Borrower, and the Lender is prepared to make such loans upon the
terms and conditions hereof. Accordingly, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Loan Agreement in the singular to have the same
meanings when used in the plural and vice versa):
"Accepted Servicing Practices" shall mean with respect to each
Mortgage Loan, those mortgage servicing practices of prudent mortgage lending
institutions that service mortgage loans of the same type as such Mortgage Loan
in the jurisdiction where the related Mortgaged Property is located, but in no
event shall such standards or practices be lower than the standards of the
Borrower with respect to its own portfolio of similar mortgage loans; and in all
events such standards shall comply with the applicable standards and
requirements under the applicable Agency Program and related provisions of the
applicable Agency Guide.
"Affiliate" shall mean with respect to any Person, any "affiliate"
of such Person, as such term is defined in the Bankruptcy Code.
"Agency" shall mean the Government National Mortgage Association
("GNMA"), Fannie Mae, or Freddie Mac or any successors thereto.
"Agency Eligible Mortgage Loan" shall mean a Mortgage Loan that is a
First Lien Mortgage Loan that is in strict compliance with the eligibility
requirements for swap or purchase by the designated Agency, under the applicable
Agency Guide and/or designated Agency Program.
"Agency Guide" shall mean the GNMA Mortgage-Backed Securities Guide,
the Fannie Mae Selling Guide and the Fannie Mae Servicing Guide or the Freddie
Mac Sellers' and Servicers' Guide; as applicable, in each case including all
exhibits thereto, as such Guide may be amended, supplemented or otherwise
modified from time to time.
"Agency MBS" shall mean a mortgage-backed certificate guaranteed by
GNMA, a guaranteed mortgage pass-through certificate issued by Fannie Mae, or a
mortgage
<PAGE> 7
participation certificate issued by Freddie Mac, in each case representing or
backed by Mortgage Loans which are pledged to the Lender in exchange for one or
more Loans.
"Agency MBS Submission Package" shall mean the Mortgage Loan
Documents and other documents required by the relevant Agency for each pool of
Mortgage Loans to back an Agency MBS as further defined in Section 2(III) of the
Custodial Agreement.
"Agency Program" shall mean a specific mortgage-backed securities
swap or purchase program under the relevant Agency Guide or as otherwise
approved by the Agency with respect to Mortgage Loans originated pursuant to the
Agency Guide.
"Agency Purchase Documents" shall mean the documents listed in the
Custodial Agreement (other than the Mortgage Loan Documents) and any other forms
or documents now or hereafter required by the relevant Agency and Agency Program
in order to permit the respective Agency to purchase the applicable Mortgage
Loans.
"Agency Purchase Submission Package" shall mean the Mortgage Loan
Documents and other documents required for each Mortgage Loan intended to be
sold as part of a Whole Loan Transfer to an Agency as set forth in Section 2(II)
of the Custodial Agreement.
"Anticipated Settlement Date" shall mean, with respect to each
Mortgage Loan, that date specified in the related Takeout Commitment as the
expiration date for such Takeout Commitment with respect to each Agency MBS or
Whole Loan Transfer to an Agency.
"Applicable Collateral Percentage" shall mean:
(A) prior to the occurrence of a Downgrade Trigger, (i) with respect
to Agency Eligible Mortgage Loans, 98%, (ii) with respect to Non-Agency Mortgage
Loans which are First Lien Mortgage Loans, 97%, (iii) with respect to Non-Agency
Mortgage Loans which are Second Lien Mortgage Loans, 90%, and (iv) with respect
to Delinquent Mortgage Loans, 85%; and
(B) on or after the occurrence of a Downgrade Trigger, (i) with
respect to Agency Eligible Mortgage Loans, 96%, (ii) with respect to Non-Agency
Mortgage Loans which are First Lien Mortgage Loans, 94%, (iii) with respect to
Non-Agency Mortgage Loans which are Second Lien Mortgage Loans, 85%, and (iv)
with respect to Delinquent Mortgage Loans, 75%.
"Applicable Margin" shall mean:
(A) prior to the occurrence of a Downgrade Trigger, the sum of the
weighted average of the applicable rates per annum set forth below for each type
of Eligible Mortgage Loan for each day that Loans shall be secured by such
Eligible Mortgage Loans:
(i) Agency Eligible Mortgage Loans. The product of (a) a fraction
equal to the Collateral Value of all Agency Eligible Mortgage Loans divided by
the Collateral Value of all Eligible Mortgage Loans, multiplied by (b) 95 basis
points;
-2-
<PAGE> 8
(ii) Non-Agency Mortgage Loans. The product of (a) a fraction equal
to the Collateral Value of all Non-Agency Mortgage Loans divided by the
Collateral Value of all Eligible Mortgage Loans, multiplied by (b) 115 basis
points.
(iii) Delinquent Mortgage Loans. The product of (a) a fraction equal
to the Collateral Value of all Delinquent Mortgage Loans divided by the
Collateral Value of all Eligible Mortgage Loans, multiplied by (b) 150 basis
points; or
(B) on or after the occurrence of a Downgrade Trigger, the sum of
the weighted average of the applicable rates per annum set forth below for each
type of Eligible Mortgage Loan for each day that Loans shall be secured by such
Eligible Mortgage Loans:
(i) Agency Eligible Mortgage Loans. The product of (a) a fraction
equal to the Collateral Value of all Agency Eligible Mortgage Loans divided by
the Collateral Value of all Eligible Mortgage Loans, multiplied by (b) 110 basis
points;
(ii) Non-Agency Mortgage Loans. The product of (a) a fraction equal
to the Collateral Value of all Non-Agency Mortgage Loans divided by the
Collateral Value of all Eligible Mortgage Loans, multiplied by (b) 130 basis
points.
(iii) Delinquent Mortgage Loans. The product of (a) a fraction equal
to the Collateral Value of all Delinquent Mortgage Loans divided by the
Collateral Value of all Eligible Mortgage Loans, multiplied by (b) 175 basis
points.
"Appropriate Federal Banking Agency" shall have the meaning ascribed
to it by Section 1813(q) of Title 12 of the United States Code, as amended from
time to time.
"Approvals" shall mean approval by each of the Agencies as an
approved issuer in good standing, and approvals by HUD and the VA, respectively,
all as more particularly described in Section 6.06(b) hereof.
"Approved Purchaser" shall mean any Person approved by the Lender as
the provider of a Takeout Commitment.
"Available Loan Amount" shall mean the Maximum Credit, minus the
aggregate amount of Transactions outstanding under the Repurchase Agreement.
"Bank Holding Company" shall have the meaning ascribed to such term
by the Bank Holding Company Act of 1956, as amended from time to time.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of
1978, as amended from time to time.
"Blocked Account Agreement" shall mean an agreement between the
Servicer, the Borrower, and the Lender, substantially in the form of Exhibit G
hereto, as the same may be amended, supplemented or otherwise modified from time
to time, in which the Servicer acknowledges the Lender's lien on the Collection
Account, and agrees that, in the event that it receives notice that an Event of
Default hereunder has occurred and until such notice is rescinded
-3-
<PAGE> 9
by the Lender, the Servicer shall only withdraw funds from the Collection
Account on instruction from the Lender.
"Borrower" shall have the meaning provided in the heading hereof.
"Borrowing Base" shall mean the aggregate Collateral Value of all
Eligible Mortgage Loans.
"Borrowing Base Deficiency" shall have the meaning provided in
Section 2.06 hereof.
"Business Day" shall mean any day other than (i) a Saturday or
Sunday, (ii) a day on which the New York Stock Exchange, the Federal Reserve
Bank of New York or the Custodian is authorized or obligated by law or executive
order to be closed, or (iii) a day on which commercial banks are generally not
open for business in the Commonwealth of Puerto Rico.
"Capital Lease Obligations" shall mean, for any Person, all
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP, and, for purposes of this Loan
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" shall have the meaning provided in Section 4.01(b)
hereof.
"Collateral Value" shall mean, with respect to each Eligible
Mortgage Loan, the lesser of (a) the Applicable Collateral Percentage of the
Market Value of such Mortgage Loan, and (b) 99% of the outstanding principal
balance of such Mortgage Loan; provided, that, the following additional
limitations on Collateral Value shall apply:
(i) the aggregate Collateral Value of Delinquent Mortgage Loans may
not exceed 2% of the aggregate principal amount of all Loans outstanding;
(ii) the aggregate Collateral Value of Second Lien Mortgage Loans
may not exceed 5% of the Maximum Credit;
(iii) Collateral Value shall be deemed to be zero with respect to
each Mortgage Loan (1) in respect of which there is a breach of a representation
and warranty set forth on Schedule 1 (assuming each representation and warranty
is made as of the date Collateral Value is determined), (2) in respect of which
there is a delinquency in the payment of principal and/or interest which
continues for a period in excess of 60 days (without regard to any applicable
grace periods), (3) which remains pledged to the Lender hereunder (A) later than
90 days after the date on which it is first included
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in the Collateral for Non-Agency Mortgage Loans, and for Delinquent Mortgage
Loans, and (B) later than 60 days after the date on which it is first included
in the Collateral for Agency Eligible Mortgage Loans, (4) which has been
released from the possession of the Custodian under the Custodial Agreement to
the Borrower for a period in excess of 10 days, (5) which exceed the limitations
on Collateral Value set forth in (i) above, or (6) in respect of which the
related Agency MBS has been issued by the Agency.
"Collection Account" shall mean one or more accounts established by
the Servicer which may become subject to a security interest in favor of the
Lender and to the Blocked Account Agreement, into which all Collections shall be
deposited by the Servicer.
"Collections" shall mean, collectively, all collections and proceeds
on or in respect of the Mortgage Loans, excluding collections required to be
paid to the Servicer or a mortgagor on the Mortgage Loans.
"Custodial Agreement" shall mean the Custodial Agreement, dated as
of the date hereof, among the Borrower, the Custodian and the Lender,
substantially in the form of Exhibit B hereto, as the same shall be modified and
supplemented and in effect from time to time.
"Custodian" shall mean Banco Popular de Puerto Rico, as custodian
under the Custodial Agreement, and its successors and permitted assigns
thereunder.
"Cut-Off Date" shall mean the first calendar day of the month in
which the Settlement Date is to occur.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Delinquent Mortgage Loan" shall mean a Non-Agency Mortgage Loan
that is a First Lien Mortgage Loan that is at least 30 days past due and less
than or equal to 59 days past due.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Downgrade Trigger" shall mean that the Borrower's corporate senior
bond rating has been lowered or downgraded to a rating below BB+ as indicated by
S&P or below Ba1 as indicated by Moody's.
"Due Diligence Fee" shall have the meaning provided in Section 11.15
hereof.
"Due Diligence Review" shall mean the performance by the Lender of
any or all of the reviews permitted under Section 11.15 hereof with respect to
any or all of the Mortgage Loans, as desired by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loan" shall mean a Mortgage Loan secured by a
first or second mortgage lien on a one to four family residential property, as
to which the representations and warranties in Section 6.10 and Part I of
Schedule 1 hereof are correct and which is an
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Agency Eligible Mortgage Loan, a Non-Agency Mortgage Loan or a Delinquent
Mortgage Loan; provided that, in no event shall any Eligible Mortgage Loan be a
security for purposes of any securities or blue-sky laws.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
that is a member of any group of organizations (i) described in Section 414(b)
or (c) of the Code of which the Borrower is a member and (ii) solely for
purposes of potential liability under Section 302(c)(11) of ERISA and Section
412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and
Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of
which the Borrower is a member.
"Eurodollar Rate" shall mean, with respect to each day a Loan is
outstanding, the rate per annum equal to the rate appearing at page 5 of the
Telerate Screen as one-month LIBOR on such date (and if such date is not a
Business Day, the Eurodollar Rate in effect on the Business Day immediately
preceding such date), and if such rate shall not be so quoted, the rate per
annum at which the Lender is offered Dollar deposits at or about 10:00 A.M., New
York City time, on such date by prime banks in the interbank eurodollar market
where the eurodollar and foreign currency exchange operations in respect of its
Loans are then being conducted for delivery on such day for a period of 30 days
and in an amount comparable to the amount of the Loans to be outstanding on such
day.
"Event of Default" shall have the meaning provided in Section 8
hereof.
"Fannie Mae" shall mean Fannie Mae, or any successor thereto.
"Federal Funds Margin" shall mean 25 basis points (0.25%).
"Federal Funds Rate" shall mean, with respect to each day a Loan is
outstanding, the rate per annum equal to the rate appearing at page 5 of the
Telerate Screen at 8:30 a.m., New York City Time, as "Opening Federal Funds
Rate" on such date (and if such date is not a Business Day, the Federal Funds
Rate in effect on the Business Day immediately preceding such date), or, if such
rate is not so available for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Lender from three
federal funds brokers of recognized standing selected by it.
"FHA" shall mean the Federal Housing Administration, an agency
within the United States Department of Housing and Urban Development, or any
successor thereto and including the Federal Housing Commissioner and the
Secretary of Housing and Urban Development where appropriate under the FHA
regulations.
"First Lien Mortgage Loan" shall mean an Mortgage Loan secured by a
lien on the Mortgaged Property, subject to no prior liens, other than Permitted
Liens, on such Mortgaged Property.
"Freddie Mac" shall mean Freddie Mac, or any successor thereto.
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"Funding Date" shall mean the date on which a Loan is made
hereunder.
"GAAP" shall mean generally accepted accounting principles as in
effect from time to time in the United States.
"GNMA" shall mean the Government National Mortgage Association, or
any successor thereto.
"Good Delivery" shall mean, with respect to an Agency MBS, the
meaning ascribed to such term in the PSA Guide in connection with the standard
requirements for the delivery and settlement of an Agency MBS, and with respect
to a Whole Loan Transfer, the requirements for delivery as set forth in the
applicable Takeout.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over the Borrower,
any of its Subsidiaries or any of its properties.
"Guarantee" shall mean, as to any Person, any obligation of such
Person directly or indirectly guaranteeing any Indebtedness of any other Person
or in any manner providing for the payment of any Indebtedness of any other
Person or otherwise protecting the holder of such Indebtedness against loss
(whether by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, or to take-or-pay or otherwise);
provided that the term "Guarantee" shall not include (i) endorsements for
collection or deposit in the ordinary course of business, or (ii) obligations to
make servicing advances for delinquent taxes and insurance or other obligations
in respect of a Mortgaged Property, to the extent required by the Lender. The
amount of any Guarantee of a Person shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Guarantee is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have
correlative meanings.
"HUD" shall mean the Department of Housing and Urban Development, or
any federal agency or official thereof which may from time to time succeed to
the functions thereof with regard to FHA insurance. The term "HUD," for the
purposes of this Loan Agreement, is also deemed to include subdivisions thereof
such as the FHA.
"Indebtedness" shall mean, for any Person: (a) obligations created,
issued or incurred by such Person for borrowed money (whether by loan, the
issuance and sale of debt securities or the sale of Property to another Person
subject to an understanding or agreement, contingent or otherwise, to repurchase
such Property from such Person); (b) obligations of such Person to pay the
deferred purchase or acquisition price of Property or services, other than trade
accounts payable (other than for borrowed money) arising, and accrued expenses
incurred, in the ordinary course of business so long as such trade accounts
payable are payable within 90 days of the date the respective goods are
delivered or the respective services are rendered; (c) Indebtedness of others
secured by a Lien on the Property of such Person, whether or not the respective
Indebtedness so secured has been assumed by such Person; (d) obligations
(contingent
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or otherwise) of such Person in respect of letters of credit or similar
instruments issued or accepted by banks and other financial institutions for
account of such Person; (e) Capital Lease Obligations of such Person; (f)
obligations of such Person under repurchase agreements, sale/buy-back agreements
or like arrangements; (g) Indebtedness of others Guaranteed by such Person; (h)
all obligations of such Person incurred in connection with the acquisition or
carrying of fixed assets by such Person; and (i) Indebtedness of general
partnerships of which such Person is a general partner.
"Individual Takeout Amount" shall mean the principal amount of a
Whole Loan Transfer or an Agency MBS, covered by a particular Takeout
Commitment, determined in accordance with Good Delivery requirements.
"Initial Mortgage Loan Balance" shall mean the aggregate principal
balance of the applicable Mortgage Loan as of the Cut-Off Date, after
application of scheduled payments of principal due on or before such Cut-Off
Date, whether or not collected, but without application of payments of scheduled
principal prepaid for a due date beyond the Cut-Off Date.
"Insured Depository Institution" shall have the meaning ascribed to
such term by Section 1813(c)(2) of Title 12 of the United States Code, as
amended from time to time, and shall include a Bank Holding Company.
"Interest Rate Protection Agreement" shall mean, with respect to any
or all of the Mortgage Loans, any short sale of US Treasury Security, or futures
contract, or mortgage related security, or Eurodollar futures contract, or
options related contract, or interest rate swap, cap or collar agreement or
similar arrangements providing for protection against fluctuations in interest
rates or the exchange of nominal interest obligations, either generally or under
specific contingencies, [entered into by the Borrower and an Affiliate of the
Lender,] and acceptable to the Lender.
"Investor Requirements" shall mean the underwriting standards or
guidelines of the Takeout Investor, with respect to the related Mortgage Loans
and the delivery and servicing thereof.
"Lender" shall have the meaning provided in the heading hereto.
"Lien" shall mean any mortgage, lien, pledge, charge, security
interest or similar encumbrance.
"Loan" shall have the meaning provided in Section 2.01(a) hereof.
"Loan Agreement" shall mean this Master Loan and Security Agreement,
as the same may be amended, supplemented or otherwise modified from time to
time.
"Loan Documents" shall mean, collectively, this Loan Agreement, the
Note, the Custodial Agreement, and the Blocked Account Agreement.
"Market Value" shall mean, as of any date in respect of an Eligible
Mortgage Loan, the price at which such Eligible Mortgage Loan could readily be
sold as determined in
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good faith by the Lender, which price may be determined to be zero. The Lender's
determination of Market Value shall be conclusive upon the parties absent
manifest error on the part of the Lender.
"Material Adverse Effect" shall mean a material adverse effect on
(a) the Property, business, operations, financial condition or prospects of the
Borrower, (b) the ability of the Borrower to perform its obligations under any
of the Loan Documents to which it is a party, (c) the validity or enforceability
of any of the Loan Documents, (d) the rights and remedies of the Lender under
any of the Loan Documents, (e) the timely payment of the principal of or
interest on the Loans or other amounts payable in connection therewith or (f)
the Collateral.
"Maximum Credit" shall mean $400,000,000.
"Moody's" shall mean Moody's Investors Service, Inc., or any
successor thereto.
"Mortgage" shall mean the mortgage, deed of trust or other
instrument securing a Mortgage Note, which creates a first lien or second lien
on the fee in real property securing the Mortgage Note.
"Mortgage File" shall have the meaning assigned thereto in the
Custodial Agreement.
"Mortgage Loan" shall mean a mortgage loan which the Custodian has
been instructed to hold for the Lender pursuant to the Custodial Agreement, and
which Mortgage Loan includes, without limitation, a Mortgage Note and related
Mortgage.
"Mortgage Loan Documents" shall mean, with respect to a Mortgage
Loan, the documents comprising the Mortgage File for such Mortgage Loan.
"Mortgage Loan Schedule" shall have the meaning assigned thereto in
the Custodial Agreement.
"Mortgage Loan Schedule and Exception Report" shall mean the
mortgage loan schedule and exception report prepared by the Custodian pursuant
to the Custodial Agreement.
"Mortgage Loan Tape" shall mean a computer-readable file containing
information with respect to each Mortgage Loan, to be delivered by the Borrower
to the Lender pursuant to Section 2.03(a) hereof which tape fields are
identified on Annex I to the Custodial Agreement.
"Mortgage Note" shall mean the original executed promissory note or
other evidence of the indebtedness of a mortgagor/borrower with respect to a
Mortgage Loan.
"Mortgaged Property" shall mean the real property (including all
improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
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"Mortgagor" shall mean the obligor on a Mortgage Note.
"MS & Co." shall mean Morgan Stanley & Co. Incorporated, a
registered broker-dealer.
"MS Indebtedness" shall mean any indebtedness of the Borrower
hereunder and under any other arrangement between the Borrower on the one hand
and the Lender or an Affiliate of the Lender on the other hand, including
without limitation the obligations of the Borrower under the Repurchase
Agreement.
"Multiemployer Plan" shall mean a multiemployer plan defined as such
in Section 3(37) of ERISA to which contributions have been or are required to be
made by the Borrower or any ERISA Affiliate and that is covered by Title IV of
ERISA.
"Net Income" shall mean, for the Borrower, for any period, the
consolidated net income of the Borrower and its consolidated Subsidiaries for
such period as determined in accordance with GAAP.
"1934 Act" shall mean the Securities and Exchange Act of 1934, as
amended.
"Non-Agency Mortgage Loan" shall mean a Mortgage Loan which is
either a First Lien Mortgage Loan or a Second Lien Mortgage Loan made by the
Borrower to a Mortgagor with an `A' credit history which is underwritten in
accordance with the Borrower's Underwriting Guidelines for `A' credit Mortgage
Loans.
"Note" shall have the meaning provided in Section 2.02(a) hereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Liens" shall have the meaning provided in Schedule 1,
Part I, (j).
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, limited liability company, trust,
unincorporated association or government (or any agency, instrumentality or
political subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
maintained by the Borrower or any ERISA Affiliate and covered by Title IV of
ERISA, other than a Multiemployer Plan.
"Post-Default Rate" shall mean, in respect of any principal of any
Loan or any other amount under this Loan Agreement, the Note or any other Loan
Document that is not paid when due to the Lender (whether at stated maturity, by
acceleration, by mandatory prepayment or otherwise), a rate per annum during the
period from and including the due date to but excluding the date on which such
amount is paid in full equal to 4% per annum plus the Prime Rate.
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"Prime Rate" shall mean the prime rate announced to be in effect
from time to time, as published as the average rate in The Wall Street Journal.
"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"PSA Guide" shall mean the Uniform Practices for the Clearance and
Settlement of Mortgage-Backed Securities and Other related Securities, published
(and periodically updated and supplemented) by the Public Securities Association
("PSA").
"Regulations T, U and X" shall mean Regulations T, U and X of the
Board of Governors of the Federal Reserve System (or any successor), as the same
may be modified and supplemented and in effect from time to time.
"Repurchase Agreement" shall mean that certain Master Repurchase
Agreement for purchases of mortgage loans to be entered into between Doral
Financial Corporation and Morgan Stanley & Co. International Limited, as the
same may be amended, supplemented or otherwise modified from time to time.
"Requirement of Law" shall mean as to any Person, the certificate of
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Responsible Officer" shall mean, as to any Person, the chief
executive officer, chief operating officer, or any executive vice president or,
with respect to financial matters, the chief financial officer, treasurer or
chief accounting officer of such Person.
"S&P" shall mean Standard and Poor's Ratings Services, or any
successor thereto.
"Second Lien Mortgage Loan" shall mean a Mortgage Loan secured by
the lien on the Mortgaged Property, subject to one prior lien on such Mortgaged
Property.
"Secured Obligations" shall have the meaning provided in Section
4.01(c) hereof.
"Servicer" shall have the meaning provided in Section 11.14(c)
hereof.
"Servicing Agreement" shall have the meaning provided in Section
11.14(c) hereof.
"Servicing Records" shall have the meaning provided in Section
11.14(b) hereof.
"Settlement Date" shall mean, with respect to each Mortgage Loan,
the actual date on which the Takeout Price is received by the Lender.
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"Standard Agency Mortgage Loan Representations" shall mean all of
the representations and warranties made or deemed made respecting the Mortgage
Loans contained in (or incorporated by reference in) the relevant Agency Guide
provisions and Agency Program.
"Subsidiary" shall mean, with respect to any Person, any
corporation, partnership or other entity of which at least a majority of the
securities or other ownership interests having by the terms thereof ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions of such corporation, partnership or other entity
(irrespective of whether or not at the time securities or other ownership
interests of any other class or classes of such corporation, partnership or
other entity shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned or controlled by
such Person or one or more Subsidiaries of such Person or by such Person and one
or more Subsidiaries of such Person.
"System" shall mean all hardware or software, or any system
consisting of one or more thereof, including, without limitation, any and all
enhancements, upgrades, customizations, modifications, maintenance and the like
utilized by any Person for the benefit of such Person to perform its obligations
and to administer and track, store, process, provide, and where appropriate,
insert, true and accurate dates and calculations for dates and spans with
respect to the Mortgage Loans.
"Takeout Amount" shall mean the aggregate of the Individual Takeout
Amounts respecting a Whole Loan Transfer or an Agency MBS to be sold, issued or
swapped, as applicable, in connection with a given Transaction, which Takeout
Amount shall be required to equal the Whole Loan Amount or Agency MBS.
"Takeout Commitment" shall mean the collective reference to (i) with
respect to an Agency MBS, a trade confirmation from the Agency to swap for the
principal amount of one or more Mortgage Loans an Agency MBS as more
particularly described therein, (ii) with respect to a Whole Loan Transfer
pursuant to which an Agency is the Takeout Investor, a trade confirmation from
such Agency to the Borrower confirming the details of a forward trade between
the Takeout Investor (as buyer) and the Borrower (as seller) constituting a
valid binding and enforceable mandatory delivery commitment by such Agency to
purchaser on the Anticipated Settlement Date and at a given Takeout Price the
Whole Loan Amount described therein and (iii) with respect to each Agency MBS
and each Whole Loan Transfer (other than those in which the Takeout Investor is
an Agency), a trade confirmation from the Takeout Investor to the Borrower
confirming the details of a forward trade between the Takeout Investor (as
buyer) and the Borrower (as seller) constituting a valid, binding and
enforceable mandatory delivery commitment by a Takeout Investor to purchase on
the Anticipated Settlement Date and at a given Takeout Price the principal
amount of the Agency MBS or Whole Loan Amount described therein.
"Takeout Investor" shall mean a securities broker-dealer, Agency or
other institution, acceptable to the Lender, which has made a Takeout
Commitment.
"Takeout Price" shall mean as to each Takeout Commitment the
purchase price (expressed as a percentage of par) set forth therein.
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"Takeout Proceeds" shall mean as to each Settlement Date, the actual
amount of proceeds delivered to the Lender by the applicable Takeout Investor
for the purchase of Mortgage Loans or Agency MBS on such Settlement Date.
"Termination Date" shall mean December 29, 2000 or such earlier date
on which this Loan Agreement shall terminate in accordance with the provisions
hereof or by operation of law.
"Test Period" shall have the meaning provided in Section 7.13
hereof.
"True Sale Certification" shall mean the form of true sale
certification attached as Exhibit J hereto.
"Underwriting Guidelines" shall mean the underwriting guidelines
attached as Exhibit E hereto.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as
in effect on the date hereof in the State of New York; provided that if by
reason of mandatory provisions of law, the perfection or the effect of
perfection or non-perfection of the security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than New York, "Uniform Commercial Code" shall, in the case of Puerto Rico, mean
the Puerto Rico Commercial Transactions Act (or any successor statute thereto)
or in the case of any other jurisdiction it shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such perfection or effect of perfection or non-perfection.
"VA" shall mean the United States Department of Veterans Affairs.
"Well Capitalized" shall mean, with respect to any Insured
Depository Institution, the maintenance by such Insured Depository Institution
of capital ratios at or above the required minimum levels for such capital
category under the regulations promulgated pursuant to Section 1831(o) ("Prompt
Corrective Action") of the United States Code, as amended from time to time, or
with respect to Bank Holding Companies, the definition of such term contained in
Regulation Y of the Board of Governors of the Federal Reserve System, as amended
from time to time.
"Whole Loan Amount" shall mean the Initial Mortgage Loan Balance of
the Mortgage Loans sold to the Takeout Investor pursuant to a Whole Loan
Transfer.
"Whole Loan Transfer" shall mean the sale or transfer of some or all
of the Mortgage Loans to a Takeout Investor in a whole loan transaction.
"Year 2000 Compliant" shall mean the ability of a System to continue
its normal functions including and following December 1, 1999 and the ability of
such System to support its continued normal usage such that neither the
performance nor the correct functioning of such System will be affected by the
approach, and passing into, the year 2000.
1.02 Accounting Terms and Determinations. Except as otherwise
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial
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statements and certificates and reports as to financial matters required to be
delivered to the Lender hereunder shall be prepared, in accordance with GAAP.
Section 2. Loans, Note and Prepayments.
2.01 Loans.
(a) The Lender agrees from time to time, on the terms and conditions
of this Loan Agreement, to make loans (individually, a "Loan" and, collectively,
the "Loans") to the Borrower in Dollars, from and including the Effective Date
to and including the Termination Date in an aggregate principal amount at any
one time outstanding up to but not exceeding the Available Loan Amount as in
effect from time to time.
(b) Subject to the terms and conditions of this Loan Agreement,
during such period the Borrower may borrow, repay and reborrow hereunder;
provided that, notwithstanding the foregoing, the Lender shall have no
obligation to make Loans to the Borrower in excess of the then current Available
Loan Amount and, in the event the obligation of the Lender to make Loans to the
Borrower is terminated as permitted hereunder, the Lender shall have no further
obligation to make additional Loans hereunder.
(c) In no event shall a Loan be made when any Default or Event of
Default has occurred and is continuing.
2.02 Notes.
(a) The Loans made by the Lender shall be evidenced by a single
promissory note of the Borrower substantially in the form of Exhibit A hereto
(the "Note"), dated the date hereof, payable to the Lender in a principal amount
equal to the amount of the Maximum Credit as originally in effect and otherwise
duly completed. The Lender shall have the right to have its Note subdivided, by
exchange for promissory notes of lesser denominations or otherwise.
(b) The date, amount and interest rate of each Loan made by the
Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of the Note, endorsed by the Lender on the schedule attached to the Note or any
continuation thereof; provided that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under the Note in
respect of the Loans.
2.03 Procedure for Borrowing.
(a) The Borrower may request a borrowing hereunder, on any Business
Day during the period from and including the Effective Date to and including the
Termination Date, by delivering to the Lender, with a copy to the Custodian, a
written request for borrowing, substantially in the form of Exhibit D attached
hereto, which request must be received by the Lender prior to 11:00 a.m., New
York City time, one (l) Business Day prior to the requested Funding Date. Such
request for borrowing shall (i) attach a schedule identifying the Eligible
Mortgage Loans that the Borrower propose to pledge to the Lender and to be
included in the
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Borrowing Base in connection with such borrowing, (ii) specify the requested
Funding Date, (iii) include a Mortgage Loan Tape containing information with
respect to the Eligible Mortgage Loans that the Borrower proposes to pledge to
the Lender and to be included in the Borrowing Base in connection with such
borrowing, and (iv) attach an officer's certificate signed by a Responsible
Officer of the Borrower as required by Section 5.02(b) hereof.
(b) Upon the Borrower's request for a borrowing pursuant to Section
2.03(a), the Lender shall, assuming all conditions precedent set forth in
Section 5.01 and 5.02 have been met and provided no Default shall have occurred
and be continuing, make a Loan to the Borrower on the requested Funding Date, in
the amount so requested provided that the aggregate principal balance of Loans
outstanding after giving effect to the Loan requested shall not exceed the
Available Loan Amount as then in effect.
(c) The Borrower shall release to the Custodian no later than [12:00
p.m.,] New York City time, on the requested Funding Date, the Mortgage File
pertaining to each Eligible Mortgage Loan to be pledged to the Lender and
included in the Borrowing Base on such requested Funding Date, in accordance
with the terms and conditions of the Custodial Agreement.
(d) Pursuant to the Custodial Agreement, the Custodian shall deliver
to the Lender and the Borrower, no later than 1:00 p.m. on a Funding Date, a
Trust Receipt (as defined in the Custodial Agreement) in respect of all Mortgage
Loans pledged to the Lender on such Funding Date, and a Mortgage Loan Schedule
and Exception Report. Subject to Section 5 hereof, such borrowing will then be
made available to the Borrower by the Lender transferring, via wire transfer, to
the following account: Federal Reserve Bank of New York, ABA# 221572838, for the
A/C of Doral Bank for further credit to HF Mortgage Bankers Account #
2-4000011-2, in the aggregate amount of such borrowing in funds immediately
available to the Borrower.
2.04 Limitation on Types of Loans; Illegality. Anything herein to
the contrary notwithstanding, if, on or prior to the determination of any
Eurodollar Rate:
(a) the Lender determines, which determination shall be conclusive,
that quotations of interest rates for the relevant deposits referred to in the
definition of "Eurodollar Rate" in Section 1.01 hereof are not being provided in
the relevant amounts or for the relevant maturities for purposes of determining
rates of interest for Loans as provided herein; or
(b) the Lender determines, which determination shall be conclusive,
that the relevant rate of interest referred to in the definition of "Eurodollar
Rate" in Section 1.01 hereof upon the basis of which the rate of interest for
Loans is to be determined is not likely adequately to cover the cost to the
Lender of making or maintaining Loans; or
(c) it becomes unlawful for the Lender to honor its obligation to
make or maintain Loans hereunder using a Eurodollar Rate;
then the Lender shall give the Borrower prompt notice thereof and,
so long as such condition remains in effect, the Lender shall be under no
obligation to make additional Loans, and the Borrower shall, either prepay all
such Loans as may be outstanding or pay interest
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on such Loans at a rate per annum equal to the Federal Funds Rate plus the
Applicable Margin plus the Federal Funds Margin.
2.05 Repayment of Loans; Interest.
(a) The Borrower hereby promises to repay in full on the Termination
Date the then aggregate outstanding principal amount of the Loans.
(b) The Borrower hereby promises to pay to the Lender interest on
the unpaid principal amount of each Loan for the period from and including the
date of such Loan to but excluding the date such Loan shall be paid in full, at
a rate per annum equal to (i) with respect to the period prior to December 31,
1999, the applicable Eurodollar Rate plus the Applicable Margin, (ii) with
respect to the period from and including December 31, 1999 to and including
January 3, 2000, the Federal Funds Rate plus the Federal Funds Margin plus the
Applicable Margin, and (iii) with respect to the period on or after January 4,
2000, the applicable Eurodollar Rate plus the Applicable Margin. Notwithstanding
the foregoing, the Borrower hereby promises to pay to the Lender interest at the
applicable Post-Default Rate on any principal of any Loan and on any other
amount payable by the Borrower hereunder or under the Note that shall not be
paid in full when due (whether at stated maturity, by acceleration or by
mandatory prepayment or otherwise) for the period from and including the due
date thereof to but excluding the date the same is paid in full. Accrued
interest on each Loan shall be payable monthly on the first Business Day of each
month and for the last month of the Loan Agreement on the first Business Day of
such last month and on the Termination Date; provided, that, the Lender may, in
its sole discretion, require accrued interest to be paid simultaneously with any
prepayment of principal made by the Borrower on account of any of the Loans
outstanding. Interest payable at the Post-Default Rate shall accrue daily and
shall be payable upon such accrual.
(c) It is understood and agreed that, unless and until a Default
shall have occurred and be continuing, the Borrower shall be entitled to the
proceeds of the Mortgage Loans pledged to the Lender hereunder.
2.06 Mandatory Prepayments or Pledge.
If at any time the aggregate outstanding principal amount of Loans
exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by the
Lender and notified to the Borrower on any Business Day, the Borrower shall no
later than one Business Day after receipt of such notice, either prepay the
Loans in part or in whole or pledge additional Eligible Mortgage Loans (which
Collateral shall be in all respects acceptable to the Lender) to the Lender,
such that after giving effect to such prepayment or pledge the aggregate
outstanding principal amount of the Loans does not exceed the Borrowing Base.
2.07 Takeout Commitments.
The Borrower shall (a) instruct each Takeout Investor to remit
Purchase Proceeds in connection with each Takeout Commitment directly to the
Lender to the account set forth in Section 3.01(a) hereof, or (b) in the event
the Borrower repays the outstanding Loans related to each Takeout Commitment,
and provided that no Default shall have occurred and be continuing, the Borrower
may instruct the Lender as to where to deliver and release the related
Collateral;
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provided that any such release would not result in a Borrowing Base Deficiency.
In the event that the Borrower elects to proceed as described in clause (a) of
the preceding sentence, subject to the following sentence, on the Settlement
Date, the Lender shall apply the Takeout Proceeds received by the Lender to
amounts due to the Lender or any of its Affiliates from the Borrower as provided
herein; to the extent that no Default shall have occurred and be continuing, the
Lender shall remit any excess Takeout Proceeds to the Borrower provided that the
Lender receives, prior to 3:00 p.m., New York City time on such Settlement Date,
from (i) the Borrower via facsimile or electronically a confirmation of receipt
of funds from the Borrower, in the form of Exhibit I attached hereto (the
"Confirmation of Receipt of Funds") stating among other things that the Takeout
Investor has purchased the Mortgage Loans or Agency MBS from the Borrower and
the Takeout Proceeds paid by the Takeout Investor for such Mortgage Loans and
from (ii) the applicable Takeout Investor, the Takeout Proceeds by wire transfer
in immediately available funds to the depository account designated by the
Lender. In the event the Lender receives the Confirmation of Receipt of Funds
from the Borrower or the Takeout Proceeds from the Takeout Investor after 3:00
p.m., New York City time on the related Settlement Date, the Lender shall remit
any excess referred to in the first sentence of this paragraph, to the Borrower
on the Business Day following such Settlement Date and the Borrower shall not be
entitled to any interest thereon.
2.08 Extension of Termination Date.
At the request of the Borrower made at least thirty (30) days, but
in no event earlier than ninety (90) days, prior to the then current Termination
Date, the Lender may in its sole discretion extend the Termination Date for a
period to be determined by Lender in its sole discretion by giving written
notice of such extension to the Borrower no later than twenty (20) days, but in
no event earlier than thirty (30) days, prior to the then current Termination
Date. Any failure by the Lender to deliver such notice of extension shall be
deemed to be the Lender's determination not to extend the then current
Termination Date.
Section 3. Payments; Computations; Etc.
3.01 Payments.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrower under this Loan
Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the
following account maintained by the Lender: Account No. 40615114, for the
account of MSMCI, Citibank, N.A., ABA No. 021000089, Attn: Whole Loan
Operations, not later than 1:00 p.m., New York City time, on the date on which
such payment shall become due (and each such payment made after such time on
such due date shall be deemed to have been made on the next succeeding Business
Day). The Borrower acknowledges that it has no rights of withdrawal from the
foregoing account.
(b) Except to the extent otherwise expressly provided herein, if the
due date of any payment under this Loan Agreement or the Note would otherwise
fall on a day that is not a Business Day, such date shall be extended to the
next succeeding Business Day, and interest shall be payable for any principal so
extended for the period of such extension.
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3.02 Computations. Interest on the Loans shall be computed on the
basis of a 360-day year for the actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
3.03 Requirements of Law.
(a) If any Requirement of Law (other than with respect to any
amendment made to the Lender's certificate of incorporation and by-laws or other
organizational or governing documents) or any change in the interpretation or
application thereof or compliance by the Lender with any request or directive
(whether or not having the force of law) from any central bank or other
Governmental Authority made subsequent to the date hereof:
(i) shall subject the Lender to any tax of any kind whatsoever with
respect to this Loan Agreement, the Note or any Loan made by it (excluding
net income taxes) or change the basis of taxation of payments to the
Lender in respect thereof;
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory Loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, Loans or
other extensions of credit by, or any other acquisition of funds by, any
office of the Lender which is not otherwise included in the determination
of the Eurodollar Rate hereunder;
(iii) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender deems to be material, of making, continuing or
maintaining any Loan or to reduce any amount due or owing hereunder in respect
thereof, then, in any such case, the Borrower shall promptly pay the Lender such
additional amount or amounts as will compensate the Lender for such increased
cost or reduced amount receivable.
(b) If the Lender shall have determined that the adoption of or any
change in any Requirement of Law (other than with respect to any amendment made
to the Lender's certificate of incorporation and by-laws or other organizational
or governing documents) regarding capital adequacy or in the interpretation or
application thereof or compliance by the Lender or any corporation controlling
the Lender with any request or directive regarding capital adequacy (whether or
not having the force of law) from any Governmental Authority made subsequent to
the date hereof shall have the effect of reducing the rate of return on the
Lender's or such corporation's capital as a consequence of its obligations
hereunder to a level below that which the Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration
the Lender's or such corporation's policies with respect to capital adequacy) by
an amount deemed by the Lender to be material, then from time to time, the
Borrower shall promptly pay to the Lender such additional amount or amounts as
will compensate the Lender for such reduction.
(c) If the Lender becomes entitled to claim any additional amounts
pursuant to this Section, it shall promptly notify the Borrower of the event by
reason of which it has become so entitled. A certificate as to any additional
amounts payable pursuant to this Section submitted by the Lender to the Borrower
shall be conclusive in the absence of manifest error.
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<PAGE> 24
3.04 Facility Fee.
(a) The Borrower agrees to pay to the Lender on or prior to the
Effective Date a facility fee equal to 8.75 basis points (.0875%) of the Maximum
Credit ($350,000), such payment to be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the account
set forth in Section 3.01(a) hereof. In the event that the Lender fails to make
a Loan to the Borrower due solely to any of the circumstances set forth in
Section 5.02(k) hereof, then, upon request of the Borrower, the Lender shall
refund to the Borrower that portion of the facility fee paid pursuant to this
Section 3.04, pro-rated over the number of days (notwithstanding any extension
of the Termination Date pursuant to Section 2.08, such amount shall be
calculated based upon the original term of this Loan Agreement) during which the
Lender fails to make Loans requested by the Borrower solely because of the
circumstances set forth in Section 5.02(k) hereof.
Section 4. Collateral Security. 4.01 Collateral; Security Interest.
(a) Pursuant to the Custodial Agreement, the Custodian shall hold
the Mortgage Loan Documents as exclusive bailee and agent for the Lender
pursuant to terms of the Custodial Agreement and shall deliver to the Lender
Trust Receipts (as defined in the Custodial Agreement) each to the effect that
it has reviewed such Mortgage Loan Documents in the manner and to the extent
required by the Custodial Agreement and identifying any deficiencies in such
Mortgage Loan Documents as so reviewed.
(b) All of the Borrower's right, title and interest in, to and under
each of the following items of property, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, is hereinafter
referred to as the "Collateral":
(i) all Mortgage Loans;
(ii) all Mortgage Loan Documents, including without limitation all
promissory notes, and all Servicing Records (as defined in Section
11.14(b) below), servicing agreements and any other collateral pledged or
otherwise relating to such Mortgage Loans, together with all files,
documents, instruments, surveys, certificates, correspondence, appraisals,
computer programs, computer storage media, accounting records and other
books and records relating thereto;
(iii) all mortgage guaranties and insurance (issued by governmental
agencies or otherwise) and any mortgage insurance certificate or other
document evidencing such mortgage guaranties or insurance relating to any
Mortgage Loan and all claims and payments thereunder;
(iv) all other insurance policies and insurance proceeds relating to
any Mortgage Loan or the related Mortgaged Property, including but not
limited to any payments or proceeds under any related primary insurance,
hazard insurance and FHA Mortgage insurance policies and VA guarantees (if
any);
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<PAGE> 25
(v) all Takeout Commitments now existing or hereafter arising,
covering any part of the foregoing Collateral, all rights to deliver such
Mortgage Loans to Takeout Investors or to permanent investors and other
purchasers pursuant thereto and all proceeds resulting from the
disposition of such Collateral pursuant thereto, including the Borrower's
right and entitlement to receive the entire Takeout Price specified in
each Takeout Commitment;
(vi) any Agency MBS issued pursuant to a Takeout Commitment; (vii)
the Collection Account and all monies from time to time on deposit
therein;
(viii) all "general intangibles", "accounts" and "chattel paper" as
defined in the Uniform Commercial Code relating to or constituting any and
all of the foregoing; and
(ix) any and all replacements, substitutions, distributions on or
proceeds of any and all of the foregoing.
(c) The Borrower hereby assigns, pledges and grants a security
interest in all of its right, title and interest in, to and under the Collateral
to the Lender to secure the MS Indebtedness including without limitation the
repayment of principal of and interest on all Loans and all other amounts owing
to the Lender hereunder, under the Note and under the other Loan Documents and
the Transactions entered into under the Repurchase Agreement (collectively, the
"Secured Obligations"). The Borrower agrees to mark its computer records and
tapes to evidence the interests granted to the Lender hereunder. The Borrower
hereby irrevocably and absolutely assigns and sets over to MS & Co., as the
Lender's designee, all of the Borrower's rights and obligations in and to each
Takeout Commitment.
4.02 Further Documentation. At any time and from time to time, upon
the written request of the Lender, and at the sole expense of the Borrower, the
Borrower will promptly and duly execute and deliver, or will promptly cause to
be executed and delivered, such further instruments and documents and take such
further action as the Lender may reasonably request for the purpose of obtaining
or preserving the full benefits of this Loan Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the Liens created hereby. The Borrower also
hereby authorizes the Lender to file any such financing or continuation
statement without the signature of the Borrower to the extent permitted by
applicable law.
4.03 Changes in Locations, Name, etc. The Borrower shall not (i)
change the location of its chief executive office/chief place of business from
that specified in Section 6.11 hereof or (ii) change its name, identity or
corporate structure (or the equivalent) or (iii) unless it shall have given the
Lender at least 30 days prior written notice thereof and shall have delivered to
the Lender all Uniform Commercial Code financing statements and amendments
thereto as the Lender shall request and taken all other actions deemed necessary
by the Lender to continue its perfected status in the Collateral with the same
or better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
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(a) The Borrower hereby irrevocably constitutes and appoints the
Lender and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of the Borrower and in the name of the Borrower or in its
own name, from time to time in the Lender's discretion, for the purpose of
carrying out the terms of this Loan Agreement, to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Loan Agreement, and,
without limiting the generality of the foregoing, the Borrower hereby gives the
Lender the power and right, on behalf of the Borrower, without assent by, but
with notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(i) in the name of the Borrower or its own name, or otherwise, to
take possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
mortgage insurance or with respect to any other Collateral and to file any
claim or to take any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Lender for the purpose of
collecting any and all such moneys due under any such mortgage insurance
or with respect to any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to
ask or demand for, collect, receive payment of and receipt for, any and
all moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and endorse any
invoices, assignments, verifications, notices and other documents in
connection with any of the Collateral; (D) to commence and prosecute any
suits, actions or proceedings at law or in equity in any court of
competent jurisdiction to collect the Collateral or any portion thereof
and to enforce any other right in respect of any Collateral; (E) to defend
any suit, action or proceeding brought against the Borrower with respect
to any Collateral; (F) to settle, compromise or adjust any suit, action or
proceeding described in clause (E) above and, in connection therewith, to
give such discharges or releases as the Lender may deem appropriate; and
(G) generally, to sell, transfer, pledge and make any agreement with
respect to or otherwise deal with any of the Collateral as fully and
completely as though the Lender were the absolute owner thereof for all
purposes, and to do, at the Lender's option and at the Borrower's expense,
at any time, and from time to time, all acts and things which the Lender
deems necessary to protect, preserve or realize upon the Collateral and
the Lender's Liens thereon and to effect the intent of this Loan
Agreement, all as fully and effectively as the Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
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<PAGE> 27
(b) The Borrower also authorizes the Lender, at any time and from
time to time, to execute, in connection with any sale provided for in Section
4.07 hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect the
Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
responsible to the Borrower for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct. 4.05 Performance by Lender of
Borrower's Obligations. If the Borrower fails to perform or comply with any of
their agreements contained in the Loan Documents and the Lender may itself
perform or comply, or otherwise cause performance or compliance, with such
agreement, the expenses of the Lender incurred in connection with such
performance or compliance, together with interest thereon at a rate per annum
equal to the Post-Default Rate, shall be payable by the Borrower to the Lender
on demand and shall constitute Secured Obligations.
4.06 Proceeds. If an Event of Default shall occur and be continuing,
(a) all proceeds of Collateral received by the Borrower consisting of cash,
checks and other near-cash items shall be held by the Borrower in trust for the
Lender, segregated from other funds of the Borrower, and shall forthwith upon
receipt by the Borrower be turned over to the Lender in the exact form received
by the Borrower (duly endorsed by the Borrower to the Lender, if required) and
(b) any and all such proceeds received by the Lender (whether from the Borrower
or otherwise) may, in the sole discretion of the Lender, be held by the Lender
as collateral security for, and/or then or at any time thereafter may be applied
by the Lender against, the Secured Obligations (whether matured or unmatured),
such application to be in such order as the Lender shall elect. Any balance of
such proceeds remaining after the Secured Obligations shall have been paid in
full and this Loan Agreement shall have been terminated shall be paid over to
the Borrower or to whomsoever may be lawfully entitled to receive the same. For
purposes hereof, proceeds shall include, but not be limited to, all principal
and interest payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, real estate owned rents and any other income
and all other amounts received with respect to the Collateral.
4.07 Remedies. If an Event of Default shall occur and be continuing,
the Lender may, at its option, enter into one or more Interest Rate Protection
Agreements covering all or a portion of the Mortgage Loans pledged to the Lender
hereunder, and the Borrower shall be responsible for all damages, judgments,
costs and expenses of any kind which may be imposed on, incurred by or asserted
against the Lender relating to or arising out of such Interest Rate Protection
Agreements; including without limitation any losses resulting from such Interest
Rate Protection Agreements. If an Event of Default shall occur and be
continuing, the Lender may exercise, in addition to all other rights and
remedies granted to it in this Loan Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Uniform Commercial Code.
Without limiting the generality of the foregoing, the Lender without demand of
performance or
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<PAGE> 28
other demand, presentment, protest, advertisement or notice of any kind (except
any notice required by law referred to below) to or upon the Borrower or any
other Person (each and all of which demands, presentments, protests,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, lease, assign, give option or options
to purchase, or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels or as
an entirety at public or private sale or sales, at any exchange, broker's board
or office of the Lender or elsewhere upon such terms and conditions as it may
deem advisable and at such prices as it may deem best, for cash or on credit or
for future delivery without assumption of any credit risk. The Lender shall have
the right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part of
the Collateral so sold, free of any right or equity of redemption in the
Borrower, which right or equity is hereby waived or released. The Borrower
further agrees, at the Lender's request, to assemble the Collateral and make it
available to the Lender at places which the Lender shall reasonably select,
whether at the Borrower's premises or elsewhere. The Lender shall apply the net
proceeds of any such collection, recovery, receipt, appropriation, realization
or sale, after deducting all reasonable costs and expenses of every kind
incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the Lender
hereunder, including without limitation reasonable attorneys' fees and
disbursements, to the payment in whole or in part of the Secured Obligations, in
such order as the Lender may elect, and only after such application and after
the payment by the Lender of any other amount required or permitted by any
provision of law, including without limitation Section 9-504(1)(c) of the
Uniform Commercial Code, need the Lender account for the surplus, if any, to the
Borrower. To the extent permitted by applicable law, the Borrower waives all
claims, damages and demands it may acquire against the Lender arising out of the
exercise by the Lender of any of its rights hereunder, other than those claims,
damages and demands arising from the gross negligence or willful misconduct of
the Lender. If any notice of a proposed sale or other disposition of Collateral
shall be required by law, such notice shall be deemed reasonable and proper if
given at least 10 days before such sale or other disposition. The Borrower shall
remain liable for any deficiency (plus accrued interest thereon as contemplated
pursuant to Section 2.05(b) hereof) if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay the Secured Obligations
and the fees and disbursements of any attorneys employed by the Lender to
collect such deficiency.
4.08 Limitation on Duties Regarding Preservation of Collateral. The
Lender's duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Neither the Lender nor
any of its directors, officers or employees shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrower or otherwise.
4.09 Powers Coupled with an Interest. All authorizations and
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
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<PAGE> 29
4.10 Release of Security Interest. Upon termination of this Loan
Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral.
Section 5. Conditions Precedent.
5.01 Initial Loan. The obligation of the Lender to make its initial
Loan hereunder is subject to the satisfaction, immediately prior to or
concurrently with the making of such Loan, of the condition precedent that the
Lender shall have received all of the following items, each of which shall be
satisfactory to the Lender and its counsel in form and substance:
(a) Loan Documents. The Loan Documents, duly completed and executed;
(i) Note. The Note, duly completed and executed;
(ii) Custodial Agreement. The Custodial Agreement, duly executed and
delivered by the Borrower and the Custodian. In addition, the Borrower
shall have taken such other action as the Lender shall have requested in
order to perfect the security interests created pursuant to the Loan
Agreement;
(b) Organizational Documents. A good standing certificate and
certified copies of the charter and by-laws (or equivalent documents) of the
Borrower and of all corporate or other authority for the Borrower with respect
to the execution, delivery and performance of the Loan Documents and each other
document to be delivered by the Borrower from time to time in connection
herewith (and the Lender may conclusively rely on such certificate until it
receives notice in writing from the Borrower to the contrary);
(c) Legal Opinion. A legal opinion of outside counsel to the
Borrower, substantially in the form attached hereto as Exhibit C;
(d) Trust Receipt and Mortgage Loan Schedule and Exception Report. A
Trust Receipt, substantially in the form of Annex 2 of the Custodial Agreement,
dated the Effective Date, from the Custodian, duly completed, with a Mortgage
Loan Schedule and Exception Report attached thereto;
(e) Facility Fee. The Lender shall have received the facility fee as
contemplated by Section 3.04; and
(f) Other Documents. Such other documents as the Lender may
reasonably request.
5.02 Initial and Subsequent Loans. The making of each Loan to the
Borrower (including the initial Loan) on any Business Day is subject to the
satisfaction of the following further conditions precedent, both immediately
prior to the making of such Loan and also after giving effect thereto and to the
intended use thereof:
(a) no Default or Event of Default shall have occurred and be
continuing;
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(b) both immediately prior to the making of such Loan and also after
giving effect thereto and to the intended use thereof, the representations and
warranties made by the Borrower in Section 6 and Schedule 1 hereof, and
elsewhere in each of the Loan Documents, shall be true, correct and complete on
and as of the date of the making of such Loan in all material respects (in the
case of the representations and warranties in Section 6.10 and Schedule 1,
solely with respect to Mortgage Loans included in the Borrowing Base) with the
same force and effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date). The Lender shall have received an
officer's certificate signed by a Responsible Officer of the Borrower certifying
as to the truth, accuracy and completeness of the above, which certificate shall
specifically include a statement that the Borrower is in compliance with all
governmental licenses and authorizations and is qualified to do business and in
good standing in all required jurisdictions.
(c) the aggregate outstanding principal amount of the Loans shall
not exceed the Borrowing Base or the Available Loan Amount;
(d) subject to the Lender's right to perform one or more Due
Diligence Reviews pursuant to Section 11.15 hereof, the Lender shall have
completed its due diligence review of the Mortgage Loan Documents for each Loan
and such other documents, records, agreements, instruments, mortgaged properties
or information relating to such Mortgage Loans as the Lender in its sole
discretion deems appropriate to review and such review shall be satisfactory to
the Lender in its sole discretion;
(e) the Lender shall have received from the Custodian a Mortgage
Loan Schedule and Exception Report with Exceptions as are acceptable to the
Lender in its sole discretion in respect of Eligible Mortgage Loans to be
pledged hereunder on such Business Day;
(f) the Lender shall have received from the Borrower a Warehouse
Lender's Release Letter substantially in the form of Exhibit E-2 hereto (or such
other form acceptable to the Lender) or a Seller's Release Letter substantially
in the form of Exhibit E-1 hereto (or such other form acceptable to the Lender)
covering each Mortgage Loan to be pledged to the Lender;
(g) the Lender shall have received true, correct and current copies
of the applicable Investor Requirements;
(h) The Lender shall have received evidence that the aggregate
outstanding principal balance of all residential mortgage loans owned by the
Borrower are being hedged in accordance with the Borrower's hedging policy;
(i) the Borrower shall have delivered to the Custodian, the Mortgage
Loan Documents, the Agency Purchase Submission Package or the Agency MBS
Submission Package, as applicable;
(j) The Lender shall have received all fees and expenses of counsel
to the Lender as contemplated by Section 11.03 (b), which amount, at the
Lender's option, may be netted from any Loan advanced under this Agreement;
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(k) Morgan Stanley Dean Witter & Co.'s corporate bond rating as
calculated by S&P or Moody's has not been lowered or downgraded to a rating
below A- as indicated by S&P or below A3 as indicated by Moody's;
(l) none of the following shall have occurred and/or be continuing:
(i) an event or events shall have occurred resulting in the
effective absence of a "repo market" or comparable "lending market" for
financing debt obligations secured by mortgage loans or securities or an
event or events shall have occurred resulting in the Lender not being able
to finance any Mortgage Loans through the "repo market" or "lending
market" with traditional counterparties at rates which would have been
reasonable prior to the occurrence of such event or events;
(ii) an event or events shall have occurred resulting in the
effective absence of a "securities market" for securities backed by
mortgage loans or an event or events shall have occurred resulting in the
Lender not being able to sell securities backed by mortgage loans at
prices which would have been reasonable prior to such event or events; or
(iii) there shall have occurred a material adverse change in the
financial condition of the Lender which effects (or can reasonably be
expected to effect) materially and adversely the ability of the Lender to
fund its obligations under this Loan Agreement.
Each request for a borrowing by the Borrower hereunder shall constitute a
certification by the Borrower that all the conditions set forth in this Section
5 (other than Sections 5.02(k) or 5.02(l)) have been satisfied (both as of the
date of such notice, request or confirmation and as of the date of such
borrowing).
Section 6. Representations and Warranties. The Borrower represents
and warrants to the Lender that throughout the term of this Loan Agreement:
6.01 Existence. The Borrower (a) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has all requisite corporate or other power, and has all
governmental licenses, authorizations, consents and approvals necessary to own
its assets and carry on its business as now being or as proposed to be
conducted, except where the lack of such licenses, authorizations, consents and
approvals would not be reasonably likely to have a Material Adverse Effect; and
(c) is qualified to do business and is in good standing in all other
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary, except where failure so to qualify would not be
reasonably likely (either individually or in the aggregate) to have a Material
Adverse Effect.
6.02 Financial Condition. The Borrower has heretofore furnished to
the Lender a copy of (a) its consolidated balance sheet and the consolidated
balance sheets of its consolidated Subsidiaries for the fiscal year of the
Borrower ended December 31, 1998 and the related consolidated statements of
income and retained earnings and of cash flows for the Borrower and its
consolidated Subsidiaries for such fiscal year, setting forth in each case in
comparative form the figures for the previous year, with the opinion thereon of
PricewaterhouseCoopers LLP and (b) its consolidated balance sheet and the
consolidated balance sheets of its consolidated Subsidiaries for the quarterly
fiscal periods of the Borrower ended
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March 31, 1999 and June 30, 1999 and the related consolidated statements of
income and retained earnings and of cash flows for the Borrower and its
consolidated Subsidiaries for such quarterly fiscal period[s], setting forth in
each case in comparative form the figures for the previous year. All such
financial statements are complete and correct and fairly present, in all
material respects, the consolidated financial condition of the Borrower and its
Subsidiaries and the consolidated results of their operations as at such dates
and for such fiscal periods, all in accordance with GAAP applied on a consistent
basis. Since December 31, 1998, there has been no material adverse change in the
consolidated business, operations or financial condition of the Borrower and its
consolidated Subsidiaries taken as a whole from that set forth in said financial
statements.
6.03 Litigation. There are no actions, suits, arbitrations,
investigations (including, without limitation, any of the foregoing which are
pending or threatened) or other legal or arbitrable proceedings affecting the
Borrower or any of its Subsidiaries or affecting any of the Property of any of
them before any Governmental Authority that (i) questions or challenges the
validity or enforceability of any of the Loan Documents or any action to be
taken in connection with the transactions contemplated hereby, (ii) makes a
claim or claims in an aggregate amount greater than $1,000,000.00, (iii) which,
individually or in the aggregate, if adversely determined, could reasonably be
likely to have a Material Adverse Effect, or (iv) requires filing with the
Securities and Exchange Commission in accordance with the 1934 Act or any rules
thereunder.
6.04 No Breach. Neither (a) the execution and delivery of the Loan
Documents nor (b) the consummation of the transactions therein contemplated in
compliance with the terms and provisions thereof will conflict with or result in
a breach of the charter or by-laws of the Borrower, or any applicable law, rule
or regulation, or any order, writ, injunction or decree of any Governmental
Authority, or any Servicing Agreement or other material agreement or instrument
to which the Borrower or any of its Subsidiaries are a party or by which any of
them or any of their Property is bound or to which any of them is subject, or
constitute a default under any such material agreement or instrument or result
in the creation or imposition of any Lien (except for the Liens created pursuant
to this Loan Agreement) upon any Property of the Borrower or any of its
Subsidiaries pursuant to the terms of any such agreement or instrument.
6.05 Action. The Borrower has all necessary corporate or other
power, authority and legal right to execute, deliver and perform its obligations
under each of the Loan Documents; the execution, delivery and performance by the
Borrower of each of the Loan Documents has been duly authorized by all necessary
corporate or other action on the part of the Borrower; and each Loan Document
has been duly and validly executed and delivered by the Borrower and constitutes
a legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms.
6.06 Approvals.
(a) No authorizations, approvals or consents of, and no filings or
registrations with, any Governmental Authority or any securities exchange are
necessary for the execution, delivery or performance by the Borrower of the Loan
Documents or for the legality, validity or
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enforceability thereof, except for filings and recordings in respect of the
Liens created pursuant to this Loan Agreement.
(b) The Borrower is approved by FHA as an approved mortgagee, by VA
as an approved VA lender, by Fannie Mae as a Fannie Mae approved seller, and by
Freddie Mac as a Freddie Mac approved seller, in each case in good standing,
with no event having occurred or the Borrower having any reason whatsoever to
believe or suspect will occur including without limitation a change in insurance
coverage which would either make the Borrower unable to comply with the
eligibility requirements for maintaining all such applicable approvals or
require notification to the relevant Agency or to HUD, FHA or VA. The Borrower
has adequate financial standing, servicing facilities, procedures and
experienced personnel necessary for the sound servicing of mortgage loans of the
same types as may from time to time constitute Mortgage Loans and in accordance
with Accepted Servicing Practices.
6.07 Margin Regulations. Neither the making of any Loan hereunder,
nor the use of the proceeds thereof, will violate or be inconsistent with the
provisions of Regulations T, U or X.
6.08 Taxes. The Borrower and its Subsidiaries have filed all Federal
income tax returns and all other material tax returns that are required to be
filed by them and have paid all taxes due pursuant to such returns or pursuant
to any assessment received by any of them, except for any such taxes as are
being appropriately contested in good faith by appropriate proceedings
diligently conducted and with respect to which adequate reserves have been
provided. The charges, accruals and reserves on the books of the Borrower and
its Subsidiaries in respect of taxes and other governmental charges are, in the
opinion of the Borrower, adequate.
6.09 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
6.10 Collateral; Collateral Security.
(a) The Borrower has not assigned, pledged, or otherwise conveyed or
encumbered any Mortgage Loan or other Collateral to any other Person, and
immediately prior to the pledge of such Mortgage Loan or any other Collateral to
the Lender, the Borrower was the sole owner of such Mortgage Loan or such other
Collateral and had good and marketable title thereto, free and clear of all
Liens, in each case except for Liens to be released simultaneously with the
Liens granted in favor of the Lender hereunder. No Mortgage Loan or other
Collateral pledged to the Lender hereunder was acquired (by purchase or
otherwise) by the Borrower from an Affiliate of the Borrower. No Mortgage Loan
pledged to the Lender hereunder was acquired by the Borrower from an Affiliate
of the Borrower unless a True Sale Certification has been delivered to the
Lender prior to such pledge.
(b) The provisions of this Loan Agreement are effective to create in
favor of the Lender a valid security interest in all right, title and interest
of the Borrower in, to and under the Collateral.
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(c) Upon receipt by the Custodian of each Mortgage Note, endorsed in
blank by a duly authorized officer of the Borrower, the Lender shall have a
fully perfected first priority security interest therein, in the Mortgage Loan
evidenced thereby and in such Borrower's interest in the related Mortgaged
Property.
(d) Upon the filing of financing statements on Form UCC-1 naming the
Lender as "Secured Party" and the Borrower as "Debtor", and describing the
Collateral, in the jurisdictions and recording offices listed on Schedule 2
attached hereto, the security interests granted hereunder in the Collateral will
constitute fully perfected first priority security interests under the Uniform
Commercial Code in all right, title and interest of the Borrower in, to and
under such Collateral which can be perfected by filing under the Uniform
Commercial Code.
6.11 Chief Executive Office/Jurisdiction of Organization. On the
Effective Date, and during the four months immediately preceding the Effective
Date, the chief executive office of the Borrower, is, and has been, located at
1159 F.D. Roosevelt Avenue, San Juan, Puerto Rico 00920. On the Effective Date,
and during the four months immediately preceding the Effective Date, the
Borrower's jurisdiction of organization is the Commonwealth of Puerto Rico.
6.12 Location of Books and Records. The location where the Borrower
keeps its books and records, including all computer tapes and records relating
to the Collateral is its chief executive office.
6.13 Hedging. The Borrower has entered into Interest Rate Protection
Agreements satisfying the requirements of Section 7.07 hereof.
6.14 True and Complete Disclosure. The information, reports,
financial statements, exhibits and schedules furnished in writing by or on
behalf of the Borrower to the Lender in connection with the negotiation,
preparation or delivery of this Loan Agreement and the other Loan Documents or
included herein or therein or delivered pursuant hereto or thereto, when taken
as a whole, do not contain any untrue statement of material fact or omit to
state any material fact necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading. All
written information furnished after the date hereof by or on behalf of the
Borrower to the Lender in connection with this Loan Agreement and the other Loan
Documents and the transactions contemplated hereby and thereby will be true,
complete and accurate in every material respect, or (in the case of projections)
based on reasonable estimates, on the date as of which such information is
stated or certified. There is no fact known to any Responsible Officer of the
Borrower, after due inquiry, that could reasonably be expected to have a
Material Adverse Effect that has not been disclosed herein, in the other Loan
Documents or in a report, financial statement, exhibit, schedule, disclosure
letter or other writing furnished to the Lender for use in connection with the
transactions contemplated hereby or thereby.
6.15 ERISA. Each Plan to which the Borrower or its Subsidiaries make
direct contributions, and, to the knowledge of the Borrower, each other Plan and
each Multiemployer Plan, is in compliance in all material respects with, and has
been administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal
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or State law. No event or condition has occurred and is continuing as to which
the Borrower would be under an obligation to furnish a report to the Lender
under Section 7.01(d) hereof.
6.16 Takeout Commitments. Each Takeout Commitment constitutes a
valid, binding and subsisting obligation of a Takeout Investor, enforceable
against the Borrower and the Takeout Investor respectively, in accordance with
its terms (subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the application of the
rules of equity, including those relating to specific performance.
6.17 Delivery of Mortgage Loans. The Borrower has no reason to
believe, after reasonable and diligent inquiry respecting (among other things)
its applicable Approvals, the relevant Mortgage Loan Documents, and Mortgage
Loan Documents, the relevant Investor Requirements, the characteristics and
quality of the Mortgage Loans, that the Whole Loan Transfer and/or issuance of
the Agency MBS, as applicable, will fail to be consummated as contemplated
therein 6.18 Well-Capitalized. As of the Effective Date, the Borrower is Well
Capitalized. Section 7. Covenants of the Borrower. The Borrower covenants and
agrees with the Lender that, so long as any Loan is outstanding and until
payment in full of all Secured Obligations:
7.01 Financial Statements. The Borrower shall deliver to the Lender:
(a) as soon as available and in any event within 50 days after the
end of each of the first three quarterly fiscal periods of each fiscal year of
the Borrower, the unaudited consolidated balance sheets of the Borrower and its
consolidated Subsidiaries as at the end of such period and the related unaudited
consolidated statements of income and retained earnings and of cash flows for
the Borrower and its consolidated Subsidiaries for such period and the portion
of the fiscal year through the end of such period, setting forth in each case in
comparative form the figures for the previous year, accompanied by a certificate
of a Responsible Officer of the Borrower, which certificate shall state that
said consolidated financial statements fairly present the consolidated financial
condition and results of operations of the Borrower and its consolidated
Subsidiaries in accordance with GAAP, consistently applied, as at the end of,
and for, such period (subject to normal year-end audit adjustments);
(b) as soon as available and in any event within 95 days after the
end of each fiscal year of the Borrower, the consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at the end of such fiscal year and
the related consolidated statements of income and retained earnings and of cash
flows for the Borrower and its consolidated Subsidiaries for such year, setting
forth in each case in comparative form the figures for the previous year,
accompanied by an opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall not be qualified as to scope
of audit or going concern and shall state that said consolidated financial
statements fairly present the consolidated financial condition and results of
operations of the Borrower and its consolidated Subsidiaries as at the end of,
and for, such fiscal year in accordance with GAAP, and a certificate of a
Responsible Officer stating that such Responsible
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Officer has obtained no knowledge, except as specifically stated, of any Default
or Event of Default;
(c) from time to time such other information regarding the financial
condition, operations, or business of the Borrower as the Lender may reasonably
request; and
(d) as soon as reasonably possible, and in any event within thirty
(30) days after a Responsible Officer of the Borrower knows, or with respect to
any Plan or Multiemployer Plan to which the Borrower or any of its Subsidiaries
makes direct contributions, has reason to believe, that any of the events or
conditions specified below with respect to any Plan or Multiemployer Plan has
occurred or exists, a statement signed by a senior financial officer of the
Borrower setting forth details respecting such event or condition and the
action, if any, that the Borrower or its ERISA Affiliate proposes to take with
respect thereto (and a copy of any report or notice required to be filed with or
given to PBGC by the Borrower or an ERISA Affiliate with respect to such event
or condition):
(i) any reportable event, as defined in Section 4043(c) of ERISA and
the regulations issued thereunder, with respect to a Plan, as to which
PBGC has not by regulation waived the requirement of Section 4043(a) of
ERISA that it be notified within thirty (30) days of the occurrence of
such event (provided that a failure to meet the minimum funding standard
of Section 412 of the Code or Section 302 of ERISA, including without
limitation the failure to make on or before its due date a required
installment under Section 412(m) of the Code or Section 302(e) of ERISA,
shall be a reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code); and any request for a waiver
under Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041(c) of ERISA of a notice of
intent to terminate any Plan or any action taken by the Borrower or an
ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Borrower or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has been
taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer Plan by
the Borrower or any ERISA Affiliate that results in liability under
Section 4201 or 4204 of ERISA (including the obligation to satisfy
secondary liability as a result of a purchaser default) or the receipt by
the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan
that it is in reorganization or insolvency pursuant to Section 4241 or
4245 of ERISA or that it intends to terminate or has terminated under
Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce
Section 515 of ERISA, which proceeding is not dismissed within 30 days;
and
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(vi) the adoption of an amendment to any Plan that would result in
the loss of tax-exempt status of the trust of which such Plan is a part if
the Borrower or an ERISA Affiliate fails to provide timely security to
such Plan in accordance with the provisions of Section 401(a)(29) of the
Code or Section 307 of ERISA.
The Borrower will furnish to the Lender, at the time it furnishes each set of
financial statements pursuant to paragraphs (a) and (b) above, a certificate of
a Responsible Officer of the Borrower to the effect that, to the best of such
Responsible Officer's knowledge, the Borrower during such fiscal period or year
has observed or performed all of its covenants and other agreements, and
satisfied every condition, contained in this Loan Agreement and the other Loan
Documents to be observed, performed or satisfied by it, and that such
Responsible Officer has obtained no knowledge of any Default or Event of Default
except as specified in such certificate (and, if any Default or Event of Default
has occurred and is continuing, describing the same in reasonable detail and
describing the action the Borrower has taken or proposes to take with respect
thereto).
7.02 Litigation. The Borrower will promptly, and in any event within
10 days after service of process on any of the following, give to the Lender
notice of all litigation, actions, suits, arbitrations, investigations
(including, without limitation, any of the foregoing which are pending or
threatened) or other legal or arbitrable proceedings affecting the Borrower or
any of its Subsidiaries or affecting any of the Property of any of them before
any Governmental Authority that (i) questions or challenges the validity or
enforceability of any of the Loan Documents or any action to be taken in
connection with the transactions contemplated hereby, (ii) makes a claim or
claims in an aggregate amount greater than $5,000,000.00, (iii) which,
individually or in the aggregate, if adversely determined, could be reasonably
likely to have a Material Adverse Effect, or (iii) requires filing with the
Securities and Exchange Commission in accordance with the 1934 Act and any rules
thereunder.
7.03 Existence, etc. The Borrower will:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises (provided that nothing in
this Section 7.03(a) shall prohibit any transaction expressly permitted under
Section 7.04 hereof);
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of Governmental Authorities (including, without
limitation, all environmental laws) if failure to comply with such requirements
would be reasonably likely (either individually or in the aggregate) to have a
Material Adverse Effect;
(c) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied;
(d) not move its chief executive office from the address referred to
in Section 6.11 or change its jurisdiction of organization from the jurisdiction
referred to in Section 6.11 unless it shall have provided the Lender 30 days'
prior written notice of such change;
(e) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any of its
Property prior to the date on which penalties attach thereto, except for any
such tax, assessment, charge or levy the payment
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of which is being contested in good faith and by proper proceedings and against
which adequate reserves are being maintained; and
(f) permit representatives of the Lender, during normal business
hours, to examine, copy and make extracts from its books and records, to inspect
any of its Properties, and to discuss its business and affairs with its
officers, all to the extent reasonably requested by the Lender.
7.04 Prohibition of Fundamental Changes. The Borrower shall not
enter into any transaction of merger or consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or
dissolution) or sell all or substantially all of its assets; provided, that the
Borrower may merge or consolidate with (a) any wholly owned Subsidiary of the
Borrower, or (b) any other Person if the Borrower is the surviving corporation;
and provided further, that if after giving effect thereto, no Default would
exist hereunder.
7.05 Borrowing Base Deficiency. If at any time there exists a
Borrowing Base Deficiency the Borrower shall cure same in accordance with
Section 2.06 hereof.
7.06 Notices. The Borrower shall give notice to the Lender:
(a) promptly upon receipt of notice or knowledge of the occurrence
of any Default or Event of Default;
(b) with respect to any Mortgage Loan pledged to the Lender
hereunder, immediately upon receipt of any principal prepayment (in full or
partial) of such pledged Mortgage Loan;
(c) with respect to any Mortgage Loan pledged to the Lender
hereunder, immediately upon receipt of notice or knowledge that the underlying
Mortgaged Property has been damaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other casualty, or otherwise damaged so
as to have a Material Adverse Effect on the Collateral Value of such pledged
Mortgage Loan; and
(d) promptly upon receipt of notice or knowledge of (i) any default
related to any Collateral (other than delinquencies appearing on the servicing
tape delivered pursuant to Section 7.14 hereof), (ii) any Lien or security
interest (other than security interests created hereby or by the other Loan
Documents) on, or claim asserted against, any of the Collateral or (iii) any
event or change in circumstances which could reasonably be expected to have a
Material Adverse Effect.
Each notice pursuant to this Section shall be accompanied by a
statement of a Responsible Officer of the Borrower setting forth details of the
occurrence referred to therein and stating what action the Borrower has taken or
proposes to take with respect thereto.
7.07 Hedging; Takeout Commitments. The Borrower shall at all times
maintain Interest Rate Protection Agreements consistent with the written hedging
policies of the Borrower and shall promptly notify Lender of any changes with
respect to such written hedging policies. The Mortgage Loans shall be in the
aggregate hedged in accordance with the
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Borrower's hedging policy. To the extent the Borrower has not entered into such
Interest Rate Protection Agreements with MS & Co. or any Affiliate thereof, the
Borrower shall deliver to the Lender monthly a written summary of the hedge
positions under the Interest Rate Protection Agreements together with the total
dollar duration value of such positions and the aggregate outstanding principal
balance of Mortgage Loans to which such Interest Rate Protection Agreements
apply. The Borrower shall not pledge, hypothecate, encumber or permit any Lien
to exist on any Interest Rate Protection Agreement unless such Interest Rate
Protection Agreement does not cover or relate to residential mortgage loans.
7.08 Reports. Upon the Lender's request, the Borrower shall provide
the Lender with a quarterly report, which report shall include, among other
items, a summary of the Borrower's delinquency and loss experience with respect
to mortgage loans serviced by the Borrower, any Servicer or any designee of
either, plus any such additional reports as the Lender may reasonably request
with respect to the Borrower's or any Servicer's servicing portfolio or pending
originations of mortgage loans.
7.09 Underwriting Guidelines. Without the prior written consent of
the Lender, the Borrower shall not amend or otherwise modify the Underwriting
Guidelines. Notwithstanding the preceding sentence, in the event that the
Borrower makes any amendment or modification to the Underwriting Guidelines, the
Borrower shall promptly deliver to the Lender a complete copy of the amended or
modified Underwriting Guidelines.
7.10 Transactions with Affiliates. The Borrower shall not enter into
any transaction, including without limitation any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate of the
Borrower unless such transaction is (a) otherwise permitted under this Loan
Agreement, (b) in the ordinary course of the Borrower's business and (c) upon
fair and reasonable terms no less favorable to the Borrower than it would obtain
in a comparable arm's length transaction with a Person which is not an Affiliate
of the Borrower, or make a payment that is not otherwise permitted by this
Section 7.10 to any Affiliate. In no event shall the Borrower transfer to the
Lender hereunder any Mortgage Loan acquired by the Borrower from an Affiliate of
the Borrower unless a True Sale Certification has been delivered to the Lender
prior to such sale. Notwithstanding the foregoing, the Lender hereby agrees that
the Borrower may forgive the existing indebtedness of Puerto Rico Island Rental
Limited Dividend Partnership, S.E. to the Borrower as more particularly
described in the Borrower's proxy statement dated March 22, 1999 filed with the
Securities and Exchange Commission.
7.11 Limitation on Liens. The Borrower will defend the Collateral
against, and will take such other action as is necessary to remove, any Lien,
security interest or claim on or to the Collateral, other than the security
interests created under this Loan Agreement, and the Borrower will defend the
right, title and interest of the Lenders in and to any of the Collateral against
the claims and demands of all persons whomsoever.
7.12 Limitation on Distributions. After the occurrence and during
the continuation of any Event of Default, the Borrower shall not make any
payment on account of, or set apart assets for, a sinking or other analogous
fund for the purchase, redemption, defeasance, retirement or other acquisition
of any equity or partnership interest of the Borrower, whether
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now or hereafter outstanding, or make any other distribution in respect of any
of the foregoing or to any shareholder or equity owner of the Borrower, either
directly or indirectly, whether in cash or property or in obligations of the
Borrower or any of its consolidated Subsidiaries.
7.13 Maintenance of Profitability. The Borrower shall not permit,
for any period of three consecutive fiscal quarters (each such period, a "Test
Period"), Net Income for such Test Period, before income taxes for such Test
Period and distributions made during such Test Period, to be less than $1.00.
7.14 Servicer; Servicing Tape. The Borrower shall provide to the
Lender on the fifth Business Day of each month a computer readable file
containing servicing information, including without limitation those fields
specified by the Lender from time to time, on a loan-by-loan basis and in the
aggregate, with respect to the Mortgage Loans serviced hereunder by the Borrower
or any Servicer. The Borrower shall not cause the Mortgage Loans to be serviced
by any servicer other than a servicer expressly approved in writing by the
Lender.
7.15 Required Filings. Each quarter the Borrower shall provide the
Lender with a copy of its most recent 10-Q filed with the Securities and
Exchange Commission. The Borrower shall promptly provide the Lender with copies
of all documents which the Borrower or any Affiliate of the Borrower is required
to file with the Securities and Exchange Commission in accordance with the 1934
Act or any rules thereunder.
7.16 No Adverse Selection. The Borrower has not selected the
Collateral in a manner so as to adversely affect the Lender's interests.
7.17 Computer Systems. The Borrower shall maintain its System in a
manner that permits the Borrower to be Year 2000 Compliant.
7.18 Approvals; Servicing. The Borrower shall maintain all
Approvals. The Borrower shall service all Mortgage Loans pledged to the Lender
pursuant to this Loan Agreement in accordance with the applicable Agency Guide.
Should the Borrower, for any reason, cease to possess all such applicable
Approvals, or should notification to the relevant Agency or to HUD, FHA or VA be
required, the Borrower shall so notify Lender immediately in writing.
Notwithstanding the preceding sentence, the Borrower shall take all necessary
action to maintain all of its Approvals at all times during the term of this
Loan Agreement and each outstanding Transaction. Should the Borrower for any
reason cease to possess all such applicable approvals, or should notification to
the relevant Agency or to HUD, FHA or VA be required, the Borrower shall so
notify Lender immediately in writing. The Borrower shall maintain adequate
financial standing, servicing facilities, procedures and experienced personnel
necessary for the sound servicing of mortgage loans of the same types as may
from time to time constitute Mortgage Loans and in accordance with Accepted
Servicing Practices.
7.19 Downgrade Trigger; Blocked Account. In the event that a
Downgrade Trigger shall have occurred, the Borrower shall promptly cause the
Servicer to establish a blocked account exclusively for the receipt of proceeds
of the Collateral and shall promptly execute and deliver to the Lender a fully
executed Blocked Account Agreement in the form of Exhibit G hereto.
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7.20 Well-Capitalized. The Borrower shall be Well Capitalized at the
time of each request for borrowing hereunder and shall maintain its status as
Well Capitalized at all times throughout the term of this Loan Agreement.
Section 8. Events of Default. Each of the following events shall
constitute an event of default (an "Event of Default") hereunder:
(a) the Borrower shall default in the payment of any principal of or
interest on any Loan when due (whether at stated maturity, upon acceleration or
at mandatory or optional prepayment); or
(b) the Borrower shall default in the payment of any other amount
payable by it hereunder or under any other Loan Document after notification by
the Lender of such default, and such default shall have continued unremedied for
five Business Days; or
(c) any representation, warranty or certification made or deemed
made herein or in any other Loan Document by the Borrower or any certificate
furnished to the Lender pursuant to the provisions hereof or thereof shall prove
to have been false or misleading in any material respect as of the time made or
furnished (other than the representations and warranties set forth in Schedule
1, which shall be considered solely for the purpose of determining the
Collateral Value of the Mortgage Loans; unless (i) the Borrower shall have made
any such representations and warranties with knowledge that they were materially
false or misleading at the time made or (ii) any such representations and
warranties have been determined by the Lender in its sole discretion to be
materially false or misleading on a regular basis); or
(d) the Borrower shall fail to comply with the requirements of
Section 7.03(a), Section 7.04, Section 7.05, Section 7.06, or Sections 7.09
through 7.20 hereof; or the Borrower shall otherwise fail to comply with the
requirements of Section 7.03 hereof and such default shall continue unremedied
for a period of five Business Days; or the Borrower shall fail to observe or
perform any other covenant or agreement contained in this Loan Agreement or any
other Loan Document and such failure to observe or perform shall continue
unremedied for a period of seven (7) Business Days; or
(e) a final judgment or judgments for the payment of money in excess
of $5,000,000 in the aggregate shall be rendered against the Borrower or any of
its Affiliates by one or more courts, administrative tribunals or other bodies
having jurisdiction and the same shall not be satisfied, discharged (or
provision shall not be made for such discharge) or bonded, or a stay of
execution thereof shall not be procured, within 30 days from the date of entry
thereof, and the Borrower or any such Affiliate shall not, within said period of
30 days, or such longer period during which execution of the same shall have
been stayed or bonded, appeal therefrom and cause the execution thereof to be
stayed during such appeal; or
(f) the Borrower shall admit in writing its inability to pay its
debts as such debts become due; or
(g) the Borrower or any of its Affiliates shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, examiner or liquidator or the like of itself or of all or a
substantial part of its property, (ii) make a general
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assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or readjustment of debts,
(v) fail to controvert in a timely and appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Bankruptcy Code or (vi) take any corporate or other action for the purpose of
effecting any of the foregoing; or
(h) a proceeding or case shall be commenced, without the application
or consent of the Borrower or any of its Affiliates, in any court of competent
jurisdiction, seeking (i) its reorganization, liquidation, dissolution,
arrangement or winding-up, or the composition or readjustment of its debts, (ii)
the appointment of, or the taking of possession by, a receiver, custodian,
trustee, examiner, liquidator or the like of the Borrower or any such Affiliate
or of all or any substantial part of its property, or (iii) similar relief in
respect of the Borrower or any such Affiliate under any law relating to
bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or
winding-up, or composition or adjustment of debts, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of 30 or more days; or an order for relief against the
Borrower or any such Affiliate shall be entered in an involuntary case under the
Bankruptcy Code; or
(i) the Custodial Agreement or any Loan Document shall for whatever
reason be terminated or cease to be in full force and effect, or the
enforceability thereof shall be contested by the Borrower; or
(j) the Borrower shall grant, or suffer to exist, any Lien on any
Collateral except the Liens contemplated hereby; or the Liens contemplated
hereby shall cease to be first priority perfected Liens on the Collateral in
favor of the Lender or shall be Liens in favor of any Person other than the
Lender; or
(k) the Borrower and/or any of its Affiliates shall, individually or
collectively, be in default in excess of $5,000,000 in the aggregate under one
or more of any note, indenture, loan agreement, guaranty, swap agreement or any
other contract to which it is a party, including, without limitation, any MS
Indebtedness, which default (1) involves the failure to pay a matured
obligation, or (2) permits the acceleration of the maturity of obligations by
any other party to or beneficiary of such note, indenture, loan agreement,
guaranty, swap agreement or other contract; or
(l) any materially adverse change in the Property, business,
financial condition or prospects of the Borrower or any of its Affiliates shall
occur, in each case as determined by the Lender in its sole discretion, or any
other condition shall exist which, in the Lender's sole discretion, constitutes
a material impairment of the Borrower's ability to perform its obligations under
this Loan Agreement, the Note or any other Loan Document;
(m) The Borrower's senior corporate bond rating has been lowered or
downgraded to a rating below BB by S&P or below Ba2 by Moody's; or
(n) the discovery by the Lender of a condition or event which
existed at or prior to the execution hereof and which the Lender, in its sole
discretion, determines materially
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and adversely affects: (i) the condition (financial or otherwise) of the
Borrower, the Borrower's Subsidiaries or Affiliates; or (ii) the ability of
either the Borrower or the Lender to fulfill their respective obligations under
this Loan Agreement.
(o) Morgan Stanley Dean Witter & Co.'s corporate bond rating as
calculated by S&P or Moody's has been lowered or downgraded to a rating below A-
as indicated by S&P or below A3 as indicated by Moody's and the Borrower shall
have failed to repay outstanding Loans within ninety (90) calendar days
following demand therefor by the Lender.
(p) there shall have occurred an "Event of Default" under the
Repurchase Agreement.
Section 9. Remedies Upon Default.
(a) An Event of Default shall be deemed to be continuing unless
expressly waived by the Lender in writing. Upon the occurrence of one or more
Events of Default hereunder, the Lender's obligation to make additional Loans to
the Borrower shall automatically terminate without further action by any Person.
Upon the occurrence of one or more Events of Default other than those referred
to in Section 8(g) or (h), the Lender may immediately declare the principal
amount of the Loans then outstanding under the Note to be immediately due and
payable, together with all interest thereon and fees and expenses accruing under
this Loan Agreement. Upon the occurrence of an Event of Default referred to in
Sections 8(g) or (h), such amounts shall immediately and automatically become
due and payable without any further action by any Person. Upon such declaration
or such automatic acceleration, the balance then outstanding on the Note shall
become immediately due and payable, without presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by the
Borrower.
(b) Upon the occurrence of one or more Events of Default, the Lender
shall have the right to obtain physical possession of the Servicing Records and
all other files of the Borrower relating to the Collateral and all documents
relating to the Collateral which are then or may thereafter come in to the
possession of the Borrower or any third party acting for the Borrower and the
Borrower shall deliver to the Lender such assignments as the Lender shall
request. The Lender shall be entitled to specific performance of all agreements
of the Borrower contained in this Loan Agreement.
Section 10. No Duty of Lender. The powers conferred on the Lender
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
Section 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise and
no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any
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right, power or privilege under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
11.02 Notices. Except as otherwise expressly permitted by this Loan
Agreement, all notices, requests and other communications provided for herein
and under the Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party provided, that a copy of all notices given
under Section 7.01 shall simultaneously be delivered to Credit Department,
Morgan Stanley Dean Witter, 1221 Avenue of the Americas, 35th Floor, New York,
New York 10036; Attention: Patrick Romaine. Except as otherwise provided in this
Loan Agreement and except for notices given under Section 2 (which shall be
effective only on receipt), all such communications shall be deemed to have been
duly given when transmitted by telex or telecopy or personally delivered or, in
the case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
11.03 Indemnification and Expenses.
(a) The Borrower agrees to hold the Lender, and its Affiliates and
their officers, directors, employees, agents and advisors (each an "Indemnified
Party") harmless from and indemnify any Indemnified Party against all
liabilities, losses, damages, judgments, costs and expenses of any kind which
may be imposed on, incurred by or asserted against such Indemnified Party
(collectively, the "Costs") relating to or arising out of this Loan Agreement,
the Note, any other Loan Document or any transaction contemplated hereby or
thereby, or any amendment, supplement or modification of, or any waiver or
consent under or in respect of, this Loan Agreement, the Note, any other Loan
Document or any transaction contemplated hereby or thereby, that, in each case,
results from anything other than any Indemnified Party's gross negligence or
willful misconduct. Without limiting the generality of the foregoing, the
Borrower agrees to hold any Indemnified Party harmless from and indemnify such
Indemnified Party against all Costs with respect to all Mortgage Loans relating
to or arising out of any violation or alleged violation of any environmental
law, rule or regulation or any consumer credit laws, including without
limitation the Truth in Lending Act and/or the Real Estate Settlement Procedures
Act, that, in each case, results from anything other than such Indemnified
Party's gross negligence or willful misconduct. In any suit, proceeding or
action brought by an Indemnified Party in connection with any Mortgage Loan for
any sum owing thereunder, or to enforce any provisions of any Mortgage Loan, the
Borrower will save, indemnify and hold such Indemnified Party harmless from and
against all expense, loss or damage suffered by reason of any defense, set-off,
counterclaim, recoupment or reduction or liability whatsoever of the account
debtor or obligor thereunder, arising out of a breach by the Borrower of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to or in favor of such account debtor or obligor or
its successors from the Borrower. The Borrower also agrees to reimburse an
Indemnified Party as and when billed by such Indemnified Party for all such
Indemnified Party's costs and expenses incurred in connection with the
enforcement or the preservation of such Indemnified Party's rights under this
Loan Agreement, the Note, any
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other Loan Document or any transaction contemplated hereby or thereby, including
without limitation the reasonable fees and disbursements of its counsel. The
Borrower hereby acknowledges that, notwithstanding the fact that the Note is
secured by the Collateral, the obligation of the Borrower under the Note is a
recourse obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender all
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the development, preparation and execution of, and any amendment,
supplement or modification to, this Loan Agreement, the Note, any other Loan
Document or any other documents prepared in connection herewith or therewith.
The Borrower agrees to pay as and when billed by the Lender all of the
out-of-pocket costs and expenses incurred in connection with the consummation
and administration of the transactions contemplated hereby and thereby including
without limitation (i) all the reasonable fees, disbursements and expenses of
counsel to the Lender and (ii) all the due diligence, inspection, testing and
review costs and expenses incurred by the Lender with respect to Collateral
under this Loan Agreement, including, but not limited to, those costs and
expenses incurred by the Lender pursuant to Sections 11.03(a), 11.14 and 11.15
hereof.
11.04 Amendments. Except as otherwise expressly provided in this
Loan Agreement, any provision of this Loan Agreement may be modified or
supplemented only by an instrument in writing signed by the Borrower and the
Lender and any provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns This Loan Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
11.06 Survival. The obligations of the Borrower under Sections 3.03
and 11.03 hereof shall survive the repayment of the Loans and the termination of
this Loan Agreement. In addition, each representation and warranty made or
deemed to be made by a request for a borrowing, herein or pursuant hereto shall
survive the making of such representation and warranty, and the Lender shall not
be deemed to have waived, by reason of making any Loan, any Default that may
arise because any such representation or warranty shall have proved to be false
or misleading, notwithstanding that the Lender may have had notice or knowledge
or reason to believe that such representation or warranty was false or
misleading at the time such Loan was made.
11.07 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this Loan
Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Loan Agreement
by signing any such counterpart.
11.09 Loan Agreement Constitutes Security Agreement; Governing Law.
This Loan Agreement shall be governed by New York law without reference to
choice of law doctrine, and shall constitute a security agreement within the
meaning of the Uniform Commercial Code.
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11.10 Submission To Jurisdiction; Waivers. The Borrower hereby
irrevocably and unconditionally:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF
NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT
COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR
ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET
FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER
SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT
TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
11.12 Acknowledgments. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Loan Agreement, the Note and the other Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrower, and
the relationship between the Borrower and the Lender is solely that of debtor
and creditor; and
(c) no joint venture exists between the Lender and the Borrower.
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11.13 Hypothecation or Pledge of Loans. The Lender shall have free
and unrestricted use of all Collateral and nothing in this Loan Agreement shall
preclude the Lender from engaging in repurchase transactions with the Collateral
or otherwise pledging, repledging, transferring, hypothecating, or
rehypothecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any Collateral delivered to the Lender by the
Borrower.
11.14 Servicing.
(a) The Borrower covenants to maintain or cause the servicing of the
Mortgage Loans to be maintained in conformity with accepted and prudent
servicing practices in the industry for the same type of mortgage loans as the
Mortgage Loans and in a manner at least equal in quality to the servicing the
Borrower provides for mortgage loans which it owns. In the event that the
preceding language is interpreted as constituting one or more servicing
contracts, each such servicing contract shall terminate automatically upon the
earliest of (i) an Event of Default, (ii) the date on which all the Secured
Obligations have been paid in full or (iii) the transfer of servicing approved
by the Borrower.
(b) If the Mortgage Loans are serviced by the Borrower, (i) the
Borrower agrees that the Lender is the collateral assignee of all servicing
records, including but not limited to any and all servicing agreements, files,
documents, records, data bases, computer tapes, copies of computer tapes, proof
of insurance coverage, insurance policies, appraisals, other closing
documentation, payment history records, and any other records relating to or
evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii)
the Borrower grants the Lender a security interest in all servicing fees and
rights relating to the Mortgage Loans and all Servicing Records to secure the
obligation of the Borrower or its designee to service in conformity with this
Section and any other obligation of the Borrower to the Lender. The Borrower
covenants to safeguard such Servicing Records and to deliver them promptly to
the Lender or its designee (including the Custodian) at the Lender's request.
(c) If the Mortgage Loans are serviced by a third party servicer
(such third party servicer, the "Servicer"), the Borrower (i) shall provide a
copy of the servicing agreement to the Lender, which shall be in form and
substance acceptable to the Lender (the "Servicing Agreement"); (ii) shall
provide a Servicer Notice to the Servicer substantially in the form of Exhibit H
hereto, and (iii) hereby irrevocably assigns to the Lender and the Lender's
successors and assigns all right, title, interest of the Borrower in, to and
under, and the benefits of, any Servicing Agreement with respect to the Mortgage
Loans. Any successor to the Servicer shall be approved in writing by the Lender
prior to such successor's assumption of servicing obligations with respect to
the Mortgage Loans.
(d) If the servicer of the Mortgage Loans is the Borrower or the
Servicer is an Affiliate of the Borrower, the Borrower shall provide to the
Lender a letter from the Borrower or the Servicer, as the case may be, to the
effect that upon the occurrence of an Event of Default, the Lender may terminate
any Servicing Agreement and transfer servicing to its designee, at no cost or
expense to the Lender, it being agreed that the Borrower will pay any and all
fees required to terminate the Servicing Agreement and to effectuate the
transfer of servicing to the designee of the Lender.
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(e) After the Funding Date, until the pledge of any Mortgage Loan is
relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of such Mortgage Loan and the Borrower will have no obligation
or right to repossess such Mortgage Loan or substitute another Mortgage Loan,
except as provided in the Custodial Agreement.
(f) In the event the Borrower or an Affiliate is servicing the
Mortgage Loans, the Borrower shall permit the Lender to inspect the Borrower's
or its Affiliate's servicing facilities, as the case may be, for the purpose of
satisfying the Lender that the Borrower or its Affiliate, as the case may be,
has the ability to service the Mortgage Loans as provided in this Loan
Agreement.
(g) The Borrower shall ensure that the Servicer will maintain the
Servicer's System in a manner that permits the Servicer to be Year 2000
Compliant.
11.15 Periodic Due Diligence Review. The Borrower acknowledges that
the Lender has the right to perform continuing due diligence reviews with
respect to the Mortgage Loans, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than three (3) Business
Day's) prior notice to the Borrower, the Lender or its authorized
representatives will be permitted during normal business hours to examine,
inspect, and make copies and extracts of, the Mortgage Files and any and all
documents, records, agreements, instruments or information relating to such
Mortgage Loans in the possession or under the control of the Borrower and/or the
Custodian. The Borrower also shall make available to the Lender a knowledgeable
financial or accounting officer for the purpose of answering questions
respecting the Mortgage Files and the Mortgage Loans. Without limiting the
generality of the foregoing, the Borrower acknowledges that the Lender may make
Loans to the Borrower based solely upon the information provided by the Borrower
to the Lender in the Mortgage Loan Tape and the representations, warranties and
covenants contained herein, and that the Lender, at its option, has the right at
any time to conduct a partial or complete due diligence review on some or all of
the Mortgage Loans securing such Loan, including without limitation ordering new
credit reports and new appraisals on the related Mortgaged Properties and
otherwise re-generating the information used to originate such Mortgage Loan.
The Lender may underwrite such Mortgage Loans itself or engage a mutually agreed
upon third party underwriter to perform such underwriting. The Borrower agrees
to cooperate with the Lender and any third party underwriter in connection with
such underwriting, including, but not limited to, providing the Lender and any
third party underwriter with access to any and all documents, records,
agreements, instruments or information relating to such Mortgage Loans in the
possession, or under the control, of the Borrower. The Borrower further agrees
that it shall reimburse the Lender for any and all out-of-pocket costs and
expenses incurred by the Lender in connection with the Lender's activities
pursuant to this Section 11.15 (the "Due Diligence Fee"); provided that, the Due
Diligence Fee shall be limited to $25,000 per annum unless (a) the Lender, due
to no fault of the Lender, has to conduct more extensive due diligence than
originally contemplated in connection with this Agreement or (b) there is an
increase in the cost of conducting due diligence as a result of the structure or
timing of any Loan contemplated hereunder or (c) a Default shall have occurred.
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11.16 Set-Off. In addition to any rights and remedies of the Lender
provided by this Loan Agreement and by law, the Lender shall have the right,
without prior notice to the Borrower, any such notice being expressly waived by
the Borrower to the extent permitted by applicable law, upon any amount becoming
due and payable by the Borrower hereunder (whether at the stated maturity, by
acceleration or otherwise) to set-off and appropriate and apply against such
amount any and all deposits (general or special, time or demand, provisional or
final), in any currency, and any other credits, indebtedness or claims, in any
currency, in each case whether direct or indirect, absolute or contingent,
matured or unmatured, at any time held or owing by the Lender or any Affiliate
thereof to or for the credit or the account of the Borrower. The Lender agrees
promptly to notify the Borrower after any such set-off and application made by
the Lender; provided that the failure to give such notice shall not affect the
validity of such set-off and application.
11.17 Intent. The parties recognize that each Loan is a "securities
contract" as that term is defined in Section 741 of Title 11 of the United
States Code, as amended.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 50
IN WITNESS WHEREOF, the parties hereto have caused this Loan
Agreement to be duly executed and delivered as of the day and year first above
written.
BORROWER
DORAL FINANCIAL CORPORATION
By: /S/ Mario S. Levis
------------------------------------
Title: Executive Vice President &
Treasurer
Address for Notices:
1159 F.D Roosevelt Avenue
San Juan, Puerto Rico 00920-2998
Attention: Mario S. Levis
Telecopier No.: (787) 749-8267
Telephone No: (787) 749-7108
LENDER
MORGAN STANLEY MORTGAGE
CAPITAL INC.
By: /s/ Marc Flamino
------------------------------------
Title: Vice President
Address for Notices:
1585 Broadway
New York, New York 10036
Attention: Marc Flamino
Telecopier No.: 212-761-0093
Telephone No.: 212-761-4243
<PAGE> 51
Schedule 1
REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS
Part I. Eligible Residential Mortgage Loans
As to each residential Mortgage Loan included in the Borrowing Base
on a Funding Date (and the related Mortgage, Mortgage Note, Assignment of
Mortgage and Mortgaged Property), the Borrower shall be deemed to make the
following representations and warranties to the Lender as of such date and as of
each date Collateral Value is determined (certain defined terms used herein and
not otherwise defined in the Loan Agreement appearing in Part III to this
Schedule 1):
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Schedule with respect to the Mortgage Loan is complete, true and
correct in all material respects. Each Mortgage Loan to be part of a Whole Loan
Transfer is an Eligible Mortgage Loan or an Agency Eligible Mortgage Loan. As to
the Agency Eligible Mortgage Loans in the aggregate and each Agency Eligible
Mortgage Loan, all of the Standard Agency Mortgage Loan Representations are (and
shall be as of all relevant dates) true and correct in all material respects;
Borrower has not negotiated with the applicable Agency any exceptions or
modifications to such Standard Agency Mortgage Loan Representations unless such
exceptions or modifications have been disclosed in writing to the Lender.
(b) Payments Current. All payments required to be made up to the
Funding Date for the Mortgage Loan under the terms of the Mortgage Note have
been made and credited. With respect to each Mortgage Loan, other than a
Delinquent Mortgage Loan, no payment required under the Mortgage Loan is
delinquent nor has any payment under the Mortgage Loan been delinquent at any
time since the origination of the Mortgage Loan. The first Monthly Payment shall
be made, or shall have been made, with respect to the Mortgage Loan on its Due
Date or within the grace period, all in accordance with the terms of the related
Mortgage Note.
(c) No Outstanding Charges. There are no defaults in complying with
the terms of the Mortgage securing the Mortgage Loan, and all taxes,
governmental assessments, insurance premiums, water, sewer and municipal
charges, leasehold payments or ground rents which previously became due and
owing have been paid, or an escrow of funds has been established in an amount
sufficient to pay for every such item which remains unpaid and which has been
assessed but is not yet due and payable. Neither the Borrower nor the Qualified
Originator from which the Borrower acquired the Mortgage Loan has advanced
funds, or induced, solicited or knowingly received any advance of funds by a
party other than the Mortgagor, directly or indirectly, for the payment of any
amount required under the Mortgage Loan, except for interest accruing from the
date of the Mortgage Note or date of disbursement of the proceeds of the
Mortgage Loan, whichever is earlier, to the day which precedes by one month the
Due Date of the first installment of principal and interest thereunder.
(d) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any respect,
from the date of origination; except by a written instrument which has been
recorded, if necessary to protect the
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interests of the Lender, and which has been delivered to the Custodian and the
terms of which are reflected in the Mortgage Loan Schedule. The substance of any
such waiver, alteration or modification has been approved by the title insurer,
to the extent required, and its terms are reflected on the Mortgage Loan
Schedule. No Mortgagor in respect of the Mortgage Loan has been released, in
whole or in part, except in connection with an assumption agreement approved by
the title insurer, to the extent required by such policy, and which assumption
agreement is part of the Mortgage File delivered to the Custodian and the terms
of which are reflected in the Mortgage Loan Schedule.
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor in respect of the Mortgage Loan was a debtor
in any state or Federal bankruptcy or insolvency proceeding at the time the
Mortgage Loan was originated. The Borrower has no knowledge nor has it received
any notice that any Mortgagor in respect of the Mortgage Loan is a debtor in any
state or federal bankruptcy or insolvency proceeding.
(f) Hazard Insurance. The Mortgaged Property is insured by a fire
and extended perils insurance policy, issued by a Qualified Insurer, and such
other hazards as are customary in the area where the Mortgaged Property is
located, and to the extent required by the Borrower as of the date of
origination consistent with the Underwriting Guidelines, against earthquake and
other risks insured against by Persons operating like properties in the locality
of the Mortgaged Property, in an amount not less than the greatest of (i) 100%
of the replacement cost of all improvements to the Mortgaged Property, (ii) the
outstanding principal balance of the Mortgage Loan, or (iii) the amount
necessary to avoid the operation of any co-insurance provisions with respect to
the Mortgaged Property, and consistent with the amount that would have been
required as of the date of origination in accordance with the Underwriting
Guidelines. If any portion of the Mortgaged Property is in an area identified by
any federal Governmental Authority as having special flood hazards, and flood
insurance is available, a flood insurance policy meeting the current guidelines
of the Federal Emergency Management Agency is in effect with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the least of (1) the outstanding principal balance of the Mortgage Loan, (2) the
full insurable value of the Mortgaged Property, and (3) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended
by the Flood Disaster Protection Act of 1974. All such insurance policies
(collectively, the "hazard insurance policy") contain a standard mortgagee
clause naming the Borrower, its successors and assigns (including without
limitation, subsequent owners of the Mortgage Loan), as mortgagee, and may not
be reduced, terminated or canceled without 30 days' prior written notice to the
mortgagee. No such notice has been received by the Borrower. All premiums on
such insurance policy have been paid. The related Mortgage obligates the
Mortgagor to maintain all such insurance and, at such Mortgagor's failure to do
so, authorizes the mortgagee to maintain such insurance at the Mortgagor's cost
and expense and to seek reimbursement therefor from such Mortgagor. Where
required by state law or regulation, the Mortgagor has been given an opportunity
to choose the carrier of the required hazard insurance, provided the policy is
not a "master" or "blanket" hazard insurance policy covering a condominium, or
any hazard insurance policy covering the common facilities of a
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planned unit development. The hazard insurance policy is the valid and binding
obligation of the insurer and is in full force and effect. The Borrower has not
engaged in, and has no knowledge of the Mortgagor's having engaged in, any act
or omission which would impair the coverage of any such policy, the benefits of
the endorsement provided for herein, or the validity and binding effect of
either including, without limitation, no unlawful fee, commission, kickback or
other unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney, firm or other Person, and no such unlawful
items have been received, retained or realized by the Borrower.
(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
equal credit opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with, the consummation of the transactions contemplated hereby
will not involve the violation of any such laws or regulations, and the Borrower
shall maintain or shall cause its agent to maintain in its possession, available
for the inspection of the Lender, and shall deliver to the Lender, upon demand,
evidence of compliance with all such requirements.
(h) No Satisfaction of Mortgage. The Mortgage has not been
satisfied, canceled, subordinated or rescinded, in whole or in part, and the
Mortgaged Property has not been released from the lien of the Mortgage, in whole
or in part, nor has any instrument been executed that would effect any such
release, cancellation, subordination or rescission. The Borrower has not waived
the performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor has the
Borrower waived any default resulting from any action or inaction by the
Mortgagor.
(i) Location and Type of Mortgaged Property. The Mortgaged Property
is located in an Acceptable State as identified in the Mortgage Loan Schedule
and consists of a single parcel of real property with a detached single family
residence erected thereon, or a two- to four-family dwelling, or an individual
condominium unit in a low-rise condominium project, or an individual unit in a
planned unit development or a de minimis planned unit development, provided,
however, that any condominium unit or planned unit development shall conform
with the applicable Fannie Mae and Freddie Mac requirements regarding such
dwellings and that no residence or dwelling is a mobile home or a manufactured
dwelling. No portion of the Mortgaged Property is used for commercial purposes.
(j) Valid Lien. The Mortgage is a valid, subsisting, enforceable and
perfected (A) first lien and first priority security interest with respect to
each Mortgage Loan which is indicated by the Borrower to be a first lien (as
reflected on the Mortgage Loan Tape) or (B) second lien and second priority
security interest with respect to each Mortgage Loan which is indicated by the
Borrower to be a Second Lien (as reflected on the Mortgage Loan Tape), in either
case, on the real property included in the Mortgaged Property, including all
buildings on the Mortgaged Property located in or annexed to such buildings, and
all additions, alterations and replacements made at any time with respect to the
foregoing. The lien of the Mortgage is subject only to the items listed in (1),
(2) and (3) below (the "Permitted Liens"):
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(1) the lien of current real property taxes and assessments not yet
due and payable;
(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording
acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered
to the originator of the Mortgage Loan and (a) referred to or otherwise
considered in the appraisal made for the originator of the Mortgage Loan
or (b) which do not adversely affect the Appraised Value of the Mortgaged
Property set forth in such appraisal;
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property; and
(4) with respect to each Mortgage Loan which is indicated by the
Borrower to be a Second Lien Mortgage Loan (as reflected on the Mortgage
Loan Tape) a first lien on the Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a valid,
subsisting and enforceable (A) first lien and first priority security interest
with respect to each Mortgage Loan which is indicated by the Borrower to be a
first lien (as reflected on the Mortgage Loan Tape) or (B) second lien and
second priority security interest with respect to each Mortgage Loan which is
indicated by the Borrower to be a Second Lien Mortgage Loan (as reflected on the
Mortgage Loan Tape), in either case, on the property described therein and such
Borrower has full right to pledge and assign the same to the Lender. The
Mortgaged Property was not, as of the date of origination of the Mortgage Loan,
subject to a mortgage, deed of trust, deed to secure debt or other security
instrument creating a lien subordinate to the lien of the Mortgage.
(k) Validity of Mortgage Documents. The Mortgage Note and the
Mortgage and any other agreement executed and delivered by a Mortgagor or
guarantor, if applicable, in connection with a Mortgage Loan are genuine, and
each is the legal, valid and binding obligation of the maker thereof enforceable
in accordance with its terms. All parties to the Mortgage Note, the Mortgage and
any other such related agreement had legal capacity to enter into the Mortgage
Loan and to execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such related
agreement have been duly and properly executed by such related parties. No
fraud, error, omission, misrepresentation, negligence or similar occurrence with
respect to a Mortgage Loan has taken place on the part of any Person, including,
without limitation, the Mortgagor, any appraiser, any builder or developer, or
any other party involved in the origination of the Mortgage Loan. The Borrower
has reviewed all of the documents constituting the Servicing File and has made
such inquiries as it deems necessary to make and confirm the accuracy of the
representations set forth herein.
(l) Full Disbursement of Proceeds. The Mortgage Loan has been closed
and the proceeds of the Mortgage Loan have been fully disbursed and there is no
further requirement
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for future advances thereunder, and any and all requirements as to completion of
any on-site or off-site improvement and as to disbursements of any escrow funds
therefor have been complied with. All costs, fees and expenses incurred in
making or closing the Mortgage Loan and the recording of the Mortgage were paid,
and the Mortgagor is not entitled to any refund of any amounts paid or due under
the Mortgage Note or Mortgage.
(m) Ownership. The Borrower is the sole owner and holder of the
Mortgage Loan. The Mortgage Loan is not assigned or pledged, and the Borrower
has good, indefeasible and marketable title thereto, and has full right to
transfer, pledge and assign the Mortgage Loan to the Lender free and clear of
any encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to assign, transfer and
pledge each Mortgage Loan pursuant to this Loan Agreement and following the
pledge of each Mortgage Loan, the Lender will hold such Mortgage Loan free and
clear of any encumbrance, equity, participation interest, lien, pledge, charge,
claim or security interest except any such security interest created pursuant to
the terms of this Loan Agreement.
(n) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (i) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (ii) either (A) organized
under the laws of such state, (B) qualified to do business in such state, (C) a
federal savings and loan association, a savings bank or a national bank having a
principal office in such state, or (D) not doing business in such state.
(o) LTV; CLTV. No Agency Eligible Mortgage Loan (other than an FHA
insured or VA guaranteed Mortgage Loan) has an LTV greater than 80%. No Agency
Eligible Mortgage Loan that is an FHA insured or VA guaranteed Mortgage Loan has
an LTV greater than 97%. No Non-Agency Mortgage Loan has a CLTV greater than
85%.
(p) Title Insurance. The Mortgage Loan is covered by either (i) an
attorney's opinion of title and abstract of title, the form and substance of
which is acceptable to prudent mortgage lending institutions making mortgage
loans in the area wherein the Mortgaged Property is located or (ii) an ALTA
lender's title insurance policy or other generally acceptable form of policy or
insurance acceptable to Fannie Mae or Freddie Mac and each such title insurance
policy is issued by a title insurer acceptable to Fannie Mae or Freddie Mac and
qualified to do business in the jurisdiction where the Mortgaged Property is
located, insuring the Borrower, its successors and assigns, as to the first
priority lien of the Mortgage in the original principal amount of the Mortgage
Loan (or to the extent a Mortgage Note provides for negative amortization, the
maximum amount of negative amortization in accordance with the Mortgage),
subject only to the exceptions contained in clauses (1), (2) and (3) and, with
respect to each Mortgage Loan which is indicated by the Borrower to be a Second
Lien Mortgage Loan (as reflected on the Mortgage Loan Tape) clause (4) of
paragraph (j)) of this Part I of Schedule 1, and in the case of adjustable rate
Mortgage Loans, against any loss by reason of the invalidity or unenforceability
of the lien resulting from the provisions of the Mortgage providing for
adjustment to the Mortgage Interest Rate and Monthly Payment. Where required by
state law or regulation, the Mortgagor has been given the opportunity to choose
the carrier of the required
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mortgage title insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress and against encroachments by or upon
the Mortgaged Property or any interest therein. The title policy does not
contain any special exceptions (other than the standard exclusions) for zoning
and uses and has been marked to delete the standard survey exception or to
replace the standard survey exception with a specific survey reading. The
Borrower, its successors and assigns, are the sole insureds of such lender's
title insurance policy, and such lender's title insurance policy is valid and
remains in full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this Loan Agreement. No claims
have been made under such lender's title insurance policy, and no prior holder
or servicer of the related Mortgage, including the Borrower, has done, by act or
omission, anything which would impair the coverage of such lender's title
insurance policy, including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other Person, and no
such unlawful items have been received, retained or realized by the Borrower.
(q) No Defaults. There is no default, breach, violation or event of
acceleration existing under the Mortgage or the Mortgage Note (other than
payment defaults with respect to Delinquent Mortgage Loans) and no event has
occurred which, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach, violation or event
of acceleration, and neither the Borrower nor its predecessors have waived any
default, breach, violation or event of acceleration. With respect to each
Mortgage Loan which is indicated by the Borrower to be a Second Lien Mortgage
Loan (as reflected on the Mortgage Loan Schedule) (i) the prior mortgage is in
full force and effect, (ii) there is no default, breach, violation or event of
acceleration existing under such prior mortgage or the related mortgage note,
(iii) no event which, with the passage of time or with notice and the expiration
of any grace or cure period, would constitute a default, breach, violation or
event of acceleration thereunder, and either (A) the prior mortgage contains a
provision which allows or (B) applicable law requires, the mortgagee under the
Second Lien Mortgage Loan to receive notice of, and affords such mortgagee an
opportunity to cure any default by payment in full or otherwise under the prior
mortgage.
(r) No Mechanics' Liens. There are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
Mortgaged Property which are or may be liens prior to, or equal or coordinate
with, the lien of the Mortgage.
(s) Location of Improvements; No Encroachments. All improvements
which were considered in determining the Appraised Value of the Mortgaged
Property lie wholly within the boundaries and building restriction lines of the
Mortgaged Property, and no improvements on adjoining properties encroach upon
the Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning and building law, ordinance or
regulation.
(t) Origination; Payment Terms. The Mortgage Loan was originated by
or in conjunction with a mortgagee approved by the Secretary of Housing and
Urban Development pursuant to Sections 203 and 211 of the National Housing Act,
a savings and loan association, a savings bank, a commercial bank, credit union,
insurance company or similar banking institution
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which is supervised and examined by a federal or state authority. Principal
payments on the Mortgage Loan commenced no more than 60 days after funds were
disbursed in connection with the Mortgage Loan. The Mortgage Interest Rate is
adjusted, with respect to adjustable rate Mortgage Loans, on each Interest Rate
Adjustment Date to equal the Index plus the Gross Margin (rounded up or down to
the nearest .125%), subject to the Mortgage Interest Rate Cap. The Mortgage Note
is payable on the first day of each month in equal monthly installments of
principal and interest, which installments of interest, with respect to
adjustable rate Mortgage Loans, are subject to change due to the adjustments to
the Mortgage Interest Rate on each Interest Rate Adjustment Date, with interest
calculated and payable in arrears, sufficient to amortize the Mortgage Loan
fully by the stated maturity date, over an original term of not more than 30
years from commencement of amortization. The due date of the first payment under
the Mortgage Note is no more than 60 days from the date of the Mortgage Note.
(u) Customary Provisions. The Mortgage Note has a stated maturity.
The Mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a
Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the
Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage
Loan will be able to deliver good and merchantable title to the Mortgaged
Property. There is no homestead exemption available to a Mortgagor other than
those which are inferior to the rights of the Mortgagee under the Mortgage,
provided that the Mortgage Note related thereto evidences indebtedness for the
acquisition or purchase of, or liability incurred for improvements to, the
Mortgaged Property. Any Mortgage which does not arise out of indebtedness for
the acquisition or purchase of, or liability incurred for improvements to, the
Mortgaged Property, may be subject to a homestead exemption of $1,500.
(v) Conformance with Underwriting Guidelines and Agency Standards.
The Mortgage Loan was underwritten in accordance with the Underwriting
Guidelines. The Mortgage Note and Mortgage are on forms similar to those used by
Freddie Mac or Fannie Mae and the Borrower has not made any representations to a
Mortgagor that are inconsistent with the mortgage instruments used.
(w) Occupancy of the Mortgaged Property. As of the Funding Date the
Mortgaged Property is lawfully occupied under applicable law. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities. The Borrower has not received notification from any
Governmental Authority that the Mortgaged Property is in material non-compliance
with such laws or regulations, is being used, operated or occupied unlawfully or
has failed to have or obtain such inspection, licenses or certificates, as the
case may be. The Borrower has not received notice of any violation or failure to
conform with any such law, ordinance, regulation, standard, license or
certificate. The Mortgagor represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the
Mortgagor's primary residence.
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(x) No Additional Collateral. The Mortgage Note is not and has not
been secured by any collateral except the lien of the corresponding Mortgage and
the security interest of any applicable security agreement or chattel mortgage
referred to in clause (j) above.
(y) Deeds of Trust. In the event the Mortgage constitutes a deed of
trust, a trustee, authorized and duly qualified under applicable law to serve as
such, has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Custodian or
the Lender to the trustee under the deed of trust, except in connection with a
trustee's sale after default by the Mortgagor.
(z) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage,
the Assignment of Mortgage and any other documents required to be delivered
under the Custodial Agreement for each Mortgage Loan have been delivered to the
Custodian. The Borrower or its agent is in possession of a complete, true and
accurate Mortgage File in compliance with the Custodial Agreement, except for
such documents the originals of which have been delivered to the Custodian.
(aa) Transfer of Mortgage Loans. The Assignment of Mortgage, to the
extent required, is in recordable form and is acceptable for recording under the
laws of the jurisdiction in which the Mortgaged Property is located.
(bb) Due-On-Sale. The Mortgage contains an enforceable provision for
the acceleration of the payment of the unpaid principal balance of the Mortgage
Loan in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder.
(cc) No Buydown Provisions; No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions pursuant to which
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Borrower, the Mortgagor, or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature.
(dd) Consolidation of Future Advances. Any future advances made to
the Mortgagor prior to the Funding Date have been consolidated with the
outstanding principal amount secured by the Mortgage, and the secured principal
amount, as consolidated, bears a single interest rate and single repayment term.
The lien of the Mortgage securing the consolidated principal amount is expressly
insured as having either (A) first lien priority with respect to each Mortgage
Loan which is indicated by the Borrower to be a first lien (as reflected on the
Mortgage Loan Tape) or (B) second lien priority with respect to each Mortgage
Loan which is indicated by the Borrower to be a Second Lien Mortgage Loan (as
reflected on the Mortgage Loan Tape), in either case, by a title insurance
policy, an endorsement to the policy insuring the mortgagee's consolidated
interest or by other title evidence acceptable to Fannie Mae and Freddie Mac.
The consolidated principal amount does not exceed the original principal amount
of the Mortgage Loan.
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(ee) Mortgaged Property Undamaged. The Mortgaged Property is
undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty so as to affect adversely the value of the Mortgaged
Property as security for the Mortgage Loan or the use for which the premises
were intended and each Mortgaged Property is in good repair. There have not been
any condemnation proceedings with respect to the Mortgaged Property and the
Borrower has no knowledge of any such proceedings.
(ff) Collection Practices; Escrow Deposits; Interest Rate
Adjustments. The origination and collection practices used by the originator,
each servicer of the Mortgage Loan and the Borrower with respect to the Mortgage
Loan have been in all respects in compliance with Accepted Servicing Practices,
applicable laws and regulations, and have been in all respects legal and proper.
With respect to escrow deposits and Escrow Payments (other than with respect to
each Mortgage Loan which is indicated by the Borrower to be a Second Lien
Mortgage Loan and for which the mortgagee under the first lien is collecting
Escrow Payments (as reflected on the Mortgage Loan Tape), all such payments are
in the possession of, or under the control of, the Borrower and there exist no
deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. All Escrow Payments have been collected in
full compliance with state and federal law. An escrow of funds is not prohibited
by applicable law and has been established in an amount sufficient to pay for
every item that remains unpaid and has been assessed but is not yet due and
payable. No escrow deposits or Escrow Payments or other charges or payments due
the Borrower have been capitalized under the Mortgage or the Mortgage Note. All
Mortgage Interest Rate adjustments have been made in strict compliance with
state and federal law and the terms of the related Mortgage Note. Any interest
required to be paid pursuant to state, federal and local law has been properly
paid and credited.
(gg) Conversion to Fixed Interest Rate. With respect to adjustable
rate Mortgage Loans, the Mortgage Loan is not convertible to a fixed interest
rate Mortgage Loan.
(hh) Other Insurance Policies. No action, inaction or event has
occurred and no state of facts exists or has existed that has resulted or will
result in the exclusion from, denial of, or defense to coverage under any
applicable special hazard insurance policy, PMI Policy or bankruptcy bond,
irrespective of the cause of such failure of coverage. In connection with the
placement of any such insurance, no commission, fee, or other compensation has
been or will be received by the Borrower or by any officer, director, or
employee of the Borrower or any designee of the Borrower or any corporation in
which the Borrower or any officer, director, or employee had a financial
interest at the time of placement of such insurance.
(ii) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not
notified the Borrower, and the Borrower has no knowledge, of any relief
requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil
Relief Act of 1940.
(jj) Appraisal. The Mortgage File contains an appraisal of the
related Mortgaged Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the Borrower, who had no
interest, direct or indirect in the Mortgaged Property or in any loan made on
the security thereof, and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan, and the appraisal and appraiser
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both satisfy the requirements of Fannie Mae or Freddie Mac and Title XI of the
Federal Institutions Reform, Recovery, and Enforcement Act of 1989 as amended
and the regulations promulgated thereunder, all as in effect on the date the
Mortgage Loan was originated.
(kk) Disclosure Materials. The Mortgagor has executed a statement to
the effect that the Mortgagor has received all disclosure materials required by
applicable law with respect to the making of adjustable rate mortgage loans, and
the Borrower maintains such statement in the Mortgage File.
(ll) Construction or Rehabilitation of Mortgaged Property. No
Mortgage Loan was made for the purpose of construction or rehabilitation of a
Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property.
(mm) No Defense to Insurance Coverage. No action has been taken or
failed to be taken, no event has occurred and no state of facts exists or has
existed on or prior to the Funding Date (whether or not known to the Borrower on
or prior to such date) which has resulted or will result in an exclusion from,
denial of, or defense to coverage under any private mortgage insurance
(including, without limitation, any exclusions, denials or defenses which would
limit or reduce the availability of the timely payment of the full amount of the
loss otherwise due thereunder to the insured) whether arising out of actions,
representations, errors, omissions, negligence, or fraud of the Borrower, the
related Mortgagor or any party involved in the application for such coverage,
including the appraisal, plans and specifications and other exhibits or
documents submitted therewith to the insurer under such insurance policy, or for
any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay.
(nn) Capitalization of Interest. The Mortgage Note does not by its
terms provide for the capitalization or forbearance of interest.
(oo) No Equity Participation. No document relating to the Mortgage
Loan provides for any contingent or additional interest in the form of
participation in the cash flow of the Mortgaged Property or a sharing in the
appreciation of the value of the Mortgaged Property. The indebtedness evidenced
by the Mortgage Note is not convertible to an ownership interest in the
Mortgaged Property or the Mortgagor and the Borrower has not financed nor does
it own directly or indirectly, any equity of any form in the Mortgaged Property
or the Mortgagor.
(pp) Withdrawn Mortgage Loans. If the Mortgage Loan has been
released to the Borrower pursuant to a Request for Release as permitted under
Section 5 of the Custodial Agreement, then the promissory note relating to the
Mortgage Loan was returned to the Custodian within 10 days (or if such tenth day
was not a Business Day, the next succeeding Business Day).
(qq) Origination Date. The Origination Date is no earlier than nine
months prior to the date the Mortgage Loan is first included in the Borrowing
Base.
(rr) No Exception. The Custodian has not noted any material
exceptions on an Exception Report (as defined in the Custodial Agreement) with
respect to the Mortgage Loan
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which would materially adversely affect the Mortgage Loan or the Lender's
security interest, granted by the Borrower, in the Mortgage Loan.
(ss) Qualified Originator. The Mortgage Loan has been originated by,
and, if applicable, purchased by the Borrower from, a Qualified Originator.
(tt) Mortgage Submitted for Recordation. The Mortgage either has
been or will promptly be submitted for recordation in the appropriate
governmental recording office of the jurisdiction where the Mortgaged Property
is located.
(uu) Riegle Act. None of the Mortgage Loans are classified as "high
cost" loans under the Home Ownership and Equity Protection Act of 1994.
(vv) Agency Eligible Mortgage Loans. With respect to each Agency
Eligible Mortgage Loan:
(i) With respect to each Agency Eligible Mortgage Loan covered by a
Takeout Commitment, the Mortgage Loan is covered by a Takeout
Commitment of the Agency for the swap of such Mortgage Loan for an
Agency MBS or the purchase of such Mortgage Loan by the Agency, and
each Takeout Commitment is a valid, binding and subsisting
obligation of the Agency enforceable in accordance with its terms.
(ii) The Borrower has no reason to believe, after reasonable
and diligent inquiry respecting (among other things) its Agency
Approval, the relevant Agency Purchase Documents, the relevant
Agency Program requirements and the characteristics and quality of
the Agency Eligible Mortgage Loans, that Agency MBS will not be
issued and delivered or the Agency purchase shall not be
consummated, as applicable, with respect to such Agency Eligible
Mortgage Loan.
(iii) Each Agency Eligible Mortgage Loan complies with all
applicable Fannie Mae regulations.
(iv) All of the representations and warranties made or deemed
made respecting such Agency Eligible Mortgage Loan in, and contained
in or incorporated by reference in, the Agency Guide and Agency
Program (collectively, the "Standard Agency Mortgage Loan
Representations") are (and shall be as of all relevant dates) true
and correct in all material respects; and except as has been
expressly disclosed to the Lender by the Borrower in writing, the
Borrower has not negotiated with the Agency any exceptions or
modifications to such Standard Agency Mortgage Loan Representations.
1-11
<PAGE> 62
Part II. Defined Terms.
In addition to terms defined elsewhere in the Loan Agreement, the
following terms shall have the following meanings when used in this Schedule 1:
"Acceptable State" shall mean the Commonwealth of Puerto Rico and
any state notified by the Borrower to the Lender from time to time and approved
in writing by the Lender, which approval has not been revoked by the Lender in
their sole discretion, any such notice of revocation to be given no later than
10 Business Days prior to its intended effective date.
"Accepted Servicing Practices" shall mean, with respect to any
Mortgage Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loans in the jurisdiction where the related Mortgaged Property is located.
"ALTA" means the American Land Title Association.
"Appraised Value" shall mean the value set forth in an appraisal
made in connection with the origination of the related Mortgage Loan as the
value of the Mortgaged Property.
"Assignment of Mortgage" shall mean, with respect to any Mortgage,
an assignment of the Mortgage, notice of transfer or equivalent instrument in
recordable form, sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect the assignment of the Mortgage
to the Lender.
"Best's" means Best's Key Rating Guide, as the same shall be amended
from time to time.
"Combined Loan-to-Value Ratio" or "CLTV" means with respect to any
Mortgage Loan, as of any date, the percentage equivalent of a fraction, the
numerator of which is the original outstanding principal amount of such Mortgage
Loan as of the related date of origination of such Mortgage Loan of (i) the
Mortgage Loan plus (ii) the mortgage loan constituting the first lien (if any)
and the denominator of which is the Appraised Value of the Mortgaged Property.
"Due Date" means the day of the month on which the Monthly Payment
is due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Payments" means with respect to any Mortgage Loan, the
amounts constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed by
the Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
1-12
<PAGE> 63
"Gross Margin" means with respect to each adjustable rate Mortgage
Loan, the fixed percentage amount set forth in the related Mortgage Note.
"Index" means with respect to each adjustable rate Mortgage Loan,
the index set forth in the related Mortgage Note for the purpose of calculating
the interest rate thereon.
"Insurance Proceeds" means with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Interest Rate Adjustment Date" means with respect to each
adjustable rate Mortgage Loan, the date, specified in the related Mortgage Note
and the Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage
Loan, the ratio of the original outstanding principal amount of the Mortgage
Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at
origination or (b) if the Mortgaged Property was purchased within 12 months of
the origination of the Mortgage Loan, the purchase price of the Mortgaged
Property.
"Monthly Payment" means the scheduled monthly payment of principal
and interest on a Mortgage Loan as adjusted in accordance with changes in the
Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an
adjustable rate Mortgage Loan.
"Mortgage Interest Rate" means the annual rate of interest borne on
a Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortgage Interest Rate Cap" means with respect to an adjustable
rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set
forth in the related Mortgage Note.
"Mortgagee" means the Borrower or any subsequent holder of a
Mortgage Loan.
"Origination Date" shall mean, with respect to each Mortgage Loan,
the date of the Mortgage Note relating to such Mortgage Loan, unless such
information is not provided by the Borrower with respect to such Mortgage Loan,
in which case the Origination Date shall be deemed to be the date that is 40
days prior to the date of the first payment under the Mortgage Note relating to
such Mortgage Loan.
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
"Qualified Insurer" means an insurance company duly qualified as
such under the laws of the jurisdiction in which the Mortgaged Property is
located, duly authorized and licensed in such jurisdiction to transact the
applicable insurance business and to write the insurance provided, and approved
as an insurer by Fannie Mae and Freddie Mac and whose claims paying ability is
rated in the two highest rating categories by any of the rating agencies with
respect to primary mortgage insurance and in the two highest rating categories
by Best's with respect to hazard and flood insurance.
1-13
<PAGE> 64
"Qualified Originator" means an originator of Mortgage Loans
reasonably acceptable to the Lender.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Borrower consisting of originals of all documents in the
Mortgage File which are not delivered to a Custodian and copies of the Mortgage
Loan Documents set forth in Section 2 of the Custodial Agreement.
"Underwriting Guidelines" means the underwriting guidelines attached
as Exhibit E hereto.
1-14
<PAGE> 65
Schedule 2
FILING JURISDICTIONS AND OFFICES
[TO BE PROVIDED BY COUNSEL TO BORROWER]
2-1
<PAGE> 66
EXHIBIT A
[FORM OF PROMISSORY NOTE]
$ 400,000,000 December 30, 1999
New York, New York
FOR VALUE RECEIVED, DORAL FINANCIAL CORPORATION, a Commonwealth of
Puerto Rico corporation (the "Borrower"), hereby promises to pay to the order of
MORGAN STANLEY MORTGAGE CAPITAL INC. (the "Lender"), at the principal office of
the Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the
United States, and in immediately available funds, the principal sum of FOUR
HUNDRED MILLION DOLLARS ($400,000,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Loans made by the Lender to the
Borrower under the Loan Agreement), on the dates and in the principal amounts
provided in the Loan Agreement, and to pay interest on the unpaid principal
amount of each such Loan, at such office, in like money and funds, for the
period commencing on the date of such Loan until such Loan shall be paid in
full, at the rates per annum and on the dates provided in the Loan Agreement.
The date, amount and interest rate of each Loan made by the Lender
to the Borrower, and each payment made on account of the principal thereof,
shall be recorded by the Lender on its books and, prior to any transfer of this
Note, endorsed by the Lender on the schedule attached hereto or any continuation
thereof; provided, that the failure of the Lender to make any such recordation
or endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Loan Agreement or hereunder in
respect of the Loans made by the Lender.
This Note is the Note referred to in the Master Loan and Security
Agreement dated as of December 30, 1999 (as amended, supplemented or otherwise
modified and in effect from time to time, the "Loan Agreement") between the
Borrower and the Lender, and evidences Loans made by the Lender thereunder.
Terms used but not defined in this Note have the respective meanings assigned to
them in the Loan Agreement.
The Borrower agrees to pay all the Lender's costs of collection and
enforcement (including reasonable attorneys' fees and disbursements of Lender's
counsel) in respect of this Note when incurred, including, without limitation,
reasonable attorneys' fees through appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrower hereby
acknowledges, admits and agrees that the Borrower's obligations under this Note
are recourse obligations of the Borrower to which the Borrower pledges its full
faith and credit.
The Borrower, and any indorsers or guarantors hereof, (a) severally
waive diligence, presentment, protest and demand and also notice of protest,
demand, dishonor and nonpayments of this Note, (b) expressly agree that this
Note, or any payment hereunder, may be extended from time to time, and consent
to the acceptance of further Collateral, the release of any Collateral for this
Note, the release of any party primarily or secondarily liable hereon, and (c)
expressly agree that it will not be necessary for the Lender, in order to
enforce payment of
A-1
<PAGE> 67
this Note, to first institute or exhaust the Lender's remedies against the
Borrower or any other party liable hereon or against any Collateral for this
Note. No extension of time for the payment of this Note, or any installment
hereof, made by agreement by the Lender with any person now or hereafter liable
for the payment of this Note, shall affect the liability under this Note of the
Borrower, even if the Borrower is not a party to such agreement; provided,
however, that the Lender and the Borrower, by written agreement between them,
may affect the liability of the Borrower.
Any reference herein to the Lender shall be deemed to include and
apply to every subsequent holder of this Note. Reference is made to the Loan
Agreement for provisions concerning optional and mandatory prepayments,
Collateral, acceleration and other material terms affecting this Note.
A-2
<PAGE> 68
This Note shall be governed by and construed under the laws of the
State of New York (without reference to choice of law doctrine) whose laws the
Borrower expressly elects to apply to this Note. The Borrower agrees that any
action or proceeding brought to enforce or arising out of this Note may be
commenced in the Supreme Court of the State of New York, Borough of Manhattan,
or in the District Court of the United States for the Southern District of New
York.
DORAL FINANCIAL CORPORATION
By:_____________________________________
Name:
Title:
A-3
<PAGE> 69
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Loan
Agreement to the Borrower, on the dates, in the principal amounts and bearing
interest at the rates set forth below, and subject to the payments and
prepayments of principal set forth below:
<TABLE>
<CAPTION>
Principal Unpaid
Amount Interest Amount Paid Principal Notation
Date Made of Loan Rate or Prepaid Amount Made by
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
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</TABLE>
A-4
<PAGE> 70
EXHIBIT B
[FORM OF CUSTODIAL AGREEMENT]
B-1
<PAGE> 71
EXHIBIT C
[FORM OF OPINION OF COUNSEL TO BORROWER]
(date)
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
You have requested [our] [my] opinion, as counsel to DORAL FINANCIAL
CORPORATION, a Commonwealth of Puerto Rico corporation (the "Borrower"), with
respect to certain matters in connection with that certain Master Loan and
Security Agreement, dated December 30, 1999 (the "Loan and Security Agreement"),
by and between the Borrower and Morgan Stanley Mortgage Capital Inc. (the
"Lender"), being executed contemporaneously with a Promissory Note, dated
December 30, 1999, from the Borrower to the Lender (the "Note"), a Custodial
Agreement, dated as of December 30, 1999, (the "Custodial Agreement"), by and
among the Borrower, Banco Popular de Puerto Rico (the "Custodian"), and the
Lender. Capitalized terms not otherwise defined herein have the meanings set
forth in the Loan and Security Agreement.
[We] [I] have examined the following documents:
1. the Loan and Security Agreement;
2. the Note;
3. Custodial Agreement;
4. unfiled copies of the financing statements listed on Schedule
1 (collectively, the "Financing Statements") naming the
Borrower as Debtor and the Lender as Secured Party and
describing the Collateral (as defined in the Loan and Security
Agreement) as to which security interests may be perfected by
filing under the Uniform Commercial Code of the States listed
on Schedule 1 (the "Filing Collateral"), which [we][I]
understand will be filed in the filing offices listed on
Schedule 1 (the "Filing Offices");
5. the reports listed on Schedule 2 as to UCC financing
statements (collectively, the "UCC Search Report");
6. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
C-1
<PAGE> 72
To the extent [we] [I] have deemed necessary and proper, [we] [I]
have relied upon the representations and warranties of the Borrower contained in
the Loan and Security Agreement. [We] [I] have assumed the authenticity of all
documents submitted to [us][me] as originals, the genuineness of all signatures,
the legal capacity of natural persons and the conformity to the originals of all
documents submitted to [us][me] as originals.
Based upon the foregoing, it is [our] [my] opinion that:
1. Doral Financial Corporation is a Commonwealth of Puerto Rico
corporation duly organized, validly existing and in good standing under the laws
of Puerto Rico and is qualified to transact business in, and is in good standing
under, the laws of Puerto Rico.
2. The Borrower has the corporate power to engage in the
transactions contemplated by the Loan and Security Agreement, the Note, and the
Custodial Agreement and all requisite corporate power, authority and legal right
to execute and deliver the Loan and Security Agreement, the Note, and the
Custodial Agreement and observe the terms and conditions of such instruments.
The Borrower has all requisite corporate power to borrow under the Loan and
Security Agreement and to grant a security interest in the Collateral under the
Loan and Security Agreement.
3. The execution, delivery and performance by the Borrower of the
Loan and Security Agreement, the Note, and the Custodial Agreement, and the
borrowings by the Borrower and the pledge of the Collateral under the Loan and
Security Agreement have been duly authorized by all necessary corporate action
on the part of the Borrower. Each of the Loan and Security Agreement, the Note
and the Custodial Agreement have been executed and delivered by the Borrower and
are legal, valid and binding agreements enforceable in accordance with their
respective terms against the Borrower, subject to bankruptcy laws and other
similar laws of general application affecting rights of creditors and subject to
the application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially interfere
with the realization of the benefits provided thereunder or with the Lender's
security interest in the Collateral.
4. No consent, approval, authorization or order of, and no filing or
registration with, any court or governmental agency or regulatory body is
required on the part of the Borrower for the execution, delivery or performance
by the Borrower of the Loan and Security Agreement, the Note and the Custodial
Agreement or for the borrowings by the Borrower under the Loan and Security
Agreement or the granting of a security interest to the Lender in the
Collateral, under the Loan and Security Agreement.
5. The execution, delivery and performance by the Borrower of, and
the consummation of the transactions contemplated by, the Loan and Security
Agreement, the Note and the Custodial Agreement do not and will not (a) violate
any provision of the Borrower's charter or by-laws, (b) violate any applicable
law, rule or regulation, (c) violate any order, writ, injunction or decree of
any court or governmental authority or agency or any arbitral award applicable
to the Borrower of which I have knowledge (after due inquiry) or (d) result in a
breach of, constitute a default under, require any consent under, or result in
the acceleration or required prepayment of any indebtedness pursuant to the
terms of, any agreement or instrument
C-2
<PAGE> 73
of which [we][I] have knowledge (after due inquiry) to which the Borrower is a
party or by which it is bound or to which it is subject, or (except for the
Liens created pursuant to the Loan and Security Agreement) result in the
creation or imposition of any Lien upon any Property of the Borrower pursuant to
the terms of any such agreement or instrument.
6. There is no action, suit, proceeding or investigation pending or,
to the best of [our] [my] knowledge, threatened against the Borrower which, in
[our] [my] judgment, either in any one instance or in the aggregate, would be
reasonably likely to result in any material adverse change in the properties,
business or financial condition, or prospects of the Borrower or in any material
impairment of the right or ability of the Borrower to carry on its business
substantially as now conducted or in any material liability on the part of the
Borrower or which would draw into question the validity of the Loan and Security
Agreement, the Note, the Custodial Agreement or the Mortgage Loans or of any
action taken or to be taken in connection with the transactions contemplated
thereby, or which would be reasonably likely to impair materially the ability of
the Borrower to perform under the terms of the Loan and Security Agreement, the
Note, the Custodial Agreement or the Mortgage Loans.
7. The Loan and Security Agreement is effective to create, in favor
of the Lender, a valid security interest under the Uniform Commercial Code in
all of the right, title and interest of the Borrower in, to and under the
Collateral as collateral security for the payment of the Secured Obligations (as
defined in the Loan and Security Agreement), except that (a) such security
interests will continue in Collateral after its sale, exchange or other
disposition only to the extent provided in Section 9-306 of the Uniform
Commercial Code, and (b) the security interests in Collateral in which the
Borrower acquires rights after the commencement of a case under the Bankruptcy
Code in respect of the Borrower may be limited by Section 552 of the Bankruptcy
Code.
8. When the Mortgage Notes are delivered to the Custodian, endorsed
in blank by a duly authorized officer of the Borrower, the security interest
referred to in paragraph 7 above in the Mortgage Notes will constitute a fully
perfected first priority security interest in all right, title and interest of
the Borrower therein, in the Mortgage Loan evidenced thereby and in the
Borrower's interest in the related Mortgaged Property.
9. (a) Upon the filing of financing statements on Form UCC-1 naming
the Lender as "Secured Party" and the Borrower as "Debtor", and describing the
Collateral, in the jurisdictions and recording offices listed on Schedule 1
attached hereto, the security interests referred to in paragraph 7 above will
constitute fully perfected security interests under the Uniform Commercial Code
in all right, title and interest of the Borrower in, to and under such
Collateral, which can be perfected by filing under the Uniform Commercial Code.
(b) The UCC Search Report sets forth the proper filing offices and
the proper debtors necessary to identify those Persons who have on file in the
jurisdictions listed on Schedule 1 financing statements covering the Filing
Collateral as of the dates and times specified on Schedule 2. The UCC Search
Report identifies no Person who has filed in any Filing Office a financing
statement describing the Filing Collateral prior to the effective dates of the
UCC Search Report.
C-3
<PAGE> 74
10.___The Borrower is not an "investment company", or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended.
Very truly yours,
C-4
<PAGE> 75
EXHIBIT D
[FORM OF REQUEST FOR BORROWING]
Master Loan and Security Agreement, dated as of December 30, 1999
(the "Loan and Security Agreement"), by and between the Borrower and Morgan
Stanley Mortgage Capital Inc. (the "Lender"),
Lender: Morgan Stanley Mortgage Capital Inc.
Borrower: Doral Financial Corporation
Requested Funding Date: ________________________________________
Transmission Date: ________________________________________
Transmission Time:
Number of Mortgage
Loans to be Pledged: ________________________________________
UPB: $_______________________________________
Requested Wire Amount: $_______________________________________
Wire Instructions:
Requested by:
DORAL FINANCIAL CORPORATION
By:______________________________________
Name:
Title:
D-1
<PAGE> 76
EXHIBIT E-1
[FORM OF BORROWER'S RELEASE LETTER]
[Date]
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Attention: ____________________
Facsimile: ____________________
Re: Master Loan and Security Agreement, dated as of December 30,
1999 (the "Loan and Security Agreement"), by and among Doral
Financial Corporation (the "Borrower") and Morgan Stanley
Mortgage Capital Inc. (the "Lender")
Ladies and Gentlemen:
With respect to the mortgage loans described in the attached
Schedule A (the "Mortgage Loans") (a) we hereby certify to you that the Mortgage
Loans are not subject to a lien of any third party and (b) we hereby release all
right, interest or claim of any kind with respect to such Mortgage Loans, such
release to be effective automatically without further action by any party upon
payment from Morgan Stanley Mortgage Capital Inc., of the amount of the Loan
contemplated under the Loan and Security Agreement (calculated in accordance
with the terms thereof) in accordance with the wiring instructions set forth in
the Loan and Security Agreement.
Very truly yours,
DORAL FINANCIAL CORPORATION
By:____________________________________
Name:
Title:
E-1-1
<PAGE> 77
EXHIBIT E-2
[FORM OF WAREHOUSE LENDER'S RELEASE LETTER]
(Date)
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Attention: ________________
Facsimile:________________
Re: Certain Mortgage Loans Identified on Schedule A hereto and
owned by Doral Financial Corporation
The undersigned hereby releases all right, interest, lien or claim
of any kind with respect to the mortgage loan (s) described in the attached
Schedule A, such release to be effective automatically without any further
action by any party upon payment in one or more installments, in immediately
available funds of $__________________, in accordance with the following wire
instructions:
________________________________________
________________________________________
Very truly yours,
[WAREHOUSE LENDER]
By: __________________________________
Name:
Title:
E-2-1
<PAGE> 78
EXHIBIT F
UNDERWRITING GUIDELINES
[TO BE PROVIDED BY THE BORROWER]
F-1
<PAGE> 79
EXHIBIT G
[FORM OF BLOCKED ACCOUNT AGREEMENT FOR
NON-CALIFORNIA ENTITIES]
______ __, 199_
________________________
________________________
________________________
Attn: __________________
Re: Collection Account Established by ______________ ("Servicer")
Pursuant to that Certain Servicing Agreement (as amended,
supplemented or otherwise modified from time to time, the
"Servicing Agreement"), dated December 30, 1999, among
Servicer, Doral Financial Corporation (the "Borrower")
Ladies and Gentlemen:
We refer to the collection account established by the Servicer
pursuant to the Servicing Agreement, at _______________, ___________, _____,
Account No._____________, ABA# ____________ (the "Blocked Account"), which the
Servicer maintains in the Servicer's name in trust for the Borrower.
The Servicer will, from time to time, deposit funds received in
accordance with the Servicing Agreement into the Blocked Account. Morgan Stanley
Mortgage Capital Inc. (the "Lender") has established a secured loan arrangement
with the Borrower. By its execution of this letter, the Servicer acknowledges
that the Borrower has granted a security interest in all of its right, title and
interest in and to the Blocked Account and any funds from time to time on
deposit therein, that such funds are received by the Servicer in trust for the
benefit of Lender and, except as provided below, are for application against the
Borrower's liabilities to Lender.
By the Servicer's execution of this letter, it agrees: (a) that all
funds from time to time hereafter in the Blocked Account are the property of the
Borrower held in trust for the benefit of the Lender and that unless and until
the Servicer receives notice from the Lender that an event of default has
occurred and is continuing under the Lender's secured lending arrangement with
the Borrower (a "Notice of Event of Default"), the Servicer shall transfer funds
from the Blocked Account in accordance with the Borrower's instructions; (b)
that Servicer will not exercise any right of set-off, banker's lien or any
similar right in connection with such funds provided, that in the event any
check is returned to the Servicer because of insufficient funds (or is otherwise
unpaid) the Servicer shall be entitled to set off the amount of any such
returned check; (c) that until the Servicer receives written notification from
the Lender to the contrary, the Servicer will not withdraw (other than as
expressly set forth in the Servicing Agreement or herein) or permit any person
or entity to withdraw or transfer funds from the Blocked Account;
G-1
<PAGE> 80
and (d) that if the Servicer receives a Notice of Event of Default from the
Lender, the Servicer shall not withdraw or permit the Borrower to withdraw or
transfer funds from the Blocked Account and shall cause or permit withdrawals
from the Blocked Account in any manner as the Lender may instruct.
All bank statements in respect to the Blocked Account shall be sent
to the Borrower with copies to:
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Attention:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
G-2
<PAGE> 81
Kindly acknowledge your agreement with the terms of this agreement
by signing the enclosed copy of this letter and returning it to the undersigned.
Very truly yours,
MORGAN STANLEY MORTGAGE CAPITAL INC.
By: ___________________________________
Title:
Agreed and acknowledged:
By:________________________________
Title:
G-3
<PAGE> 82
EXHIBIT H
FORM OF SERVICER NOTICE
__________ __, 199__
[SERVICER], as Servicer
[ADDRESS] Attention: ___________
Re: Master Loan and Security Agreement, dated as of December 30,
1999 (the "Loan and Security Agreement"), by and between Doral
Financial Corporation (the "Borrower") and Morgan Stanley
Mortgage Capital Inc. (the "Lender").
Ladies and Gentlemen:
[SERVICER] (the "Servicer") is servicing certain mortgage loans for
the Borrower pursuant to certain Servicing Agreements between the Servicer and
the Borrower. Pursuant to the Loan Agreement between the Lender and the
Borrower, the Servicer is hereby notified that the Borrower has pledged to the
Lender certain mortgage loans which are serviced by Servicer which are subject
to a security interest in favor of the Lender.
Upon receipt of a Notice of Event of Default from the Lender in
which the Lender shall identify the mortgage loans which are then pledged to
Lender under the Loan Agreement (the "Mortgage Loans"), the Servicer shall
segregate all amounts collected on account of such Mortgage Loans, hold them in
trust for the sole and exclusive benefit of the Lender, and remit such
collections in accordance with the Lender's written instructions. Following such
Notice of Event of Default, Servicer shall follow the instructions of Lender
with respect to the Mortgage Loans, and shall deliver to Lender any information
with respect to the Mortgage Loans reasonably requested by Lender.
Notwithstanding any contrary information which may be delivered to
the Servicer by the Borrower, the Servicer may conclusively rely on any
information or Notice of Event of Default delivered by the Lender, and the
Borrower shall indemnify and hold the Servicer harmless for any and all claims
asserted against it for any actions taken in good faith by the Servicer in
connection with the delivery of such information or Notice of Event of Default.
No provision of this letter may be modified or amended without the
prior written consent of the Lender. The Lender is an intended third party
beneficiary of this letter.
H-1
<PAGE> 83
Please acknowledge receipt of this instruction letter by signing in
the signature block below and forwarding an executed copy to the Lender promptly
upon receipt. Any notices to the Lender should be delivered to the following
address: 1585 Broadway, New York, New York 10036; Attention: Mr. Steven Rudner,
with a copy to Mr. Greg Walker; Telephone: (212) 761-2144; Facsimile: (212)
761-0747.
Very truly yours,
DORAL FINANCIAL CORPORATION
By:____________________________________
Name:
Title:
ACKNOWLEDGED:
__________________________________
as Servicer
By:__________________________________
Title:
Telephone:
Facsimile:
H-2
<PAGE> 84
EXHIBIT I
FORM OF CONFIRMATION OF RECEIPT OF FUNDS
To:___________________
Re: The Master Loan and Security Agreement, dated as of December 30,
1999 (the "Loan Agreement"), between Morgan Stanley Mortgage Capital
Inc. ("Lender"), and Doral Financial Corporation (the "Borrower").
In connection with the administration of the pool of Mortgage Loans
held by you as the Custodian for Lender and its assigns, Borrower hereby
confirms that the Mortgage Loans identified on the attached schedule1 have been
sold in accordance with the applicable Takeout Commitment and the Takeout
Proceeds for such Mortgage Loans equal $______________.
The Borrower hereby certifies that all Takeout Proceeds received in
connection therewith have been credited to the Lender as provided in the Loan
Agreement.
DORAL FINANCIAL CORPORATION
By:________________________
Name: _____________________
Title:_____________________
Date: _____________________
- ----------
1 Attach schedule listing for each Mortgage Loan: Mortgage Loan Number;
outstanding principal balance of such Mortgage Loan; Mortgagor's name; Takeout
Proceeds for such Mortgage Loan.
I-1
<PAGE> 85
EXHIBIT I
[FORM OF TRUE SALE CERTIFICATION]
CERTIFICATE OF DORAL FINANCIAL CORPORATION
In connection with the loan transaction pursuant to the Master Loan and Security
Agreement, dated as of __________, 199__ between [NAME OF LENDER] and Doral
Financial Corporation (the "Purchaser"), the undersigned certifies, on behalf of
Purchaser that:
1. I personally participated as the __________ of the Purchaser in the
transaction (the "Transaction"), pursuant to which [NAME OF SELLER] (the
"Seller") sold [DESCRIBE ASSETS] (the "Assets") to the Purchaser. In such
capacity, I reviewed the purchase and sale agreement relating to the
Transaction dated as of __________ __, 199_ (the "Purchase and Sale
Agreement").
2. Due to my close involvement in the Transaction, I can accurately and
diligently certify the facts listed herein on behalf of the Purchaser.
3. The Seller has shifted all of the risks and burdens which are associated
with the ownership of the Assets to the Purchaser.
4. The Seller has shifted all of the benefits and rewards which are
associated with the Assets to the Purchaser. Subsequent to the
consummation of the Transaction, the Seller had no control rights with
respect to the Assets, and all legal rights and title with respect to the
Assets vested in the Purchaser.
5. There has been no recourse to the Seller with respect to the performance
of the Assets.
6. As of the date of the consummation of the Transaction, the Seller received
from the Purchaser reasonably equivalent value for the transferred Assets.
7. The Purchase and Sale Agreement represented the intention of the Seller
and the Purchaser to accomplish a complete and irrevocable sale of the
Assets.
8. The Seller neither was obligated to repurchase, nor had any "call" rights
with respect to, the Assets.
9. The Purchaser neither was obligated to sell the Assets back to the Seller,
nor had any "put" rights with respect to the Assets.
10. The Purchaser's books and records reflect that the Transaction was a sale
of the Assets, rather than a secured financing or a loan.
11. The Purchaser treated the Transaction as a sale for accounting and tax
purposes.
J-1
<PAGE> 86
12. The Transaction was duly authorized by the Purchaser's officers and
directors, as required by the Purchaser's organizational documents and
applicable law.
I have been duly authorized to execute this certificate on behalf of
Purchaser
DORAL FINANCIAL CORPORATION
By:_____________________________________
Name:
Title:
J-2
<PAGE> 87
CERTIFICATE OF [NAME OF SELLER]
In connection with the loan transaction pursuant to the Master Loan and Security
Agreement, dated as of ___________, 199__ between [NAME OF LENDER] and Doral
Financial Corporation (the "Purchaser"), the undersigned certifies, on behalf of
[NAME OF SELLER] (the "Seller") that:
1. I personally participated as the __________ of the Seller in the
transaction (the "Transaction") pursuant to which Seller sold [DESCRIBE
ASSETS] (the "Assets") to the Purchaser. In such capacity, I reviewed the
purchase and sale agreement relating to the Transaction dated as of
__________ __, 199_ (the "Purchase and Sale Agreement").
2. Due to my close involvement in the Transaction, I can accurately and
diligently certify the facts listed herein on behalf of the Seller.
3. The Seller has shifted all of the risks and burdens which are associated
with the ownership of the Assets to the Purchaser.
4. The Seller has shifted all of the benefits and rewards which are
associated with the Assets to the Purchaser. Subsequent to the
consummation of the Transaction, the Seller had no control rights with
respect to the Assets, and all legal rights and title with respect to the
Assets vested in the Purchaser.
5. There has been no recourse to the Seller with respect to the performance
of the Assets.
6. As of the date of the consummation of the Transaction, the Seller received
from the Purchaser reasonably equivalent value for the transferred Assets.
7. The Purchase and Sale Agreement represented the intention of the Seller
and the Purchaser to accomplish a complete and irrevocable sale of the
Assets.
8. The Seller neither was obligated to repurchase, nor had any "call" rights
with respect to, the Assets.
9. The Purchaser neither was obligated to sell the Assets back to the Seller,
nor had any "put" rights with respect to the Assets.
10. The Seller's books and records reflect that the Transaction was a sale of
the Assets, rather than a secured financing or a loan.
11. The Seller treated the Transaction as a sale for accounting and tax
purposes.
12. The Transaction was duly authorized by the Seller's officers and
directors, as required by the Seller's organizational documents and
applicable law.
J-3
<PAGE> 88
I have been duly authorized to execute this certificate on behalf of [NAME
OF SELLER].
[NAME OF SELLER]
By:_____________________________________
Name:
Title:
J-4
<PAGE> 1
EXHIBIT 12(a)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $ 76,613 $ 59,839 $ 37,797 $31,279 $22,060
Plus:
Fixed Charges (excluding capitalized interest) 163,269 115,894 62,269 47,130 44,442
-------- -------- -------- ------- -------
TOTAL EARNINGS $239,882 $175,733 $100,066 $78,409 $66,502
======== ======== ======== ======= =======
FIXED CHARGES:
Interest expensed and capitalized $160,712 $114,396 $ 60,912 $45,857 $43,380
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 2,286 544 526 586 372
An estimate of the interest component within rental expense 1,474 1,080 831 687 690
-------- -------- -------- ------- -------
TOTAL FIXED CHARGES $164,472 $116,020 $ 62,269 $47,130 $44,442
======== ======== ======== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 1.46 1.51 1.61 1.66 1.50
======== ======== ======== ======= =======
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $ 76,613 $ 59,839 $ 37,797 $31,279 $22,060
Plus:
Fixed Charges (excluding capitalized interest) 127,485 98,456 52,255 41,604 41,081
-------- -------- -------- ------- -------
TOTAL EARNINGS $204,098 $158,295 $ 90,052 $72,883 $63,141
======== ======== ======== ======= =======
FIXED CHARGES:
Interest expensed and capitalized $124,928 $ 96,916 $ 50,898 $40,331 $40,019
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 2,286 544 526 586 372
An estimate of the interest component within rental expense 1,474 1,080 831 687 690
-------- -------- -------- ------- -------
TOTAL FIXED CHARGES $128,688 $ 98,540 $ 52,255 $41,604 $41,081
======== ======== ======== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 1.59 1.61 1.72 1.75 1.54
======== ======== ======== ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 12 (b)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $ 76,613 $ 59,839 $ 37,797 $31,279 $22,060
Plus:
Fixed Charges (excluding capitalized interest) 163,269 115,894 62,269 47,130 44,442
-------- -------- -------- ------- -------
TOTAL EARNINGS $239,882 $175,733 $100,066 $78,409 $66,502
======== ======== ======== ======= =======
FIXED CHARGES:
Interest expensed and capitalized $160,712 $114,396 $ 60,912 $45,857 $43,380
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 2,286 544 526 586 372
An estimate of the interest component within rental expense 1,474 1,080 831 687 690
-------- -------- -------- ------- -------
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 164,472 116,020 62,269 47,130 44,442
-------- -------- -------- ------- -------
Preferred dividend requirements 5,139 676 130 14 187
Ratio of pre tax income to net income 1.133 1.133 1.161 1.156 1.127
-------- -------- -------- ------- -------
PREFERRED DIVIDEND FACTOR 5,821 766 151 16 211
-------- -------- -------- ------- -------
TOTAL FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS $170,293 $116,786 $ 62,420 $47,147 $44,653
======== ======== ======== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS 1.41 1.50 1.60 1.66 1.49
======== ======== ======== ======= =======
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $ 76,613 $ 59,839 $ 37,797 $31,279 $22,060
Plus:
Fixed Charges (excluding capitalized interest) 127,485 98,456 52,255 41,604 41,081
-------- -------- -------- ------- -------
TOTAL EARNINGS $204,098 $158,295 $ 90,052 $72,883 $63,141
======== ======== ======== ======= =======
FIXED CHARGES:
Interest expensed and capitalized $124,928 $ 96,916 $ 50,898 $40,331 $40,019
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 2,286 544 526 586 372
An estimate of the interest component within rental expense 1,474 1,080 831 687 690
-------- -------- -------- ------- -------
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 128,688 98,540 52,255 41,604 41,081
-------- -------- -------- ------- -------
Preferred dividend requirements 5,139 676 130 14 187
Ratio of pre tax income to net income 1.133 1.133 1.161 1.156 1.127
-------- -------- -------- ------- -------
PREFERRED DIVIDEND FACTOR 5,821 766 151 16 211
-------- -------- -------- ------- -------
TOTAL FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS $134,509 $ 99,306 $ 52,406 $41,621 $41,292
======== ======== ======== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS 1.52 1.59 1.72 1.75 1.53
======== ======== ======== ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13
DORAL FINANCIAL
CORPORATION
[LOGO]
1999
ANNUAL
REPORT
<PAGE> 2
[LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview .............................................. 1
Message to our Shareholders ........................... 2
Directors, Officers and Division Presidents ........... 6
The Companies of Doral Financial Corporation .......... 8
Organization Chart by Business Group .................. 9
1999 in Review ........................................ 10
Stock Prices and Dividend Policy ...................... 17
Management's Discussion and Analysis .................. 19
Selected Financial Data ............................... 20
Report of Independent Accountants ..................... 47
Consolidated Financial Statements ..................... 48
Corporate Directory ................................... Back Inside Cover
</TABLE>
OVERVIEW
Doral Financial Corporation commenced operations 27 years ago as a stand-alone
mortgage banking company in Puerto Rico and has evolved into a full-service
financial institution with a highly profitable business. Once again the
performance for the year was excellent. Doral Financial Corporation is now
entering a new era of financial services with the capability to build and expand
on its three basic business lines.
Mortgage origination and servicing remains a primary source of revenues and
profits and we are dedicated to continuing the growth of this important segment
of our business through our broad-based mortgage banking operations.
The equally impressive performance of our commercial bank in Puerto Rico and our
new banking, multi-family and commercial lending operations in New York City, as
well as retail and institutional investment services on the island, confirm the
strong presence Doral has strategically built in the marketplace.
We are carefully cultivating that tremendous potential for growth, both in
Puerto Rico and on the U.S. mainland.
<PAGE> 3
[LOGO]
A MESSAGE TO OUR SHAREHOLDERS
Doral Financial Corporation achieved record earnings in 1999 in our three core
businesses -mortgage banking, banking and broker-dealer operations.
The Company continues to attain earnings growth by utilizing its preeminent
position in Puerto Rico and emphasizing its strategic goal of expanding in the
United States mainland.
Our Company's continuous outstanding performance comes from the long-established
commitment to a corporate culture that is based on providing unsurpassed
customer service and innovative financial products, which guides all of our
business groups to operate at peak levels. That commitment produced record
operating results in 1999 that increased our capital base, which was further
bolstered by the successful issuance of $75 million in preferred stock in
February 1999 and $200 million in medium term notes in July 1999. As a result,
Doral Financial is well positioned for future growth and expansion.
[PHOTO]
SALOMON LEVIS
Chairman of the Board and
Chief Executive Officer
During October of 1999 we launched our new U.S. mainland banking subsidiary,
Doral Bank in New York City. The flagship of our expansion into the United
States, Doral Bank, New York was organized to replicate the banking success of
Doral Bank, Puerto Rico. It will focus on meeting the financial needs of
targeted minority communities in metropolitan New York City. Headquartered at
387 Park Avenue South in midtown Manhattan, Doral Bank, New York is a
full-service retail bank offering a wide array of deposit and loan products that
will be extended to communities in New York City. Many of these communities are
currently not adequately served by traditional financial institutions.
DORAL FINANCIAL ACHIEVED RECORD NET INCOME OF $67.9 MILLION,
REPRESENTING A 29% INCREASE OVER THE PRIOR YEAR.
During 1999, Doral Financial achieved the following milestones:
- - Doral Financial posted record net income of $67.9 million, representing
a 29% increase over the prior year, despite an overall increase in
market interest rates during the year that negatively affected other
mortgage banking companies.
- - Net income increased by 19% to $1.50 per share on a fully diluted
basis.
- - We continued our well-established pattern of superior performance with
a return on average common equity of 21.9% and a return on average
assets of almost 2%.
- - Net interest income increased 41% to $49.9 million, benefiting from our
efforts to develop a stable source of income from secured real estate
loans and high quality U.S. government and U.S. Agency securities to
complement fee-based income from mortgage banking operations. The
interest on these securities is not taxable to the Company.
- - It was the 27th consecutive year of profitable results since the
inception of the Company.
- - Net gains on the sale of loans amounted to $80.2 million, an increase
of 62%.
- - Loan production increased 18% to $2.7 billion.
- - The Company's servicing portfolio is the largest in Puerto Rico and
grew 23% to $7.6 billion. The portfolio contributed significant revenue
with servicing income rising 26% to $24.9 million. Our more than
100,000 mortgage customers represent a significant market for cross
selling other Doral products and services.
- - Total assets rose to a record $4.5 billion, an increase of 55%.
NET INCOME
(in millions)
[GRAPH]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
$32.5 $52.8 $67.9
</TABLE>
DORAL FINANCIAL CORPORATION
2 1999 ANNUAL REPORT
<PAGE> 4
NET INTEREST INCOME
(in millions)
[GRAPH]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
$28.7 $35.3 $49.9
</TABLE>
- - Shareholders' equity grew 43% from $270 million to $385 million as a
result of the $75 million preferred stock offering in February 1999 and
record earnings for the year.
- - The quarterly dividend to shareholders was increased during 1999 from
six cents to eight cents per share.
- - The investment-grade rating of our corporate debt was reaffirmed.
STRONG LEADERSHIP IN MORTGAGE BANKING
Mortgage banking in the Puerto Rico market continues to be the most significant
contributor to our Company's excellent operating results. Doral Financial was
the leading residential mortgage lender in the lucrative Puerto Rico real estate
market in 1999 for the thirteenth consecutive year, and we continue to build on
our dominant market share. Total loan origination volume increased 18% to $2.7
billion for 1999, despite a general increase in interest rates. We ranked first
in Puerto Rico in the issuance of mortgage-backed securities, totaling $1.3
billion in 1999.
MORTGAGE SERVICING PORTFOLIO
(in billions)
[GRAPH]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
$4.7 $6.2 $7.6
</TABLE>
Our mortgage banking operation
- - provided short-term financing for the development and construction of
government-sponsored affordable housing as well as other high-quality,
moderately priced residential projects.
- - increased its share of the permanent financing of new residential
properties as the housing shortage continued in Puerto Rico;
- - Offered a wide range of secured residential real estate loan products
including low-balance, high-yield loans with substantial homeowner
equity; and
- - added 18 mortgage outlets through development and acquisition.
The Company's servicing portfolio increased to $7.6 billion in 1999, reflecting
management's strategic goal to grow a stable source of recurring income that
partially offsets the volatility normally associated with traditional mortgage
banking companies. Servicing income for 1999 increased 26% to $24.9 million
through internal originations, selective purchases and improved operating
efficiencies resulting from economies of scale and technological advances.
RETAIL BANKING EXPANSION
Doral Bank, Puerto Rico has grown to become an important banking institution in
the Puerto Rican market, recording the following achievements in 1999:
- - $1.9 billion in total assets.
- - $122.7 million in equity.
- - $16.1 million in net income, an increase of 97%.
- - 50.4% increase in loan portfolio to $745.8 million.
- - Increased deposit base by 86% to $992.7 million in 1999.
- - Customer base of approximately 77,000, an increase of 116%.
- - Opened eight new branches for a total of 19 branches with another 15 in
the planning stage, to be opened in the next 12 to 24 months.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 3
<PAGE> 5
[LOGO]
[CHART]
In addition to providing new full-service banking facilities, the branch
expansion program maximized efficiency by incorporating the loan production
capabilities of the mortgage banking affiliates and retail investment brokerage
services offered by Doral Securities. During the year, the bank also began a
program offering higher yielding consumer loans, including automobile financing
and credit cards, on a selective basis targeting our mortgage customers. Doral
Bank, Puerto Rico has established a network of branches concentrated in
metropolitan San Juan, and will now seek strategic sites in the other
metropolitan centers throughout Puerto Rico. We envision opening additional
branches in selective markets designed to maximize the bank's market penetration
in Puerto Rico.
Doral Bank, New York commenced operations in New York City in October 1999 as a
federally chartered, FDIC-insured federal savings bank headquartered at 27th
Street and Park Avenue South in midtown Manhattan. As previously noted, Doral
Bank, New York is focused on filling the void in banking services available to
ethnic communities in metropolitan New York City.
Doral Bank, New York has enjoyed a remarkable level of business development in
its initial months of operation and finished 1999 with total assets of $42.5
million, total deposits of $17.8 million and shareholder's equity of $24.6
million. It is projected to achieve profitability in the first quarter of 2000.
DORAL BANK, PUERTO RICO CONTRIBUTED $16.1 MILLION TO NET INCOME IN
1999, AN INCREASE OF 97% FROM THE PRIOR YEAR.
As with all our operations, the bank is striving to provide unsurpassed customer
service, convenience and financial products not readily available to minority
communities from traditional financial services providers, and it will
capitalize on the Company's experience and expertise in real estate secured
lending. We are fully committed to providing our target markets in New York with
the same high-quality services that have been successful for the last 27 years
in our various operations in Puerto Rico. Doral Bank, New York is positioned to
take full advantage of the Doral Financial reputation and its strong name
recognition in the Puerto Rican and other Hispanic communities of New York City.
We anticipate opening other bank branches in New York City's predominately
Hispanic neighborhoods during the year 2000. Our goal is to give minority
communities a vehicle to establish and maintain affordable banking
relationships.
SECURITIES BROKER-DEALER
Doral Securities is a full service broker-dealer. It complements our banking and
mortgage banking products and is also a source for competitive financing for the
Company. Doral Securities continues to make increasing contributions to the
overall net income of the Company. In addition to stocks, mutual funds and
bonds, Doral Securities offers tax-exempt and tax-advantaged GNMA and Puerto
Rican securities and has significantly expanded its retail securities business
through its main office in Metropolitan San Juan and a new office in Mayaguez,
Puerto Rico. Doral Securities also offers investment banking services and
financial advisory services in Puerto Rico and the Caribbean region.
BANK SUBSIDIARIES
ASSET BASE
(in millions)
[GRAPH]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
$428 $805 $1,936
</TABLE>
UNITED STATES MAINLAND OPERATIONS
While the Company continues to emphasize established operations in Puerto Rico
as its primary business segment, operations in the United States offer
significant opportunities for diversification and adding shareholder value.
Metropolitan New York City has a population in excess of eight million, with
minorities making up 48%. Hispanics are the fastest growing minority in the
entire country and comprise approximately 22% of the Metropolitan New York City
population. Since many minorities feel they are underserved by traditional
financial institutions, we believe that this market segment presents a great
opportunity for the Company through Doral Bank, New York and Doral Money, Inc.
DORAL FINANCIAL CORPORATION
4 1999 ANNUAL REPORT
<PAGE> 6
[LOGO]
BANK SUBSIDIARIES
DEPOSIT BASE
(in millions)
[GRAPH]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
$300 $533 $1,010
</TABLE>
Doral Money was formed in 1998 to expand the Company's presence in the U.S.
mainland. We believe that Doral Money shows significant promise, targeting
multi-family and other secured real estate lending in the moderate income areas
of the five boroughs of New York City. With unprecedented demand for housing and
the impact of New York's rent control regulations reducing the supply of new
housing in this segment of the market, these properties have consistently
maintained low vacancies and have been able to historically weather reversals in
market conditions with minimal adverse consequences.
THE PUERTO RICO MARKET
Puerto Rico continued to provide a favorable business environment for Doral
Financial in 1999, and our 27 consecutive years of profitable operations are
evidence of the Company's ability to maximize the income potential from its
primary market. The Puerto Rico residential real estate market in general has
remained strong and has experienced consistent appreciation in value due to the
island's population dynamics and the overall shortage of residential housing
units as well as the lack of such alternatives as rental apartments and adequate
government housing.
FUTURE PROSPECTS
Our goals for the new millennium:
- - Strive for increased profitability.
- - Enhance shareholder value.
- - Expand all segments of our business both in Puerto Rico and in the
United States.
- - Provide better services to the public, addressing their needs.
WE WILL CONTINUE TO EXPLORE OPPORTUNITIES FOR SUITABLE CORPORATE
ACQUISITIONS AND THE DEVELOPMENT OF STRATEGIC ALLIANCES IN BOTH PUERTO RICO AND
THE UNITED STATES.
Doral Financial begins its 28th year of operations excited by the challenges and
opportunities that the future holds and is dedicated to achieving even greater
success to further enhance shareholder value. Management constantly seeks ways
to improve productivity and efficiency through new products, internal
reorganization, technological advances and the possibilities created by the
Internet. Our experienced management team and strong capital base uniquely
position the Company to take full advantage of any opportunities created by the
recent enactment of financial modernization legislation by Congress that will
enable Doral Financial to provide an even more diversified selection of
financial products and services. During the year 2000 the Company intends to
take advantage of Puerto Rico's international banking legislation to further
enhance our ability to invest in high-quality securities on a tax-advantaged
basis. Throughout the coming year, we will continue to explore opportunities for
suitable corporate acquisitions and the development of strategic alliances in
both Puerto Rico and the United States that will contribute to earnings,
strengthen our various businesses and enhance the image of the Company. We thank
all of our clients, shareholders and employees for supporting us in this
endeavor, knowing that their reward will be our continued mutual success.
/s/ Salomon Levis
Salomon Levis
Chairman of the Board and Chief Executive Officer
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 5
<PAGE> 7
[LOGO]
DORAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CORPORATE CORPORATE DIVISION
DIRECTORS OFFICERS PRESIDENTS
<S> <C> <C>
SALOMON LEVIS(1) SALOMON LEVIS(1) JOSE VIGOREAUX
Chairman of the Board and Chairman of the Board and President of Doral Bank,
Chief Executive Officer Chief Executive Officer Puerto Rico
RICHARD F. BONINI(2) ZOILA LEVIS(3) EDISON VELEZ
Senior Executive Vice President and President of Doral Mortgage
President, Chief Financial Chief Operating Officer Corporation
Officer and Secretary
RICHARD F. BONINI(2) ROBERT REINER
EDGAR M. CULLMAN,
JR. Senior Executive Vice President of Doral Bank,
President, Chief Financial New York
President and Chief Officer and Secretary
Executive Officer of General RICHARD F. BONINI(2)
Cigar Holdings, Inc. LUIS ALVARADO(4)
President of Doral
JOHN L. ERNST Executive Vice President Money, Inc.
and Assistant Secretary
Chairman of the Board and MIGUEL PASCUAL
President of Bloomingdale MARIO S. LEVIS(5)
Properties, Inc. President of Doral
Executive Vice President and Securities, Inc.
EFRAIM KIER Treasurer
AIDILIZA LEVIS
President A & M Contractors FRANCISCO RIVERO
President of Centro
ZOILA LEVIS(3) Executive Vice President, Hipotecario de
Administration and Business Puerto Rico, Inc.
President and Chief Development
Operating Officer RAUL MENENDEZ
FREDERICK C. TEED
A. BREAN MURRAY President of SANA Investment
Executive Vice President Mortgage Bankers, Inc.
Chairman and Chief Banking
Executive Officer of Brean
Murray & Co., Inc. CHRISTOPHER O'NEILL
HAROLD D. VICENTE Senior Vice President
Construction Loans
Partner,
Vicente & Cuebas RICARDO MELENDEZ
Vice President and Chief
Accounting Officer
DIRECTORS
EMERITUS FERNANDO RIVERA-
MUNICH
EDGAR M. CULLMAN
Vice President,
Chairman of the Board of General Counsel and
General Cigar Holdings, Inc. Assistant Secretary
DAVID LEVIS CARLOS VINA
Former Chairman of the Corporate Controller
Board of Doral Financial
Corporation OSCAR APONTE
Director of Internal Audit
</TABLE>
(1) Mr. Salomon Levis also serves as Chief Executive Officer and Chairman of the
Board of Doral Mortgage Corporation, Doral Bank, PR, Doral Bank, NY, Centro
Hipotecario de Puerto Rico and Doral Securities.
(2) Mr. Bonini also serves as a Director of Doral Mortgage Corporation, Doral
Bank, PR, Doral Bank, NY, and Centro Hipotecario de Puerto Rico.
(3) Ms. Levis also serves as a Director of Doral Bank, PR and Doral Securities.
(4) Mr. Alvarado also serves as an Officer and Director of Centro Hipotecario de
Puerto Rico and Director of Doral Bank, PR.
(5) Mr. Mario S. Levis also serves as a Director of Doral Securities.
DORAL FINANCIAL CORPORATION
6 1999 ANNUAL REPORT
<PAGE> 8
[Board of Directors Photo]
Board of Directors
From left to right:
Seated: Richard F. Bonini, David Levis,
Salomon Levis, Zoila Levis
Standing: Edgar M. Cullman, Jr., John L. Ernst,
A. Brean Murray
Not pictured: Edgar M. Cullman, Efraim Kier and Harold Vicente
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 7
<PAGE> 9
[LOGO]
DORAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
THE COMPANIES OF
DORAL FINANCIAL
CORPORATION LOCATIONS
<S> <C> <C>
DORAL MORTGAGE CORPORATION DORAL MORTGAGE CORPORATION SANA INVESTMENT
MORTGAGE BANKERS, INC.
The Doral Building
650 Munoz Rivera Avenue PUERTO RICO Bayamon (2 locations)
Hato Rey, Puerto Rico 00918
Arecibo Caguas
HF MORTGAGE BANKERS Bayamon (3 locations) Carolina
1159 F.D. Roosevelt Avenue Caguas (2 locations) Hato Rey
Puerto Nuevo, Puerto Rico 00920
Carolina Mayaguez
CENTRO HIPOTECARIO Catano (opened January 2000) Ponce
DE PUERTO RICO, INC.
Cayey Rio Piedras (2 locations)
305 F.D. Roosevelt Avenue
Hato Rey, Puerto Rico 00919 Fajardo DORAL BANK, PUERTO RICO
Guayama
SANA INVESTMENT MORTGAGE
BANKERS, INC. Hato Rey (5 locations) Bayamon (3 Locations)
654 Munoz Rivera Avenue, Suite 901 Humacao Caguas (2 locations)
Hato Rey, Puerto Rico 00918
Mayaguez (2 locations) Catano (2 locations)
DORAL BANK, PUERTO RICO Ponce Cayey (opened March 2000)
268 Ponce de Leon Avenue, Suite 910 Rio Piedras (2 locations) Guaynabo
Hato Rey, Puerto Rico 00918
Vega Baja Hato Rey (2 locations)
DORAL SECURITIES, INC. Humacao
U.S. MAINLAND
268 Munoz Rivera Avenue, Suite 1803 Mayaguez
Hato Rey, Puerto Rico 00918 Miami, Florida
Ponce
DORAL MONEY, INC. HF MORTGAGE BANKERS Puerto Nuevo
387 Park Avenue South Bayamon Rio Piedras (3 locations, one opened
New York, New York 10016 January 2000))
Caguas
Vega Alta (opened January 2000)
DORAL BANK, NEW YORK Guaynabo
387 Park Avenue South Hato Rey DORAL SECURITIES, INC.
New York, New York 10016
Mayaguez Hato Rey
DORAL PROPERTIES, INC Ponce Mayaguez
1159 F.D. Roosevelt Avenue Puerto Nuevo
Puerto Nuevo, Puerto Rico 00920 DORAL MONEY, INC.
Rio Piedras (opened February 2000)
New York, New York
Vega Alta (opened February 2000)
CENTRO HIPOTECARIO DORAL BANK, NEW YORK
DE PUERTO RICO, INC.
New York, New York
Bayamon
Hato Rey
Manati (opened February 2000)
</TABLE>
DORAL FINANCIAL CORPORATION
8 1999 ANNUAL REPORT
<PAGE> 10
[LOGO]
DORAL FINANCIAL CORPORATION
BUSINESS GROUPS
[CHART]
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 9
<PAGE> 11
[LOGO]
1999 IN REVIEW
DOMINANCE IN MORTGAGE BANKING
Doral is preeminent in origination of residential mortgage loans, the sale of
loans on the secondary market, issuance of mortgage-backed securities and the
servicing of mortgages.
We intend to use the same flexibility and foresight that has contributed to our
prior success to continue to develop our businesses in Puerto Rico and the
United States. As a result, we are positioned to achieve greater success in the
years ahead as a financial services provider dedicated to meet all of the
consumer's financial needs.
We are the leader in all categories of mortgage lending in Puerto Rico, offering
the homebuyer a wide range of mortgage financing alternatives. Moreover, Doral
has developed the most efficient and extensive delivery system to originate and
service mortgage loans, the bulk of which are generated by our own mortgage
lending units.
Those units have developed distinctive market identities and loyalties, based on
their particular business development strategies. For example, Doral Mortgage
Corporation concentrates on making loans for the purchase and refinancing of
existing homes. The acquisition of Sana Mortgage Bankers, Inc. in 1999 added to
that core business capacity. Meanwhile, HF Mortgage Bankers primarily works with
home builders to provide mortgage financing for new home construction, and
Centro Hipotecario targets real estate brokers and corporate employees.
In total, 45 mortgage loan centers, strategically located throughout Puerto
Rico, satisfy this unique and growing market for mortgage financing. These
outlets provide every type of mortgage loan, geared to serve the particular
requirements of every segment of the economy, from construction financing for
residential and commercial development to second mortgages for home improvement.
Doral Financial makes available a wide variety of mortgage products and
traditionally emphasizes first mortgage loans secured by single-family
residences. There are four basic types of mortgages. The first two are those
insured or guaranteed by the Federal Housing Administration (FHA) or by the
Department of Veteran Affairs (VA). Conventional loans not insured by the FHA or
the VA fall into the last two types called conforming or non-conforming (to FNMA
or FHLMC underwriting requirements).
The company is the largest issuer of mortgage-backed securities in Puerto Rico
and securitizes a substantial portion of its mortgage production through either
GNMA (Government National Mortgage Association), Freddie Mac (the Federal Home
Loan Mortgage Corporation) or Fannie Mae (the Federal National Mortgage
Association).
DORAL FINANCIAL CORPORATION
10 1999 ANNUAL REPORT
<PAGE> 12
[PHOTO]
Doral's Construction Loan Division structures and provides bridge and
construction loans to builders and developers for the construction of single
and multi-family residential units. The New Projects Division prequalifies
prospective retail buyers during the construction period and provides the
permanent financing for the acquisition of the properties upon completion of
the project.
<PAGE> 13
[LOGO]
OUR CLIENT SERVICE CULTURE
Doral is a leader in serving the mortgage market in Puerto Rico. Our primary
objective was and continues to be unsurpassed customer satisfaction. The
specialists at each of our mortgage lending subsidiaries are trained to
expedite the loan process to meet the needs of their clients in the most
convenient manner possible with a minimum of complication and without
sacrificing prudent credit standards.
The systems utilized by Doral are user-friendly, while still highly effective
in measuring credit-worthiness and the other factors associated with
originating a mortgage loan. We can, therefore, make a credit judgment and
price our services at very competitive rates in the shortest time possible.
Doral's mortgage centers are open from 8:00 AM to 8:00 PM, but client issues
can arise at any time. We, therefore, maintain a telephone service that is
available seven days a week. Further, our offices will close loans at the
convenience of the clients, regardless of the time of day or day of week,
holidays included.
This client service culture also is the standard at Doral Bank branches and the
offices of Doral Securities. Our 19 bank branches are open to the public until
6:30 PM and also provide extended weekend banking hours.
Our new corporate headquarters building in
San Juan, Puerto Rico, will be the nerve
center for Doral personnel, promoting greater
efficiency through consolidation of tasks and
more effective application of management,
administrative and operating resources, all
geared towards providing better service to
our clients.
DORAL FINANCIAL CORPORATION
12 1999 ANNUAL REPORT
<PAGE> 14
[Photo 1 Doral Financial Corporation's new headquarters under construction]
[Photo 2 Three employees analyzing data]
[Photo 3 A closing with two bank personnel and a client couple]
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 13
<PAGE> 15
[LOGO]
CROSS-SELLING MARKETS, CULTURES & GENERATIONS
The objective at Doral, in mortgage banking, banking and investment services,
is to provide financial solutions that put assets to work in the most
cost-effective and rewarding manner to grow wealth and build equity for our
clients. This is best accomplished by cross selling a comprehensive list of
financial products and services available at our various affiliates.
Doral is committed to meet the challenges of the 21st century by providing
creative solutions for secured real estate financing in both Puerto Rico and
the United States. We are now capitalizing on the mobility of a new generation
of clients who appreciate and value personalized service, the ability to
achieve desired results and dedication to the task of providing quality
financial products and services.
We are keenly aware of the unique characteristics of our own primary market in
Puerto Rico and of Hispanic markets in general, having successfully served the
financial needs of one of the largest Spanish-speaking populations under the
American flag for the past 27 years. As a result, ours is a financial
institution that has substantial experience in both cultures and both
languages, translating aspirations into achievable financial goals.
DORAL FINANCIAL CORPORATION
14 1999 ANNUAL REPORT
<PAGE> 16
[Photo 1]
OUR NEW YORK MARKET
Doral Money concentrates on multi-family and other secured
real estate lending in the moderate income areas of the five
boroughs of New York City, which consistently maintain low
vacancies and represent strong earnings potential for our
operations.
[Photo 2]
The photos show multi-family
residences in New York City
financed by Doral's New York
operations.
<PAGE> 17
[LOGO]
STRONG EXPANSION PROSPECTS
Building on our extensive client base in Puerto Rico of more than 100,000
satisfied customers, Doral is selectively approaching the market on the U.S.
mainland, seeking expansion opportunities that will carry us forward in the
years to come. Initially, we have focused on building the multi-family and
commercial real estate business in the metropolitan area of New York City, as
well as capitalizing on the potential of our new bank in New York, which will
target Hispanic and other ethnic communities.
In Puerto Rico, Doral will continue to increase the volume of mortgage loan
originations and servicing by emphasizing quality customer service and
maintaining the most extensive system of branch offices of any mortgage banking
institution in the market.
We expect the Puerto Rico market to continue to present outstanding growth
opportunities because of strong homeowner demand, in spite of the prospect of
higher interest rates in the months ahead. It is estimated that there exists a
shortage of 100,000 housing units in Puerto Rico, which will continue to fuel
the demand for our products.
Doral will aggressively participate in that strong potential for continuing
development, as a major financing resource for developers, real estate brokers
and homeowners, as well as growing its banking, retail and institutional
investment franchises.
DORAL FINANCIAL CORPORATION
16 1999 ANNUAL REPORT
<PAGE> 18
STOCK PRICES AND DIVIDEND POLICY
[LOGO]
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Doral Financial's Common Stock, $1.00 par value (the "Common Stock"), is traded
on the over-the-counter market and is quoted on the National Association of
Securities Dealers Automated Quotation National Market System (the "NASDAQ
National Market") under the symbol "DORL."
The table below sets forth, for the calendar quarters indicated, the high and
low sales prices on the NASDAQ National Market and the cash dividends declared
on the Common Stock during such periods. The information in the table has been
adjusted to reflect a two-for-one stock split effective May 20, 1998.
<TABLE>
<CAPTION>
CALENDAR PRICE RANGE DIVIDENDS
YEAR QUARTER HIGH LOW PER SHARE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 1st $21.625 $17.125 $0.06
2nd 19.000 15.813 0.08
3rd 18.000 13.063 0.08
4th 13.875 10.625 0.08
1998 1st $15.344 $10.500 $0.05
2nd 18.563 15.219 0.06
3rd 19.625 14.625 0.06
4th 22.688 11.625 0.06
</TABLE>
As of February 29, 2000 the approximate number of record holders of the
Company's Common Stock was 731, which does not include beneficial owners whose
shares are held in record names of brokers and nominees. The last sales price
for the Common Stock as quoted on the NASDAQ National Market on such date was
$9.813 per share.
The terms of the Company's 8% Convertible Cumulative Preferred Stock
(liquidation preference $1,000 per share) and of the Company's 7% Noncumulative
Monthly Income Preferred Stock, Series A (liquidation preference $50 per share)
do not permit the payment of cash dividends on Common Stock if dividends on the
respective series of preferred stock are in arrears.
The ability of the Company to pay dividends in the future is limited by various
restrictive covenants contained in debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Indenture for its 7.84% Senior
Notes due 2006 (the "Senior Note Indenture") from paying dividends on any
capital stock if an event of default exists under such agreement, or if the
amount of dividends payable by the Company together with the aggregate amount
of dividends paid and other capital distributions made since October 1, 1996,
exceed the sum of: (i) 50% of the Company's Consolidated Net Income (as defined
in the Senior Note Indenture), accrued from October 1, 1996, to the end of the
quarter ending not less than 45 days prior to the dividend payment date; (ii)
$15 million; and (iii) the net proceeds of any sale of capital stock subsequent
to October 15, 1996. In addition, under other debt agreements of Doral
Financial, the Company may be prohibited from paying dividends if it is in
default under such agreements.
The ability of the Company to pay dividends may also be restricted by various
regulatory requirements and policies of bank regulatory agencies having
jurisdiction over the Company and its subsidiaries.
The Puerto Rico Internal Revenue Code generally imposes a 10% withholding tax
on the amount of any dividends paid by Doral Financial to individuals, whether
residents of Puerto Rico or not, trusts, estates, special partnerships and
non-resident foreign corporations and partnerships. Prior to the first dividend
distribution for the taxable year, individuals who are residents of Puerto Rico
may elect to be taxed on the dividends at the regular graduated rates, in which
case the special 10% tax will not be withheld from such year's distributions.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 17
<PAGE> 19
United States citizens who are non-residents of Puerto Rico may also make such
an election except that notwithstanding the making of such election, a 10%
withholding will still be made on the amount of any dividend distribution
unless the individual files with the Company prior to the first distribution
date for the taxable year, a certificate to the effect that said individual's
gross income from sources within Puerto Rico during the taxable year does not
exceed $1,300 if single, or $3,000 if married, in which case dividend
distributions will not be subject to Puerto Rico income taxes.
United States income tax law permits a credit against United States income tax
liability, subject to certain limitations, for Puerto Rico income taxes paid or
deemed paid with respect to such dividends.
DORAL FINANCIAL CORPORATION
18 1999 ANNUAL REPORT
<PAGE> 20
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Doral Financial Corporation is a bank 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 just completed its 27th year of operations. The Company is the
leading originator of mortgage loans on single-family residences in Puerto
Rico, and also manages the largest mortgage loans servicing portfolio on the
Island. The volume of loans originated and purchased during the three years
ended December 31, 1999, 1998 and 1997, by Doral Financial was approximately
$2.7 billion, $2.3 billion and $1.04 billion, respectively. Doral Financial's
mortgage servicing portfolio increased to approximately $7.6 billion as of
December 31, 1999, from $6.2 billion as of December 31, 1998, an increase of
23%. Doral Financial's strategy is to increase the size of its mortgage
servicing portfolio by relying principally on internal loan originations.
Doral Financial maintains a substantial portfolio of mortgage-backed
securities. This is a direct result of the Company's mortgage securitization
activities. At December 31,1999, Doral Financial held securities for trading
with a fair market value of $862.7 million, approximately $614.5 million of
which consisted of Puerto Rico GNMA securities, the interest on which is
tax-exempt to the Company. These securities are generally held by Doral
Financial for longer periods prior to sale in order to maximize the tax-exempt
interest received thereon. Securities held-for-trading are reflected on Doral
Financial's Consolidated Financial Statements at their fair market value with
resulting gains or losses included in operations as part of trading account
profit.
As part of its strategy to maximize net interest income, Doral Financial also
invests in securities that are classified as available-for-sale or
held-to-maturity. During the year ended December 31, 1999, the Company
purchased $819.5 million in securities classified as held-to-maturity. As of
December 31, 1999, Doral Financial held approximately $1.5 billion in
securities and other investments that are classified as held-to-maturity. As of
December 31, 1999, Doral Financial also held $66.3 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.
Doral Bank PR, the Company's principal banking subsidiary, contributed net
income of $16.1 million, $8.2 million and $5.0 million for the years ended
December 31, 1999, 1998 and 1997, respectively, including the operations of
Doral Money, a wholly owned subsidiary of Doral Bank PR. Doral Money,
established during the second quarter of 1998, contributed approximately 11% of
the Company's total loan production for both 1999 and 1998.
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 years ended
December 31, 1999, 1998 and 1997, Doral Securities' net income was $1.3
million, $1.1 million and $138,000, respectively. The increase in net income
reflects an increase in customer accounts and interest-earning assets during
these periods. During 1999, Doral Securities opened a second branch in the city
of Mayaguez, the Island's third largest city on the West Coast. Assets in
customer brokerage accounts increased to $227 million as of December 31, 1999,
from $138 million as of the same date a year ago, an increase of 64%.
For information regarding net interest income, non-interest income, net income
and identifiable assets broken down by the Company's mortgage banking, banking
and investment broker-dealer segments, please refer to Note 31 of the Company's
Consolidated Financial Statements.
Unlike most bank holding companies, Doral Financial has significant assets and
operations at the holding company level. HF Mortgage Bankers, one of the
Company's principal mortgage units, is organized as an operating division
within the parent company. As of December 31, 1999, Doral Financial had assets
and net income of $2.1 billion and $29.0 million, respectively, at the parent
company level.
The following table sets forth certain selected consolidated financial data for
Doral Financial on a historical basis for each of the five years ended December
31. This information should be read in conjunction with Doral Financial's
Consolidated Financial Statements and related notes thereto.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 19
<PAGE> 21
<TABLE>
<CAPTION>
TABLE A - SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31,
(Dollars in thousands, except for per share data) 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:(1)
Interest income $ 211,679 $ 150,051 $ 90,131 $ 66,987 $ 61,907
Interest expense 161,795 114,786 61,438 46,443 43,380
------------ ------------ ------------ ------------ ------------
Net interest income 49,884 35,265 28,693 20,544 18,527
Provision for loan losses 2,626 883 792 797 352
------------ ------------ ------------ ------------ ------------
Net interest income after provision for loan 47,258 34,382 27,901 19,747 18,175
losses
Non-interest income 126,911 86,340 45,286 40,846 29,930
Non-interest expense 97,556 60,883 35,390 29,314 26,045
------------ ------------ ------------ ------------ ------------
Income before taxes and extraordinary item 76,613 59,839 37,797 31,279 22,060
Income taxes 8,687 7,007 5,249 4,238 2,500
------------ ------------ ------------ ------------ ------------
Income before extraordinary item 67,926 52,832 32,548 27,041 19,560
Extraordinary item - non-cash charge on
extinguishment of debt -- -- 12,317 -- --
------------ ------------ ------------ ------------ ------------
Net income $ 67,926 $ 52,832 $ 20,231 $ 27,041 $ 19,560
============ ============ ============ ============ ============
Cash dividends paid $ 17,269 $ 9,975 $ 7,199 $ 6,008 $ 4,374
============ ============ ============ ============ ============
Per Share Data:
Basic:
Income before extraordinary item $ 1.55 $ 1.31 $ 0.89 $ 0.75 $ 0.67
Extraordinary item -- -- (0.34) -- --
------------ ------------ ------------ ------------ ------------
Net income $ 1.55 $ 1.31 $ 0.55 $ 0.75 $ 0.67
============ ============ ============ ============ ============
Diluted:
Income before extraordinary item $ 1.50 $ 1.26 $ 0.85 $ 0.71 $ 0.64
Extraordinary item -- -- (0.32) -- --
------------ ------------ ------------ ------------ ------------
Net income $ 1.50 $ 1.26 $ 0.53 $ 0.71 $ 0.64
============ ============ ============ ============ ============
Dividends Declared per Share:
Common Stock $ 0.30 $ 0.23 $ 0.20 $ 0.165 $ 0.145
Series A Preferred Stock $ 3.00 -- -- $ 0.3825 $ 1.05
8% Convertible Cumulative Preferred Stock $ 80.00 $ 80.00 $ 15.33 -- --
Selected Balance Sheet Data: (1)
Mortgage loans held-for-sale $ 1,015,703 $ 883,048 $ 404,672 $ 260,175 $ 243,678
Securities held-for-trading 862,698 606,918 620,288 436,125 418,348
Securities held-to-maturity 1,509,060 190,778 143,534 107,222 77,945
Securities available-for-sale 66,325 408,888 240,876 12,007 14,579
Loans receivable, net 231,184 166,987 133,055 128,766 51,355
Total assets 4,537,343 2,918,113 1,857,789 1,106,083 917,922
Loans payable and securities sold under
agreements to repurchase 2,281,416 1,624,032 1,076,912 568,840 573,754
Notes payable 461,053 199,733 164,934 152,126 51,682
Deposit accounts 1,010,424 533,113 300,494 158,902 95,740
Stockholders' equity 384,982 269,559 186,955 150,531 129,017
Weighted average shares outstanding:
Basic 40,428,920 39,941,068 36,680,158 36,266,244 29,231,680
Diluted 42,421,477 41,928,186 38,728,632 38,725,072 31,040,540
Operating Data:
Loan production $ 2,722,000 $ 2,313,000 $ 1,037,000 $ 817,000 $ 636,000
Mortgage loan servicing portfolio $ 7,633,000 $ 6,186,000 $ 4,655,000 $ 3,068,000 $ 2,668,000
</TABLE>
DORAL FINANCIAL CORPORATION
20 1999 ANNUAL REPORT
<PAGE> 22
[LOGO]
<TABLE>
<CAPTION>
TABLE A - SELECTED FINANCIAL DATA (CONTINUED) YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios: (2)(3)
Return on Average Assets 1.92% 2.17% 1.37% 2.68% 2.32%
Return on Average Common Equity 21.92% 21.65% 11.99% 19.35% 17.82%
Dividend Payout Ratio for Common Stock 20.00% 18.25% 37.74% 23.24% 22.66%
Average Equity to Average Assets 10.04% 10.00% 11.39% 13.81% 13.02%
Interest Rate Spread 1.35% 1.64% 2.10% 2.17% 2.38%
Net Yield on Average Interest-Earning Assets 6.86% 7.30% 7.90% 7.85% 8.35%
Net Yield on Average Interest-Bearing Liabilities 5.51% 5.66% 5.80% 5.68% 5.97%
</TABLE>
(1) Certain reclassifications of prior years' data have been made to
conform to 1999 classifications.
(2) Return on Average Assets, Average Common Equity and Dividend Payout
Ratio for Common Stock based on income before an extraordinary item
for 1997 would have been 2.19%, 19.29% and 23.53%, respectively.
(3) Average balances computed on a monthly basis.
A substantial portion of Doral Financial's total mortgage loan originations has
consistently been composed of refinance loans. For the years ended December 31,
1999, 1998 and 1997, refinance loans represented approximately 61%, 62% and
51%, 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.
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 B - LOAN PRODUCTION YEAR ENDED DECEMBER 31,
(Dollars in thousands, except for average initial loan balance) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
FHA/VA mortgage loans
Number of loans 8,794 7,217 5,529
Volume of loans $ 722,969 $ 571,027 $ 409,509
Percent of total volume 27% 25% 39%
Conventional conforming mortgage loans
Number of loans 10,172 9,755.00 2,131
Volume of loans $ 769,838 $ 873,540 $ 178,264
Percent of total volume 28% 38% 17%
Conventional non - conforming mortgage loans(1)(2)
Number of loans 11,852 10,735 7,399
Volume of loans $ 818,556 $ 642,769 $ 381,116
Percent of total volume 30% 27% 37%
Other(3)
Number of loans 1,783 799 554
Volume of loans $ 410,756 $ 225,551 $ 68,110
Percent of total volume 15% 10% 7%
Total loans
Number of loans 32,601 28,506 15,613
Volume of loans $2,722,119 $2,312,887 $1,036,999
Average initial loan balance $ 83,498 $ 81,140 $ 66,420
</TABLE>
(1) Includes $26 million, $20 million and $20 million, in second mortgages
for the years ended December 31, 1999, 1998 and 1997, respectively.
(2) Includes $42 million, $36 million and $38 million, in home equity or
personal loans secured by real estate mortgages up to $40,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(3) Consists of construction loans on residential projects, mortgage loans
secured by multi-family and commercial properties as well as other
commercial, land, and consumer loans.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 21
<PAGE> 23
[LOGO]
LOAN ORIGINATION CHANNELS
In Puerto Rico, Doral Financial relies primarily on its extensive retail
mortgage banking and bank branch network to originate loans. It supplements
these originations by wholesale originations consisting primarily of purchases
of FHA and VA loans from other mortgage bankers and, to a lesser extent,
originations through mortgage brokers. The Company, through Doral Bank PR and
other specialized units, also originates consumer, commercial, construction and
land loans. In 1998, Doral Financial established a multi-family lending unit in
the New York metropolitan area. In Puerto Rico, the Company maintains a
specialized unit that works closely with home builders and originates mortgage
loans to finance the acquisition of homes in new residential developments.
Doral Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
consumer, commercial, construction, land, and commercial real estate loans
which are held for investment and classified as Loans Receivable. See "Loans
Receivable".
The following table sets forth the sources of Doral Financial's loan production
as a percentage of total loan originations for the periods indicated:
TABLE C - LOAN ORIGINATION SOURCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997(1)
------------------------ ------------------------ ---------
PUERTO PUERTO
RICO US(1) TOTAL RICO US TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Retail 52% -- 52% 52% -- 52% 63%
Wholesale 19% 6% 25% 22% 6% 28% 13%
New Housing Developments 8% -- 8% 8% -- 8% 13%
Multi-family -- 5% 5% -- 5% 5% --
Other(2) 10% -- 10% 7% -- 7% 11%
</TABLE>
(1) For 1997, originations from the mainland United States represented less
than 1% of total loan originations. The wholesale operations in the United
States of Doral Money were discontinued during the third quarter of 1999.
(2) Refers to commercial, construction, land, and consumer loans originated
through Doral Bank PR and other specialized units.
MORTGAGE LOAN SERVICING
Doral Financial's principal source of servicing rights has traditionally been
its own mortgage loan production. However, during the years ended December 31,
1999 and 1998, Doral Financial purchased servicing rights to approximately
$238.3 million and $380.4 million, respectively, in principal amount of
mortgage loans. Doral Financial intends to continue growing its mortgage
servicing portfolio primarily by internal loan originations and will continue
to seek and consider attractive opportunities for bulk purchases of servicing
rights from third parties.
The following table sets forth certain information regarding the total mortgage
loan servicing portfolio of Doral Financial for the periods indicated:
DORAL FINANCIAL CORPORATION
22 1999 ANNUAL REPORT
<PAGE> 24
[LOGO]
TABLE D - MORTGAGE LOAN SERVICING
<TABLE>
<CAPTION>
(Dollars in thousands, except for average size of loans prepaid) YEAR ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END
GNMA $2,685,008 $2,281,903 $2,142,345
FHLMC/FNMA 2,195,977 1,557,592 915,935
Doral Financial grantor trusts 109,615 146,790 201,585
Other conventional mortgage loans(1) 2,642,581 2,199,774 1,395,270
---------- ---------- ----------
Total servicing portfolio $7,633,181 $6,186,059 $4,655,135
========== ========== ==========
SERVICING PORTFOLIO ACTIVITY
Beginning servicing portfolio $6,186,059 $4,655,135 $3,068,482
Add:
Loans funded and purchased(2) 2,385,162 2,243,034 1,036,999
Bulk servicing acquired 238,265 380,393 1,040,000
Less:
Servicing sales transferred -- 103,003 --
Run-off(3) 1,176,305 989,500 490,346
---------- ---------- ----------
Ending servicing portfolio $7,633,181 $6,186,059 $4,655,135
========== ========== ==========
SELECTED DATA REGARDING MORTGAGE LOANS SERVICED
Number of loans 115,691 101,760 86,269
Weighted average interest rate 7.60% 7.89% 8.35%
Weighted average remaining maturity (months) 251 208 180
Weighted average servicing fee rate 0.3741% 0.3762% 0.3673%
Average servicing portfolio $7,226,939 $5,225,921 $3,861,809
Principal prepayments (loans paid-off) $ 709,000 $ 644,000 $ 279,000
Prepayments (loans paid-off) to average portfolio 10% 12% 7%
Average size of loans prepaid $ 51,400 $ 50,300 $ 37,800
DELINQUENT MORTGAGE LOANS AND PENDING FORECLOSURES AT PERIOD END
60-89 days past due 1.32% 1.26% 1.84%
90 days or more past due 1.86% 2.35% 1.92%
---------- ---------- ----------
Total delinquencies excluding foreclosures 3.18% 3.61% 3.76%
========== ========== ==========
Foreclosures pending 1.14% 1.08% 1.32%
========== ========== ==========
</TABLE>
(1) Includes $1.1 billion, $925 million and $393 million of loans owned by the
Company at December 31, 1999, 1998 and 1997, respectively, which
represented 15%, 15% and 8%, respectively, of the total servicing
portfolio as of such dates.
(2) Excludes approximately $337 million and $70 million of commercial,
construction loans and loans sold with servicing released not included in
the Company's mortgage servicing portfolio for the years ended December
31, 1999 and 1998, respectively.
(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 December 31, 1999, 1998 and 1997, less than
6%, 5% and 1%, respectively, of Doral Financial's mortgage servicing portfolio
was related to mortgages secured by real property located outside Puerto Rico.
LOANS RECEIVABLE
Doral Financial originates mortgage loans secured by income producing
residential and commercial properties, construction loans, land loans and other
commercial and consumer loans that are held for investment and classified as
loans receivable. Substantially all of Doral Financial's loans receivable
represent loans made to entities or individuals located in Puerto Rico. The
loans originated by the Company's multi-family lending operation in the New
York City metropolitan area are classified as loans held-for-sale.
The maximum aggregate amount of unsecured loans that Doral Bank PR could make
to a single borrower under
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 23
<PAGE> 25
[LOGO]
Puerto Rico banking regulations as of December 31, 1999, was $15.5 million. The
maximum aggregate amount of loans that Doral Bank NY could make to a single
borrower under OTS banking regulations as of December 31, 1999, was $3.64
million. As of such date the largest loan held for investment by the Company
was $6.1 million, which was held by the parent company.
The following table sets forth certain information regarding Doral Financial's
loans receivable as of the dates indicated
TABLE E - LOANS RECEIVABLE, NET
<TABLE>
<CAPTION>
(Dollars in thousands) AS OF DECEMBER 31,
1999 1998 1997 1996 1995
----------------- ------------------ ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction loans $114,853 41% $ 72,081 33% $ 9,927 7% $ 2,793 2% $ 2,637 5%
Residential mortgage loans 70,659 26% 80,902 37% 87,037 65% 91,596 70% 29,481 57%
Commercial real estate 32,383 12% 16,443 8% 19,036 14% 18,462 14% 9,205 18%
Consumer - secured by mortgage 3,317 1% 5,005 2% 7,828 6% 12,207 9% 7,362 14%
Consumer - other 11,629 4% 6,290 3% 2,328 2% 356 (1) 324 (1)
Commercial non-real estate 16,989 6% 11,051 5% 3,461 2% 2,047 2% 701 1%
Loans on saving deposits 7,793 3% 3,676 2% 3,513 3% 1,771 1% 1,940 4%
Land secured 19,927 7% 21,418 10% 1,488 1% 814 (1) 330 (1)
-------- --- -------- ----- -------- --- -------- ---- ------- ----
Loans receivable, gross(2) 277,550 100% 216,866 100% 134,618 100% 130,046 100% 51,980 100%
-------- --- -------- ----- -------- --- -------- ---- ------- ----
Less:
Undisbursed portion of loans
in process (40,571) (47,575) -- -- --
Unearned interest and
deferred loan fees (3,655) (648) (322) (561) (383)
Allowance for loan losses(3) (2,140) (1,656) (1,241) (719) (242)
-------- -------- -------- -------- --------
(46,366) (49,879) (1,563) (1,280) (625)
-------- -------- -------- -------- --------
Loans receivable, net $231,184 $166,987 $133,055 $128,766 $ 51,355
======== ======== ======== ======== ========
</TABLE>
(1) Less than one percent.
(2) Sum of the percentage columns may not add up due to rounding.
(3) Does not include $4.0 million, $3.5 million, $1.6 million, $1.4 million and
$1.8 million, of allowance for loan losses allocated to mortgage loans
held-for-sale as of December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
The following table sets forth certain information as of December 31, 1999,
regarding the dollar amount of Doral Financial's loans receivable portfolio
based on the remaining contractual maturity. Expected maturities may differ
from contractual maturities because of prepayments and other market factors.
Loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less.
DORAL FINANCIAL CORPORATION
24 1999 ANNUAL REPORT
<PAGE> 26
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TABLE F - LOANS RECEIVABLE BY CONTRACTUAL MATURITIES
<TABLE>
<CAPTION>
DUE 1 DUE 1-5 DUE 5 OR MORE
YEAR YEARS AFTER YEARS AFTER
(In thousands) OR LESS DECEMBER 31, 1999 DECEMBER 31, 1999 TOTAL
---------- ----------------- ----------------- ----------
<S> <C> <C> <C> <C>
Construction loans $ 67,709 $ 47,144 $ -- $ 114,853
Residential mortgage loans 7,610 3,570 59,479 70,659
Commercial real estate 15,733 9,843 6,807 32,383
Consumer - secured by mortgage -- 1,725 1,592 3,317
Consumer - other 3,961 4,309 3,359 11,629
Commercial non-real estate 11,126 5,003 860 16,989
Loans on saving deposits 5,749 2,044 -- 7,793
Land secured 16,525 372 3,030 19,927
---------- ---------- ---------- ----------
Loans receivable, gross $ 128,413 $ 74,010 $ 75,127 $ 277,550
========== ========== ========== ==========
</TABLE>
Scheduled contractual amortization of loans receivable does not reflect the
expected term of Doral Financial's loans receivable portfolio. The average life
of these loans is substantially less than their contractual terms because of
prepayments and, with respect to conventional mortgage loans, due-on-sale
clauses, which give Doral Financial the right to declare a conventional
mortgage loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when
current mortgage loan rates are higher than rates on existing mortgage loans
and, conversely, decrease when current mortgage loan rates are lower than rates
on existing mortgage loans. Under the latter circumstances, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
The following table sets forth the dollar amount of total loans receivable at
December 31, 1999, as shown in the preceding table, which have fixed interest
rates or which have floating or adjustable interest rates.
TABLE G - LOANS RECEIVABLE BY FIXED AND FLOATING RATES
<TABLE>
<CAPTION>
FLOATING OR
ADJUSTABLE-
(In thousands) FIXED-RATE RATE TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Construction loans $ 7,454 $ 107,399 $ 114,853
Residential mortgage loans 63,562 7,097 70,659
Commercial real estate 22,383 10,000 32,383
Consumer - secured by mortgage 3,317 -- 3,317
Consumer - other 9,693 1,936 11,629
Commercial non-real estate 3,307 13,682 16,989
Loans on saving deposits 7,793 -- 7,793
Land secured 3,363 16,564 19,927
---------- ---------- ----------
Loans receivable, gross $ 120,872 $ 156,678 $ 277,550
========== ========== ==========
</TABLE>
The Company originates adjustable and fixed interest rate loans. However, given
traditional consumer preferences in Puerto Rico for fixed rate residential
mortgage loans, the Company's principal product, Doral Financial does not
anticipate a significant growth in adjustable rate loans, except in the case of
construction and land loans, mortgage loans secured by commercial properties
and other commercial loans. At December 31, 1999, 1998 and 1997, approximately
56%, 48% and 10%, respectively, of the Company's gross loans receivable were
adjustable rate loans. The increase in adjustable rate loans experienced during
1999 and 1998 was mainly the result of higher production in loans for
construction development projects and land loans. The adjustable rate loans
have
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 25
<PAGE> 27
[LOGO]
interest rate adjustment limitations and are generally tied to the prime rate.
Future market factors may affect the correlation of the interest rate
adjustment with the rate the Company pays on the different funding sources used
to finance these loans. Substantially all construction, commercial and land
loans held by the Company are adjustable rate loans maturing within 36 months.
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, referred to as
"non-conforming loans", including loans secured by multi-family projects, are
often sold to investors on a full or partial recourse basis or with put-back
options to the buyer. In such cases, the Company retains all or part of the
credit risk associated with such loans after sale. As of December 31, 1999, the
maximum amount of loans that the Company would have been required to repurchase
if all loans subject to recourse defaulted or if the buyers exercised their
put-back option was $641.1 million. As of December 31, 1999, the Company
maintained a reserve of $1.4 million for potential losses from such recourse
arrangements which is included in "Accrued expenses and other liabilities" in
the Company's Consolidated Financial Statements.
Loans secured by income-producing residential and commercial properties involve
greater credit risk because they are larger in size and more risk is
concentrated in a single borrower. The properties securing these loans are also
more difficult to dispose of in case of foreclosure.
Doral Financial is also subject to credit risk with respect to its portfolio of
loans receivable. Loans receivable represent loans that the Company holds for
investment and, therefore, the Company is at risk for the term of the loan. As
of December 31, 1999, approximately 25% of Doral Financial's gross loans
receivable portfolio consisted of residential mortgage loans.
Doral Financial manages credit risk by maintaining sound underwriting
standards, monitoring the quality of the loan portfolio, assessing reserves and
loan concentrations, recruiting qualified credit officers, implementing and
monitoring lending policies and collateral requirements, and instituting
procedures to ensure appropriate actions to comply with laws and regulations.
The Company's collateral requirements for loans depend on the financial
strength of the borrower and the type of loan involved. Acceptable collateral
principally includes cash, deposit and investment accounts and real estate,
and, to a lesser extent, liens on accounts receivable, lease receivables,
inventory and personal property. In the case of non-conforming loans sold
subject to recourse, the Company also generally requires lower loan-to-value
ratios to protect itself from possible losses on foreclosure.
Because most of Doral Financial's loans are made to borrowers located in Puerto
Rico and secured by properties located in Puerto Rico, the Company is subject
to greater credit risks tied to adverse economic, political or business
developments and natural hazards, such as hurricanes, that may affect the
Island. For example, if Puerto Rico's real estate market were to experience an
overall decline in property values, the Company's rates of loss on foreclosure
would probably increase.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets ("NPAs") consist of loans held-for-sale past due 90 days
and still accruing, loans on a non-accrual basis and other real estate owned.
Doral Financial's banking subsidiaries 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 loan
is no longer 90 or more days delinquent and collectibility is reasonably
assured. For the years ended December 31, 1999, 1998, 1997, 1996 and 1995, the
Company would have recognized $393,000, $335,000, $201,000, $114,000 and
$211,000, respectively, in additional interest income had all delinquent loans
owned by Doral Financial's banking subsidiaries been accounted for on an
accrual basis. 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 CORPORATION
26 1999 ANNUAL REPORT
<PAGE> 28
[LOGO]
The following table sets forth information with respect to Doral Financial's
non-accrual loans, other real estate owned ("OREO") and other non-performing
assets as of the dates indicated. Doral Financial did not have any troubled
debt restructurings as of any of the periods presented.
TABLE H - NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Mortgage banking business:
Non-accrual loans $ -- $ -- $ -- $ -- $ 1,250
Loans held-for-sale past due 90 days
and still accruing(1) 44,030 49,201 41,793 36,978 25,160
OREO 3,834 2,987 3,025 2,246 2,085
Other non-performing assets(2) -- 1,011 1,597 1,833 893
--------- --------- --------- --------- ---------
Total NPAs of mortgage banking business 47,864 53,199 46,415 41,057 29,388
--------- --------- --------- --------- ---------
Other lending activities through
banking subsidiaries:
Non-accrual loans
Construction -- 183 -- 125 --
Residential mortgage loans 3,731 2,382 1,623 1,101 715
Commercial real estate 567 770 775 502 160
Consumer 205 241 64 -- 71
Commercial non-real estate -- 95 -- -- 3
Other -- -- -- -- --
--------- --------- --------- --------- ---------
Total non-accrual loans 4,503 3,671 2,462 1,728 949
OREO 76 -- -- -- --
--------- --------- --------- --------- ---------
Total NPAs of banking subsidiaries 4,579 3,671 2,462 1,728 949
--------- --------- --------- --------- ---------
Total NPAs of Doral Financial (consolidated) $ 52,443 $ 56,870 $ 48,877 $ 42,785 $ 30,337
========= ========= ========= ========= =========
Total NPAs of banking subsidiaries as a
percentage of their loans receivable,
net and OREO 2.53% 2.88% 1.85% 1.34% 1.85%
Total NPAs of Doral Financial (consolidated)
as a percentage of consolidated total
assets 1.16% 1.95% 2.63% 3.87% 3.31%
Ratio of allowance for loan losses to
non-performing assets (consolidated) 11.70% 9.08% 5.86% 5.03% 6.75%
</TABLE>
(1) Does not include approximately $26.1 million, $6.5 million, $807,000,
$4.1 million and $1.6 million of 90 days past due FHA/VA loans for the
years ended December 31 1999, 1998, 1997, 1996 and 1995, 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.
(2) This amount refers to a mortgage loan to a real estate partnership to
which Doral Financial previously sold OREO. This loan is included in
"Receivables and mortgage servicing advances" in Doral Financial's
Consolidated Financial Statements.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 27
<PAGE> 29
[LOGO]
OREO arises primarily through foreclosure on mortgage loans repurchased from
investors, either because of breach of representations or warranties, or
pursuant to recourse arrangements. Doral Financial believes that the value of
the OREO reflected on its financial statements represents a reasonable estimate
of the properties' fair value, net of cost of disposition. During the past five
years, the impact of losses on loans repurchased as a result of breach of
representations or warranties or pursuant to recourse arrangements has not been
material.
The following table summarizes certain information regarding Doral Financial's
allowance for loan losses and losses on OREO, for both the Company's banking
and mortgage banking business for the periods indicated.
TABLE I - ALLOWANCE FOR LOAN LOSSES AND OREO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OREO:
Balance at beginning of period $ 1,011 $ 676 $ 356 $ 356 $ 356
Provision for losses 620 1,402 787 305 145
Losses charged to the allowance (721) (1,067) (467) (305) (145)
--------- --------- --------- --------- ---------
Balance at end of period $ 910 $ 1,011 $ 676 $ 356 $ 356
========= ========= ========= ========= =========
Allowance for Loan Losses(1):
Balance at beginning of period $ 5,166 $ 2,866 $ 2,152 $ 2,047 $ 1,991
Provision for loan losses 2,626 883 792 797 352
--------- --------- --------- --------- ---------
Charge-offs:
Mortgage loans held-for-sale (1,480) -- -- -- --
Construction -- -- -- -- --
Residential mortgage loans -- -- -- (617) --
Commercial real estate -- -- -- -- --
Consumer (477) (127) (124) (123) (114)
Commercial non-real estate (17) -- -- -- (188)
Other (40) -- -- -- --
--------- --------- --------- --------- ---------
Total Charge-offs (2,014) (127) (124) (740) (302)
--------- --------- --------- --------- ---------
Recoveries:
Mortgage loans held-for-sale 294 -- -- -- --
Construction -- -- -- -- --
Residential mortgage loans -- -- -- -- --
Commercial real estate -- -- -- -- --
Consumer 64 76 46 48 6
Commercial non-real estate -- -- -- -- --
Other -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries 358 76 46 48 6
--------- --------- --------- --------- ---------
Net charge-offs (1,656) (51) (78) (692) (296)
--------- --------- --------- --------- ---------
Other -- 1,468 -- -- --
--------- --------- --------- --------- ---------
Balance at end of period $ 6,136 $ 5,166 $ 2,866 $ 2,152 $ 2,047
========= ========= ========= ========= =========
Allowance for loan losses as a percentage
of total loans outstanding 0.49% 0.49% 0.53% 0.55% 0.69%
</TABLE>
(1) Relates to both mortgage loans held-for-sale and to loans receivable held
for investment.
DORAL FINANCIAL CORPORATION
28 1999 ANNUAL REPORT
<PAGE> 30
[LOGO]
The following table sets forth information concerning the allocation of Doral
Financial's allowance for loan losses by loan category as of the dates
indicated:
TABLE J - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands) AS OF DECEMBER 31,
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans held-for-sale $3,996 65.1% $3,510 67.9% $1,625 56.7% $1,433 66.6% $1,806 88.2%
Loans receivable, net
Construction 885 14.4% 117 2.3% 51 1.8% 13 0.6% 17 0.8%
Residential mortgage 545 8.9% 1,225 23.8% 990 34.5% 510 23.7% 87 4.3%
Commercial real estate 250 4.1% 81 1.6% 101 3.5% 102 4.7% 64 3.1%
Consumer - secured by
mortgage 25 0.4% 25 0.5% 42 1.5% 67 3.1% 51 2.5%
Consumer - other 90 1.5% 31 0.6% 12 0.4% 2 0.1% 2 0.1%
Commercial non-real estate 131 2.1% 54 1.0% 18 0.6% 11 0.5% 5 0.2%
Loans on saving deposits 60 1.0% 18 0.3% 19 0.7% 10 0.5% 13 0.7%
Land secured 154 2.5% 105 2.0% 8 0.3% 4 0.2% 2 0.1%
------ ----- ------ --- ------ ----- ------ ----- ------ -----
Total $6,136 100.0% $5,166 100% $2,866 100.0% $2,152 100.0% $2,047 100.0%
====== ====== ====== ====== ======
</TABLE>
The allowance for loan losses relating to loans held by Doral Financial was
$6.1 million at December 31, 1999, compared to $5.2 million at December 31,
1998, and $2.9 million as of December 31, 1997. The increase in the allowance
for 1999 was primarily a result of a larger 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. The
increase in 1998 was principally due to a reclassification of certain general
reserves to allowance for loan losses to cover bank loans receivable and loans
held-for-sale.
The percentage of the allowance for loan losses to non-performing loans will
not remain constant due to the nature of the Company's portfolio of loans,
which are primarily collateralized by real estate. The collateral for each
non-performing mortgage loan is analyzed to determine potential loss exposure,
and, in conjunction with other factors, this loss exposure contributes to the
overall assessment of the adequacy of the allowance for loan losses. On an
on-going basis, management monitors the loan portfolio and evaluates the
adequacy of the allowance for loan losses. In determining the adequacy of the
allowance for loan losses, management considers such factors as historical loan
loss experience, known problem loans, evaluations made by bank regulatory
authorities, assessment of economic conditions, and other appropriate data to
identify the risks in the loan portfolio. Loans deemed by management to be
uncollectible are charged to the allowance for loan losses. Recoveries on loans
previously charged-off are credited to the allowance. Provisions for loan
losses are charged to expense and credited to the allowance in amounts deemed
appropriate by management based upon its evaluation of the known and inherent
risks in the loan portfolio. While management believes that the current
allowance for loan losses is sufficient, future additions to the allowance may
be necessary if economic conditions change substantially from the assumptions
used by Doral Financial in determining the allowance for loan losses.
INVESTMENT AND TRADING ACTIVITIES
As part of Doral Financial's mortgage securitization activities, the Company is
involved in the purchase and sale of mortgage-backed securities
held-for-trading. At December 31, 1999, Doral Financial held securities for
trading with a fair market value of $862.7 million, approximately $614.5
million of which consisted of Puerto Rico tax-exempt GNMA securities and other
securities, the interest on which is tax-exempt to the Company. These
tax-exempt securities are generally held by Doral Financial for longer periods
prior to sale in order to maximize the tax-exempt interest received thereon.
Securities
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 29
<PAGE> 31
[LOGO]
held-for-trading are reflected on Doral Financial's Consolidated Financial
Statements at their fair market value with resulting gains or losses included
as part of trading account profit.
As part of its strategy to maximize net interest income, Doral Financial also
invests in securities that are classified as available-for-sale or
held-to-maturity. As of December 31, 1999, Doral Financial held $66.3 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.
Effective April 1, 1999, the Company reclassified approximately $592.2 million
of US agency and treasury securities from available-for-sale to
held-to-maturity, because the Company has the intent and ability to hold these
securities until maturity. The Company had recorded gross unrealized losses on
these securities of approximately $10.5 million at the time of the
reclassification. Such unrealized losses are included as a component of
stockholders' equity as "Accumulated other comprehensive income, net of taxes."
The unrealized losses will be amortized over the life of the securities as a
yield adjustment, pursuant to SFAS 115. After such reclassification, Doral
Financial also purchased $819.5 million in securities classified as
held-to-maturity. As of December 31, 1999, Doral Financial held approximately
$1.5 billion in securities and other investments that are classified as
held-to-maturity,
The following table summarizes Doral Financial's securities holdings as of
December 31, 1999.
TABLE K - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
HELD FOR AVAILABLE HELD TO
(In thousands) TRADING FOR SALE MATURITY
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage-backed securities $ 757,080 $ -- $ 165,524
Interest-only strips 84,293 -- --
U.S. Treasury and agency securities 15,041 66,325 1,338,536
Puerto Rico government obligations 6,284 -- 5,000
---------- ---------- ----------
Total $ 862,698 $ 66,325 $1,509,060
========== ========== ==========
</TABLE>
For additional information regarding the composition of the Company's
investment securities, please refer to Notes 6, 7 and 8 of the Company's
Consolidated Financial Statements.
BROKER-DEALER ACTIVITIES
Doral Financial is involved in the securities business through Doral
Securities, a broker-dealer firm that provides retail and institutional
brokerage, investment banking, and financial advisory services in Puerto Rico
and the Caribbean region.
The table below shows certain financial information for Doral Securities for
the years ended December 31, 1999, 1998 and 1997.
TABLE L - FINANCIAL INFORMATION OF DORAL SECURITIES BROKER-DEALER SUBSIDIARY
<TABLE>
<CAPTION>
(In thousands) YEAR ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Selected Income Statement Data:
Trading account profit $ 3,770 $ 3,196 $ 1,638
Net interest income 2,366 1,729 836
Investment banking and other fees 2,145 996 609
Commissions 923 759 259
---------- ---------- ----------
Total revenues, net of interest expense $ 9,204 $ 6,680 $ 3,342
========== ========== ==========
</TABLE>
DORAL FINANCIAL CORPORATION
30 1999 ANNUAL REPORT
<PAGE> 32
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RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999, 1998 AND
1997
Doral Financial's operations are mainly the result of:
- - the level of loan production;
- - the behavior of the mortgage servicing portfolio;
- - the various components of the Company's revenues;
- - the elements of risk inherent to loan activities; and
- - the Company's ability to manage its liquidity demands and capital resources.
These factors are, in turn, primarily influenced by:
- - the direction of interest rates;
- - the level of demand for mortgage credit;
- - the strength of the economy in Puerto Rico; and
- - the relationship between interest rates and the cost of funds.
The principal components of Doral Financial's revenues are: (i) net interest
income, (ii) net gains on mortgage loan sales; (iii) servicing income; (iv)
trading account profit; (v) gain on sale of investment securities; (vi) gain on
sale of servicing assets; and (vii) commissions, fees and other income.
NET INCOME
Doral Financial's net income for the year ended December 31, 1999, increased to
$67.9 million, compared $52.8 million for 1998, and earnings of $32.5 million
before an extraordinary non-cash charge of $12.3 million for 1997. The
extraordinary non-cash charge for 1997 was related to the exchange by Doral
Financial of outstanding convertible subordinated debentures for convertible
preferred stock. See Note 24 and Note 32 to Doral Financial's Consolidated
Financial Statements for additional information regarding this transaction.
Consolidated results include the operations of Doral Bank PR and Doral Bank NY,
the Company's banking units, which contributed approximately $15.7 million to
Doral Financial's consolidated net income in 1999, compared to $8.2 million for
1998 and $5.0 million for 1997, and Doral Securities, the Company's investment
broker-dealer unit, which contributed $1.3 million, $1.1 million and $138,000,
respectively, to consolidated net income for the years ended December 31, 1999,
1998 and 1997.
Net gain on mortgage loan sales, net interest income and servicing income were
the major components of revenues in 1999, with increases of $30.6 million,
$14.6 million and $5.2 million, respectively, from 1998 amounts.
NET INTEREST INCOME
Net interest income is the excess of interest earned by the Company on its
interest-earning assets over the interest incurred on its interest-bearing
liabilities.
The increase in net interest income for both 1999 and 1998 as compared to their
respective prior years, was principally due to an increase in the volume of
Doral Financial's average interest earning assets. Doral Bank PR contributed
approximately $28.7 million or 58% of the consolidated net interest income of
Doral Financial for the year ended December 31, 1999, compared to $15.0 million
or 42% of consolidated net interest income for the year ended December 31,
1998, and $10.1 million or 35% of consolidated net interest income for the year
ended December 31, 1997.
During each of the three years ended December 31, 1999, Doral Financial's
average earning assets have grown considerably, resulting in a continuous
growth in net interest income. Average interest-earning assets grew by 50% from
1998 to 1999, and by 80% from 1997 to 1998, while net interest income grew by
41% from 1998 to 1999, and 23% from 1997 to 1998. The growth in net interest
income compared to the growth in interest-earning assets during 1999 and 1998
was affected by the reduction of the spread between long-term and short-term
rates, sometimes referred to as flattening of the yield curve; a significant
increase in investments in AAA-rated government and government agency
securities, which tend to have lower yields but generate tax-exempt income; and
the increase in financial assets related to Doral Securities' repurchase
transactions that are typically conducted at smaller spreads. The Company
intends to continue to diversify its sources of funding in order to reduce
interest costs and maximize net interest income.
The following table presents, for the periods indicated, the Company's average
balance sheet, the total dollar amount of interest from average
interest-earning assets and the related yields, as well as the interest expense
on average interest-bearing liabilities expressed both in dollars and rates,
and the net interest margin. The table does 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 its banking subsidiaries, in each case during the periods presented.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 31
<PAGE> 33
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TABLE M - AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
<TABLE>
<CAPTION>
(Dollars in thousands) YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- ---------- -------- ---- ---------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Total Loans(1) $1,072,302 $ 78,258 7.30% $ 679,423 $ 54,694 8.05% $ 371,099 $32,768 8.83%
Mortgage-Backed Securities 857,267 58,756 6.85% 757,841 55,276 7.29% 607,944 45,464 7.48%
Investment Securities 891,670 60,235 6.76% 478,895 32,278 6.74% 71,444 5,454 7.63%
Other Interest-Earning
Assets(2) 263,633 14,430 5.47% 138,576 7,803 5.63% 90,364 6,445 7.13%
---------- -------- ---- ---------- -------- ---- ---------- ------- ----
Total Interest-Earning
Assets/Interest Income 3,084,872 $211,679 6.86% 2,054,735 $150,051 7.30% 1,140,851 $90,131 7.90%
======== ==== ======== ==== ======= ====
Total Non-Interest-Earning
Assets 445,758 385,038 341,085
---------- ---------- ----------
Total Assets $3,530,630 $2,439,773 $1,481,936
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 375,099 $ 24,292 6.48% $ 364,127 $ 26,131 7.18% $ 188,880 $13,325 7.05%
Repurchase Agreements 1,418,004 72,726 5.13% 1,072,760 55,561 5.18% 548,310 31,665 5.78%
Deposits 771,801 35,784 4.64% 393,557 17,326 4.40% 229,575 10,014 4.36%
Other Borrowed Funds(3) 372,466 28,993 7.78% 197,071 15,768 8.00% 92,706 6,434 6.94%
---------- -------- ---- ---------- -------- ---- ---------- ------- ----
Total Interest-Bearing
Liabilities/Interest
expense 2,937,370 $161,795 5.51% 2,027,515 $114,786 5.66% 1,059,471 $61,438 5.80%
======== ==== ======== ==== ======= ====
Total Non-Interest-Bearing
Liabilities 238,613 168,278 253,722
---------- ---------- ----------
Total Liabilities 3,175,983 2,195,793 1,313,193
Stockholders' Equity 354,647 243,980 168,743
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity $3,530,630 $2,439,773 $1,481,936
========== ========== ==========
Net Interest-Earning Assets $ 147,502 $ 27,220 $ 81,380
Net Interest Income on a
Non-Taxable Equivalent Basis $ 49,884 $ 35,265 $28,693
Interest Rate Spread(4) 1.35% 1.64% 2.10%
Interest Rate Margin(4) 1.62% 1.72% 2.52%
Net Interest-Earning Assets Ratio 105.02% 101.34% 107.68%
</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 deposits in other banks.
(3) Consist of FHLB-NY advances, notes payable and convertible
subordinated debentures.
(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 as a percentage of average
interest-earning assets.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-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.
DORAL FINANCIAL CORPORATION
32 1999 ANNUAL REPORT
<PAGE> 34
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TABLE N - NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
(In thousands) 1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE)DUE TO: INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Total loans $ 31,627 $ (8,063) $ 23,564 $ 27,224 $ (5,298) $ 21,926
Mortgage-backed securities 7,252 (3,771) 3,481 11,210 (1,398) 9,812
Investment securities 27,821 136 27,957 31,105 (4,281) 26,824
Other interest-earning assets 7,042 (415) 6,627 3,439 (2,081) 1,358
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST-EARNING ASSETS 73,742 (12,113) 61,629 72,978 (13,058) 59,920
---------- ---------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES
Loans payable 787 (2,626) (1,839) 12,363 443 12,806
Repurchase agreements 17,881 (716) 17,165 30,287 (6,391) 23,896
Deposits 16,652 1,806 18,458 7,153 158 7,311
Other borrowed funds 14,034 (809) 13,225 7,243 2,092 9,335
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST-BEARING
LIABILITIES 49,354 (2,345) 47,009 57,046 (3,698) 53,348
---------- ---------- ---------- ---------- ---------- ----------
NET INTEREST-EARNING ASSETS $ 24,388 $ (9,768) $ 14,620 $ 15,932 $ (9,360) $ 6,572
========== ========== ========== ========== ========== ==========
</TABLE>
INTEREST INCOME
Total interest income increased from approximately $90.1 million during 1997,
to $150.1 million during 1998, and to $211.7 million during 1999. The increase
in interest income is primarily related to the increase in Doral Financial's
total average interest-earning assets, which increased by approximately $1.0
billion during 1999 and by approximately $913.9 million during 1998.
Interest income on loans increased by $23.6 million or 43% during 1999 as
compared to 1998, and by $21.9 million or 67% during 1998 as compared to 1997.
The increase during both comparable periods reflected an increase in the level
of loans held by Doral Financial, due to the increased volume of loan
originations.
Interest income on mortgage-backed securities increased by $3.5 million or 6%
during 1999 as compared to 1998, and by $9.8 million or 22% from 1997 to 1998.
The increases during these periods reflected an increase in the average balance
of mortgage-backed securities, which increased from $607.9 million during 1997
to $757.8 million during 1998 and to $857.3 million during 1999. The increase
in mortgage-backed securities reflected the strategy of Doral Financial to hold
tax-exempt securities for longer periods prior to sale in order to maximize
tax-exempt interest income on such securities.
Interest income on investment securities increased by $28.0 million or 87% from
1998 to 1999, and by $26.8 million or 492% from 1997 to 1998. The increase in
this category of interest income reflects Doral Financial's strategy to
increase its tax-exempt interest income by investing in U.S. Treasury and
agency securities, the interest on which is tax-exempt to the Company 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. The
average balance of investment securities was $891.7 million for the year ended
December 31, 1999, as compared to $478.9 million and $71.4 million for the
years ended December 31, 1998 and 1997, respectively.
Interest income on other interest earning assets increased by $6.6 million or
85% from 1998 to 1999, as compared to an increase of $1.4 million from 1997 to
1998. Other interest-earning assets consist primarily of money market
instruments, overnight deposits, term deposits, and reverse repurchase
agreements. The increase from 1998 to 1999 was due primarily to higher
liquidity and the investment of such liquidity in reverse repurchase agreements
and term deposits. 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 and
broker-dealer activities.
INTEREST EXPENSE
Total interest expense increased to $161.8 million during 1999 compared to
$114.8 million for 1998, an increase of 41%, and grew by $53.3 million from
1997 to 1998, an increase of 87%. The increase in interest expense for 1999 was
due primarily to the growth in the average amount of interest-bearing
liabilities, which
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 33
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funded the growth in interest-earning assets. Average interest-bearing
liabilities increased to $2.9 billion at an average cost of 5.51% for the year
ended December 31, 1999, compared to $2.0 billion at an average cost of 5.66%
for the year ended December 31, 1998, and $1.1 billion at an average cost of
5.80% for the year ended December 31, 1997.
Interest expense related to loans payable amounted to $24.3 million for 1999,
compared to $26.1 million for 1998, and from 1997 to 1998 increased by $12.8
million or 96%. The slight decrease during 1999, was largely the result of
Doral Financial's efforts to diversify its funding sources for loan production
by obtaining lower cost borrowings, as well as longer term borrowings. The
increase during 1998 was due to the increase in borrowings used to fund the
Company's increased volume of loan originations. The weighted-average interest
rate cost for borrowings under Doral Financial's warehousing lines of credit
was 6.48% for 1999, compared to 7.18% for 1998 and 7.05% for 1997.
Interest expense related to securities sold under agreements to repurchase
increased by $17.2 million or 31% during 1999 as compared to 1998, and by $23.9
million or 75% during 1998 as compared to 1997. The increase during 1999
reflected increased borrowings to finance mortgage-backed securities and other
investment securities. The weighted average interest rate cost of borrowings
under repurchase agreements was 5.13% for 1999, 5.18% for 1998 and 5.78% for
1997.
Interest expense on deposits increased by $18.5 million or 107% during 1999 as
compared to 1998, and increased by $7.3 million or 73% during 1998 as compared
to 1997. The increase in interest expense on deposits reflects the increase in
deposits held at Doral Financial's banking subsidiaries which increased to $1.0
billion at December 31, 1999, from $533.1 million as of December 31, 1998 and
$300.5 million as of December 31, 1997. The growth in deposits reflects the
opening of additional branches by Doral Bank PR, which currently operates 19
branches, the offering of competitive rates and the establishment of Doral Bank
NY, which had deposits of $17.8 million as of December 31, 1999. The Company's
commercial banking subsidiary, Doral Bank PR, intends to continue its branch
expansion throughout the Island during 2000, while the Company's savings bank
subsidiary, Doral Bank NY, is exploring the possibility of opening new branches
within the New York City metropolitan area during the upcoming year. The
average interest cost of deposits was 4.64% during 1999, 4.40% during 1998 and
4.36% during 1997.
Interest expense on other borrowed funds increased by $13.2 million or 84%
during 1999 as compared to 1998, and increased by $9.3 million or 145% during
1998 as compared to 1997. Interest expense on other borrowed funds includes
various term notes issued by Doral Bank PR, Doral Financial's $75 million
senior notes due October 10, 2006, the Company's $229 million in medium term
notes issued in 1999, and Doral Bank PR's advances from the FHLB-NY, as well as
various other borrowings.
PROVISION FOR 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.
Doral Financial made provisions to its allowance for loan losses of $2.6
million, $883,000 and $792,000 for the years ended December 31, 1999, 1998 and
1997, respectively. The provision increased by $1.7 million from 1998 to 1999
primarily as a result of the increase in the size of Doral Financial's loan
portfolio and an increase in the amount of construction loans and commercial
mortgage loans for which Doral Financial provides a higher allowance for loan
losses.
NON-INTEREST INCOME
Net Gains on Mortgage Loan Sales. Net gains from mortgage loan sales increased
by 62% during 1999 and by 193% from 1997 to 1998. The increase for 1999 and
1998 was the result of increased volume of loan securitizations, and the
ability of the Company to obtain higher profitability through higher loan fees
resulting in increased gain on sales, including the creation of interest-only
strips ("IOs") in connection with 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 the Company'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
out-
DORAL FINANCIAL CORPORATION
34 1999 ANNUAL REPORT
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standing 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 a growth in internal
loan originations combined with bulk purchases of servicing rights. Doral
Financial's strategy is to rely primarily on internal mortgage loan
originations to increase the size of its servicing portfolio. During the second
and third quarters of 1997, Doral Financial engaged in several bulk purchases
of mortgage servicing rights, whereby it acquired the rights to service
approximately $1.0 billion in principal amount of loans. During 1999 and 1998,
the Company purchased servicing rights to approximately $238.3 million and
$380.4 million, respectively, of mortgages through bulk purchases. Doral
Financial anticipates that it will continue to make bulk purchases of mortgage
servicing rights in the future to the extent it can identify attractive
opportunities.
Servicing income increased 26% from 1998 to 1999, and 32% from 1997 to 1998.
Increases in the amount of loan servicing income for the latest two years were
primarily due to increases in the principal amount of loans serviced as
compared to prior years. The mortgage servicing portfolio was approximately
$7.6 billion at December 31, 1999, compared to $6.2 billion at December 31,
1998 and to $4.7 billion as of December 31, 1997. At December 31, 1999, less
than 6% of Doral Financial's servicing portfolio was related to mortgages
originated outside Puerto Rico.
The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $709 million, $644 million and $279 million for the years ended
December 31, 1999, 1998 and 1997, respectively. This represented approximately
10%, 12% and 7%, respectively, of the average principal amount of mortgage
loans serviced during those periods. Doral Financial largely reduces the
sensitivity of its servicing income to increases in prepayment rates through a
strong retail origination network that increased or maintained the size of
Doral Financial's servicing portfolio even during periods of high prepayments.
Trading Account Profit. Trading account profit includes all gains or losses,
whether realized or unrealized, in the market value of the Company's securities
held-for-trading, as well as gains or losses on options and futures contracts
used for interest rate management purposes. Trading account activities for the
year ended December 31, 1999, resulted in gains of $12.9 million, compared to
gains of $6.1 million in 1998 and $10.1 million in 1997. For the years ended
December 31, 1998 and 1997, trading account profits included $5.4 million and
$6.6 million, respectively, of unrealized gains on the value of its securities
held-for-trading, while the results for 1999 included $115,000 in unrealized
losses, mainly as a result of the increase in market interest rates during the
second half of 1999.
For the years ended December 31, 1998 and 1997, trading account profit included
losses on options and futures contracts used for interest rate management
purposes in the amount of $3.0 million and $1.3 million, respectively, while
the results for 1999 included gains of approximately $3.4 million.
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. This component of earnings decreased 49% from
1998 to 1999, and increased 284% from 1997 to 1998. The decrease during 1999
was mainly the result of a reduction in the amount of securities
available-for-sale since $592.2 million in investment securities were
reclassified to the held-to-maturity category during the second quarter of
1999.
Gain on Sale of Servicing Assets. During the year ended December 31, 1998,
Doral Financial sold servicing rights to $103 million of mortgage loans,
realizing a pretax gain of approximately $1.8 million. No such sales were made
during 1999 or 1997. 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 non-interest income, commissions and
fees increased 89% in 1999 as compared to 1998, and 80% from 1997 to 1998.
Substantial growth during these periods came primarily from the greater volume
of commissions and fees earned by Doral Financial's banking and broker-dealer
subsidiaries.
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. See Note 2 to Doral Financial's Consolidated Financial Statements
for more information regarding the accounting treatment of IOs. 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
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 35
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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 1999 resulted in the recording of
approximately $46.1 million of IOs, compared to $30.0 million and $14.5 million
in 1998 and 1997, respectively. The unamortized balance of the IOs is reflected
in Doral Financial's Consolidated Statement of Condition as a component of
"Securities held-for-trading."
IOs are amortized over the expected life of the asset and such amortization is
recorded as a reduction of interest income. The amortization of IOs is based on
the amount and timing of estimated future cash flows to be received with
respect to the IOs. Amortization of such IOs for each of the years ended
December 31, 1999, 1998 and 1997, was approximately $6.9 million, $3.7 million
and $4.0 million, respectively. The increase in the amortization for 1999 as
compared to 1998 and 1997, is due to the increase in the amount of IOs held in
the trading portfolio as a result of increased recordings of IOs in connection
with the sale of loans.
Beginning with the second quarter of 1995, following the implementation by
Doral Financial of SFAS No. 122 (later superseded by SFAS No. 125), whenever
Doral Financial sells a mortgage loan, it assigns a fair value to the related
mortgage servicing right (the "servicing asset") associated with such mortgage
loan. The servicing asset represents the present value of the servicing fees
expected to be received on the loan over the expected term of the loan. The
amount of the servicing asset is recognized at the time of the 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. During the years ended
December 31, 1999, 1998 and 1997, Doral Financial capitalized $48.1 million,
$32.9 million and $28.9 million, respectively, in servicing assets. 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 Statement of Condition of Doral Financial.
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. During 1999,
total amortization of servicing assets amounted to $11.0 million versus $6.7
million for 1998 and $3.4 million for 1997.
The following table shows the increase in the Company's mortgage servicing
assets for each of the periods shown:
TABLE O - CAPITALIZATION OF MORTGAGE SERVICING ASSETS
<TABLE>
<CAPTION>
(In thousands) YEAR ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period $ 72,568 $ 46,416 $ 20,969
Capitalization of rights 45,013 26,586 13,980
Rights sold (7) (54) --
Rights purchased 3,135 6,290 14,904
Amortization:
Scheduled (10,988) (5,739) (3,437)
Unscheduled -- (931) --
---------- ---------- ----------
Balance at end of period $ 109,721 $ 72,568 $ 46,416
========== ========== ==========
</TABLE>
DORAL FINANCIAL CORPORATION
36 1999 ANNUAL REPORT
<PAGE> 38
[LOGO]
Increases in prepayment rates or credit loss rates over anticipated levels used
in calculating the value of IOs and servicing assets can adversely affect Doral
Financial's revenues and liquidity by increasing the amortization rates for
servicing assets and IOs, as well as requiring Doral Financial to recognize an
impairment against income over and above scheduled amortization. See "Interest
Rate Management." The portion of Doral Financial's mortgage servicing portfolio
consisting of loans internally originated by Doral Financial prior to the
adoption of SFAS No. 122 is not reflected as a servicing asset on Doral
Financial's Consolidated Financial Statements, and is not subject to
amortization or impairment.
NON-INTEREST EXPENSE
Total non-interest expense increased by 60% in 1999 as compared to 1998, and
72% from 1997 to 1998, reflecting additional costs mainly associated with the
expansion of Doral Financial's loan origination capacity and banking
operations, which required a greater investment in technology and branch
facilities. Higher costs associated with the substantial growth of the
servicing portfolio also were a factor. During 1999, this expansion included
the opening of six additional mortgage banking branches in Puerto Rico, the
acquisition of SANA, which operates nine branches in Puerto Rico, five
additional branches of Doral Bank PR throughout the Island and one
broker-dealer branch office in the city of Mayaguez. The increase in expenses
also reflected the Company's expansion into the mainland United States through
the opening of a savings bank in the New York City metropolitan area, the
expansion of the specialized construction loan department, and additional costs
reflecting the increase in the servicing portfolio. Beginning in the fourth
quarter of 1999, the Company commenced a company-wide cost reduction program,
which Doral Financial anticipates will begin to be reflected in its financial
results during the first quarter of 2000.
PUERTO RICO INCOME TAXES
The maximum statutory corporate income tax rate in Puerto Rico is 39%. For
1999, the effective income tax rate for Doral Financial was 11.3%, as compared
to 11.7% for 1998 and 13.9% for 1997. The decrease in effective tax rates for
1999 and 1998 as compared to 1997 was mainly due to additional tax-exempt
income received on a larger portfolio of tax-exempt securities.
The lower effective tax rates (as compared to the maximum statutory rate) were
the result of the portion of 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, which are exempt from income tax
under Puerto Rico law. The Company also invests in U.S. Treasury and agency
securities that are exempt from Puerto Rico income taxation. Net income tax
savings to Doral Financial attributable to this exemption amounted to
approximately $13.8 million, $13.2 million and $8.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively. See Note 19 to Doral
Financial's Consolidated Financial Statements for a reconciliation of the
provision for income taxes to the amount computed by applying the applicable
Puerto Rico statutory tax rates to income before taxes.
Effective August 1, 1997, the Puerto Rico Internal Revenue Code was amended to
limit tax exemption to those FHA and VA loans and GNMA securities backed by
such loans that are used to finance the original acquisition of newly
constructed homes.
LIQUIDITY AND CAPITAL RESOURCES
Doral Financial has an ongoing need for capital to finance its lending and
investing activities. The Company's cash requirements arise from loan
originations and purchases, repayments of debt upon maturity, payments of
operating and interest expenses and servicing advances and loan repurchases.
Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA, and certain other investors and mortgage loans sold to
certain other purchasers require Doral Financial to advance funds to make
scheduled payments of principal, interest, taxes and insurance, if such
payments have not been received from the borrowers. The Company generally
recovers funds advanced pursuant to these arrangements within 30 days. During
the year ended December 31, 1999, the monthly average amount of funds advanced
by Doral Financial under such servicing agreements was approximately $8.5
million.
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 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 December 31, 1999 and 1998:
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 37
<PAGE> 39
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TABLE P - SOURCES OF BORROWINGS
<TABLE>
<CAPTION>
(Dollars in thousands) AS OF DECEMBER 31,
1999 1998
----------------------------- ------------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Repurchase Agreements $1,927,956 5.54% $1,197,328 5.26%
Loans Payable 353,460 6.53% 426,704 6.69%
Deposits 1,010,424 4.83% 533,113 4.30%
Notes Payable 461,053 7.84% 199,733 7.03%
Advances from FHLB 134,000 5.73% 32,000 6.34%
</TABLE>
Doral Financial is dependent upon its ability to access warehouse, gestation
and repurchase facilities, in addition to its ability to continue to pool and
sell loans in the secondary mortgage market. It borrows money under warehousing
lines of credit to fund its mortgage loan originations and repays the borrowing
as the mortgages are sold or securitized. The warehousing lines of credit then
become available for additional borrowings. Included among Doral Financial's
warehousing line of credit facilities are gestation or pre-sale facilities that
permit the Company to obtain more favorable rates once mortgage loans are in
the process of securitization but prior to actual issuance of the
mortgage-backed securities, as well as to finance such mortgage-backed
securities upon their issuance. Some of Doral Financial's warehousing lines of
credit are subject to termination at the discretion of the lender. Doral
Financial has several warehousing, gestation and repurchase agreements lines of
credit totaling $5.1 billion as of December 31, 1999, of which $2.3 billion was
outstanding as of such date. See Note 14 and Note 15 to Doral Financial's
Consolidated Financial Statements included elsewhere herein for more
information on Doral Financial's warehousing lines of credit and repurchase
agreements, respectively.
Doral Bank PR and Doral Bank NY obtain funding for their lending activities
through the receipt of deposits, FHLB-NY advances and from other borrowings,
such as term notes backed by FHLB-NY letters of credit. As of December 31,
1999, Doral Financial's banking subsidiaries held approximately $1.0 billion in
deposits at a weighted-average interest rate of 4.83%. For additional
information regarding deposit accounts see Note 17 to Doral Financial's
Consolidated Financial Statements included elsewhere herein.
The following table presents the average balance and the average rate paid on
each deposit type for the periods indicated.
TABLE Q - AVERAGE DEPOSIT BALANCE
<TABLE>
<CAPTION>
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $ 481,265 5.84% $ 232,702 5.77% $ 147,143 6.01%
Regular passbook savings 51,605 4.57% 29,054 4.74% 16,233 4.42%
Now accounts 106,502 4.65% 36,075 5.06% 10,189 4.40%
Non-interest bearing 132,429 -- 95,726 -- 56,010 --
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 771,801 4.64% $ 393,557 4.40% $ 229,575 4.36%
========== ========== ========== ========== ========== ==========
</TABLE>
DORAL FINANCIAL CORPORATION
38 1999 ANNUAL REPORT
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The following table sets forth the maturities of certificates of deposit having
principal amounts of $100,000 or more at December 31, 1999.
TABLE R - DEPOSIT MATURITIES
<TABLE>
<CAPTION>
(In thousands)
Certificates of deposit maturing AMOUNT
---------
<S> <C>
Three months or less $ 123,596
Over three through six months 129,894
Over six through twelve months 155,046
Over twelve months 102,391
---------
Total $ 510,927
=========
</TABLE>
As of December 31, 1999 and 1998, Doral Bank PR had approximately $295.4
million and $96.8 million, respectively, in brokered deposits obtained through
broker-dealers. Doral Bank PR uses such deposits as a source of long-term
funds. Doral Bank NY had no brokered deposits as of December 31, 1999.
Doral Bank PR and Doral Bank NY, as members of FHLB-NY, have access to
collateralized borrowings from the FHLB-NY up to a maximum of 30% of total
assets. Advances and reimbursement obligations with respect to letters of
credit must be secured by qualifying assets with a market value of 110% of the
advances or reimbursement obligations. At December 31, 1999, Doral Bank PR had
$134 million in outstanding advances from the FHLB-NY at a weighted average
interest rate cost of 5.73%. In addition, as of December 31, 1999, Doral Bank
PR had $53.1 million outstanding in term notes secured by FHLB-NY letters of
credit at an average interest rate cost of 6.11%. The interest rates on all
term notes are subject to a one-time upward adjustment to a rate equal to 100%
of LIBID for a term equal to the remaining term of the note as a result of the
changes to Section 936 of the Internal Revenue Code. Because Doral Bank PR has
the right to prepay the notes upon an upward adjustment of the rate, in all but
one of the three cases in which the investor has requested an upward
adjustment, Doral Bank PR has been successful in negotiating a rate adjustment
below 100% of LIBID. As of December 31, 1999, Doral Bank NY had no borrowings
from the FHLB-NY.
REGULATORY CAPITAL RATIOS
As of December 31, 1999, Doral Financial, Doral Bank PR and Doral Bank NY were
in compliance with all the regulatory capital requirements that were applicable
to them as a bank holding company, state non-member bank and Federal savings
bank, respectively (i.e., total capital and Tier 1 capital to risk weighted
assets of at least 8% and 4%, respectively, and Tier 1 capital to average
assets of at least 4%). Set forth below are Doral Financial's, Doral Bank PR's
and Doral Bank NY's regulatory capital ratios as of December 31, 1999, based on
existing Federal Reserve, OTS and FDIC guidelines.
TABLE S - REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
DORAL DORAL DORAL
FINANCIAL BANK PR BANK NY(1)
---------- -------- -----------
<S> <C> <C> <C>
Tier 1 Capital Ratio (Tier 1 capital to risk weighted assets) 18.1% 16.3% 155.3%
Total Capital (Total capital to risk weighted assets) 18.4% 16.7% 155.3%
Leverage Ratio (Tier 1 capital to average assets) 8.8% 9.6% 79.5%
</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 December 31, 1999, 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 meth-
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 39
<PAGE> 41
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ods 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.
ASSETS AND LIABILITIES
At December 31, 1999, Doral Financial's total assets were $4.5 billion compared
to $2.9 billion at December 31, 1998. The increase in assets was due primarily
to an increase in its securities portfolio of $1.2 billion, a net increase of
$196.9 million in the Company's loans held-for-sale and loans receivable, and
an increase of $57.5 million in money market accounts. Total liabilities were
$4.2 billion at December 31, 1999, compared to $2.6 billion at December 31,
1998. The increase in liabilities was largely the result of an increase in
securities sold under agreements to repurchase, deposit accounts, notes payable
and FHLB advances that were used to fund the increase in assets. At December
31, 1999, deposit accounts totaled $1.0 billion, compared to $533.1 million at
December 31, 1998. As of December 31, 1999, the banking subsidiaries had $1.9
billion in assets, compared to $805 million at December 31, 1998.
INTEREST RATE MANAGEMENT
General. Interest rate fluctuation is the primary market risk affecting Doral
Financial. Changes in interest rates can affect the volume of mortgage loan
originations, the net interest income earned on the Company'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.
Lower interest rates tend to increase demand for mortgage loans for home
purchases, as well as the demand for refinancing of existing mortgages. Higher
interest rates make it more difficult for potential borrowers to purchase
residential properties and to qualify for mortgage loans and reduce demand for
refinance loans. A substantial portion of Doral Financial's total mortgage loan
originations have consistently been composed of refinance loans. For the years
ended December 31, 1999, 1998 and 1997, refinance loans represented
approximately 61%, 62% and 51%, respectively, of Doral Financial's total dollar
volume of mortgage loans originated (excluding purchases from third parties).
As a result, higher interest rates may adversely affect the volume of loan
originations and income related to mortgage loan sales. Although Doral
Financial has increased home purchase originations, a significant future
increase in mortgage interest rates may adversely affect Doral Financial's
business if it results in a significant decrease in refinancing of mortgage
loans.
If long-term interest rates increase between the time Doral Financial commits
to or establishes an interest rate on a mortgage loan and the time commitments
to purchase the mortgage loan are obtained or the loan is sold, Doral Financial
may realize a reduced gain or incur a loss on such sale. The Company does not
generally hedge conventional loans in the pipeline or in the process of
origination because Doral Financial does not generally permit customers to
lock-in an interest rate prior to closing. Instead, the interest rates on these
loans are generally fixed at closing based on a certain spread over a
prevailing rate that adjusts weekly, based on the FHLMC auction for residential
mortgages. For FNMA and FHLMC conforming loans and FNMA and FHLMC
mortgage-backed securities, Doral Financial seeks to sell or to obtain
commitments for the sale of such loans or mortgage-backed securities as soon as
practicable following the funding of such loans. Conforming loans are normally
sold to institutional investors or to FNMA and FHLMC. To the extent that Doral
Financial does engage in offerings of mortgage products which lock-in the
interest rate until the closing date, it attempts to enter into forward
commitments to sell such loans at the time it fixes the rates for the loans. As
of December 31, 1999, Doral Financial had $568.8 million of commitments to sell
mortgage loans and mortgage-backed securities to third party investors.
Non-conforming conventional loans are normally sold in bulk to local financial
institutions. The sale of non-conforming conventional loans normally takes
longer than the sale of conforming mortgage loans. Accordingly, Doral Financial
attempts to manage this market risk through the purchase of listed options on
U.S. Treasury futures contracts, as well as through the purchase of option
contracts in the over-the-counter market on other interest rate sensitive
instruments, which tend to increase in value when interest rates increase.
Options are contracts that grant the purchaser the right to buy or sell the
underlying asset by a certain date for a specified price. Futures are
commitments to either purchase or sell designated instruments (such as U.S.
Treasury Note contracts or Eurodollar certificates of deposit) at a future date
for a specified price. Future contracts are generally traded on an exchange,
are marked-to-market daily and are subject to initial and maintenance margin
requirements.
In the case of Puerto Rico tax-exempt GNMA securities, which Doral Financial
normally holds for longer periods, prices tend to be more stable than for U.S.
taxable GNMA securities because their tax-exempt status under Puerto Rico law
makes them more attractive to retail investors. This relative stability of
prices for Puerto Rico GNMA securities allows Doral Financial to carry out a
less aggressive
DORAL FINANCIAL CORPORATION
40 1999 ANNUAL REPORT
<PAGE> 42
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hedging strategy to attempt to protect the value of these assets than what might
otherwise be required for U.S. GNMA securities. Doral Financial seeks to
protect itself from the market risk associated with its inventory of GNMA
securities by purchasing listed options on U.S. Treasury Bond futures contracts
and other interest rate sensitive instruments, as well as purchasing options on
U.S. GNMA securities in the over-the-counter market.
With respect to GNMA securities that are originated by Doral Financial and no
longer qualify for Puerto Rico tax exemption, Doral Financial implements a less
aggressive hedging strategy because it intends to sell such securities in the
United States market as soon as practicable following completion of the
securitization process, typically through forward commitments.
Declines in interest rates can adversely affect Doral Financial's revenues by
increasing prepayment rates and causing an increase of the amortization of
servicing assets and IOs, or causing an impairment to be recognized with
respect to such assets. Moreover, increased prepayment rates can reduce Doral
Financial's servicing income by decreasing the size of Doral Financial's
servicing portfolio. To date, Doral Financial has not used synthetic hedge
devices to protect its servicing income or the value of its servicing assets or
IOs from the risks presented by interest rate fluctuations. The primary means
used by Doral Financial to reduce the sensitivity of the Company's servicing
income and the value of its servicing asset due to a possible reduction of its
servicing portfolio has been the development of a strong retail origination
network that has allowed Doral Financial to increase or maintain the size of
its servicing portfolio even during periods of high prepayments, such as those
experienced during 1993, 1998 and early 1999.
The net interest income of Doral Financial is also subject to interest rate
risk because its interest-earning assets and interest-bearing liabilities
reprice at different times and at varying amounts. Most of Doral Financial's
interest-earning assets, including its mortgage loans and mortgage-backed
securities, are fixed-rate long-term interest-earning assets that are not
subject to repricing (except for the replacement of assets through repayments,
sales and new originations) while the short-term borrowings used to finance
these positions normally reprice on a periodic basis (e.g., daily, monthly or
quarterly). Doral Financial manages the risk to its net interest income through
a combination of the internal management of the composition of its assets and
liabilities and through the use of hedging instruments. Internal
asset-liability management practices include the attraction of longer term
funds through the use of long-term repurchase agreements and other borrowings
such as senior notes, term notes, and FHLB-NY advances. The Company also
attempts to obtain long-term deposits, including brokered certificates of
deposit.
In addition to the use of the internal asset-liability management practices
discussed above, Doral Financial has used interest rate swap agreements to
effectively fix the cost of short-term funding sources which are used to
finance the funding and holding of interest-earning assets with longer
maturities. An interest rate swap is an agreement where one party (in this
case, Doral Financial) agrees to pay a fixed-rate of interest on a notional
principal amount to a second party (generally a securities broker-dealer) in
exchange for receiving a variable rate of interest on the same notional amount
for a pre-determined period of time. No actual assets are exchanged in a swap
of this type and interest payments are generally netted. As of December 31,
1999, Doral Financial, through Doral Bank PR, had in place various interest
rate swap agreements with an aggregate notional amount of $105 million. The
Company also purchases put options on futures contracts for Eurodollar
instruments in an attempt to manage the risk affecting its net interest income
components.
Doral Financial maintains a substantial portfolio of mortgage-backed securities
(primarily fixed-rate GNMA certificates) and other investment securities.
Generally, the value of fixed-rate securities declines when interest rates
rise, and conversely, increase when interest rates fall. At December 31, 1999,
Doral Financial held $862.7 million of mortgage-backed and other investment
securities (all of which carried fixed interest rates) which were classified as
held-for-trading and reported at fair value, with unrealized gains and losses
included in earnings. In addition, at December 31, 1999, Doral Financial held
$66.3 million of investment securities (all of which carried fixed interest
rates) which were classified as available-for-sale and reported at fair value,
with unrealized gains or losses reported as a segregated component of
stockholders' equity. Accordingly, declines in the value of Doral Financial's
securities held-for-trading and available-for-sale could have a negative impact
on Doral Financial's earnings or financial condition. In order to hedge the
interest rate risk associated with Doral Financial's portfolio of securities
held-for-trading and available-for-sale, Doral Financial may use a variety of
hedging instruments including listed put and call options and futures contracts
on financial instruments (primarily Eurodollar certificates of deposit and U.S.
Treasury Note contracts). In determining the amount of its portfolio to hedge,
Doral Financial
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 41
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will consider, among other things, the volatility of prices of
its securities. As noted above, the prices for Puerto Rico tax-exempt GNMA
securities tend to be more stable than their U.S. counterparts.
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 December 31, 1999. Condensed information as
of December 31, 1998 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. 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 the swap agreements.
DORAL FINANCIAL CORPORATION
42 1999 ANNUAL REPORT
<PAGE> 44
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TABLE T - INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
1 YEAR OR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
AS OF DECEMBER 31, 1999 LESS YEARS YEARS YEARS RATE BEARING TOTAL
- -------------------------------- ----------- --------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and Money
Market Instruments $ 396,029 $ -- $ -- $ -- $ -- $ 396,029
Total Loans 1,114,383 36,008 21,369 75,127 -- 1,246,887
Securities Held-for-Trading 862,698 -- -- -- -- 862,698
Securities Available-for-Sale 66,325 -- -- -- -- 66,325
Securities Held-to-Maturity 1,597 -- 36,760 1,470,703 -- 1,509,060
FHLB Stock -- -- -- 21,645 -- 21,645
Other Assets -- -- -- -- 434,699 434,699
----------- --------- --------- ---------- ------------ ----------
TOTAL ASSETS $ 2,441,032 $ 36,008 $ 58,129 $1,567,475 $ 434,699 $4,537,343
=========== ========= ========= ========== ============ ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Loans Payable $ 353,460 $ -- $ -- $ -- $ -- $ 353,460
Repurchase Agreements 1,316,838 -- 46,560 564,558 -- 1,927,956
Deposits 761,808 66,326 60,469 673 121,148 1,010,424
Other Borrowed Funds 144,867 42,221 223,500 184,465 -- 595,053
Other Liabilities -- -- -- -- 265,468 265,468
Stockholders' Equity -- -- -- -- 384,982 384,982
----------- --------- --------- ---------- ------------ ----------
Total Liabilities and
Stockholders' Equity $ 2,576,973 $ 108,547 $ 330,529 $ 749,696 $ 771,598 $4,537,343
=========== ========= ========= ========== ============ ==========
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% -- --
CONDENSED INTEREST RATE
SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 1998
Off-Balance Sheet Instruments -
Interest Rate Swaps $ 105,000 $ (5,000) $(100,000) $ -- $ -- $ --
Interest Rate Sensitivity Gap 166,034 (113,722) (115,785) 368,371 (304,898) --
Cumulative Interest Rate
Sensitivity Gap 166,034 52,312 (63,473) 304,898 -- --
Cumulative Gap to Interest-
Earning Assets 6.44% 2.03% (2.46%) 11.83% -- --
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 43
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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 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 December 31, 1999, the Company had a one
year negative gap of approximately $30.9 million compared to a positive gap
position of $166.0 million as of December 31, 1998. The Company's negative gap
within one year is due primarily to the fact that a significant portion of the
Company's assets are financed with repurchase agreements that generally reprice
within 90 days. 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. As described above, the Company 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 the Company 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 its banking subsidiaries which
are not reflected on the Company's Consolidated Financial Statements. Contracts
with positive fair values are recorded as assets and contracts with negative
fair values as liabilities after the application of netting arrangements. For
the year ended December 31, 1999, average assets and liabilities related to
derivatives were $4.8 million and $3.8 million, respectively, compared to $1.5
million and $978,000, respectively, for the year ended December 31, 1998. The
notional amounts of assets and liabilities related to derivatives which are not
recorded on the Company's statement of condition totaled $8.3 billion and $5.6
billion, respectively, as of December 31, 1999. Notional amounts indicate the
volume of derivatives activity but do not represent the Company's exposure to
market or credit risk. Amounts do not include interest rate swaps in the
aggregate amount of $105 million held at Doral Bank PR. For additional
information regarding the Company's investment in derivatives, see Note 30 to
the Company's Consolidated Financial Statements.
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. The Company 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, the Company 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
DORAL FINANCIAL CORPORATION
44 1999 ANNUAL REPORT
<PAGE> 46
[LOGO]
fees and servicing income faster than the cost of providing such services.
Additionally, appreciation in real estate property values reduces the
loan-to-value ratio of existing loans. Interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. See
"Interest Rate Management" for a discussion of the effects of changes of
interest rates on Doral Financial's operations.
CHANGES IN ACCOUNTING STANDARDS
Accounting for Derivative and Similar Financial Instruments and for Hedging
Activities. In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative and Similar Financial Instruments
and for Hedging Activities" ("SFAS No. 133"). This new standard, as amended,
will become effective for 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, and 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.
Reclassifications. In connection with the preparation of its audited financial
statements, the Company made certain reclassifications to the components of
non-interest income reported in its earnings press release dated January 18,
2000. Specifically, net gains on mortgage loan sales and fees for the quarter
and year ended December 31, 1999, were reduced by $4.0 million, and trading
account profit increased by a corresponding amount. This reclassification did
not affect total non-interest income or net income figures.
Certain amounts reflected in the Company's Consolidated Financial Statements for
the years ended December 31, 1998 and 1997, have also been reclassified to
conform to the presentation for 1999.
YEAR 2000 ISSUES
The Year 2000 problem is caused by the situation whereby existing computer
software programs use only the last two digits to identify the year. Those
programs could read "00" as the year 1900, and thus, may not recognize dates
after December 31, 1999. This misinterpretation of data could cause significant
problems with banking and mortgage banking entities, such as the Company, as the
use of date calculations is extensive in daily operations for matters such as
interest accruals, maturity dates, delinquency status, and customer statements.
Year 2000 problems go beyond computer systems and affect anything that uses an
internal microchip such as telephones, fax machines, security and alarm systems,
vaults, elevators, heating and air conditioning.
Doral Financial does not own any proprietary software systems or applications
and relies on those provided by third party vendors. Doral Financial completed
the assessment and testing of its computer hardware, software programs and data
processing applications, including those provided by third party vendors prior
to December 31, 1999. To date, Doral Financial has not experienced any material
adverse effect on its operations as a result of Year 2000 problems related to
its own systems or hardware or those of third party providers of services.
RECENT DEVELOPMENTS
Opening of Doral Bank NY. On October 14, 1999, Doral Bank NY, the Company's
newly chartered Federal savings bank, opened for business. Doral Bank NY
currently operates out of a single branch location in the New York City
metropolitan area. Doral Bank NY is exploring the possibility of opening other
branch offices in the New York City metropolitan area.
Financial Modernization Legislation. On November 12, 1999, President Clinton
signed into law the Gramm-Leach-Bliley Act (the "Act"), which will become
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, will have the ability to elect to be treated
as financial holding companies ("FHCs"). FHCs will be permitted to engage in a
broader spectrum of activities than those currently
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 45
<PAGE> 47
[LOGO]
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. Such
election will not become effective until April 11, 2000, unless acted upon
sooner by the Board.
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.
DORAL FINANCIAL CORPORATION
46 1999 ANNUAL REPORT
<PAGE> 48
[PRICEWATERHOUSECOOPERS LOGO]
PricewaterhouseCoopers LLP
PO Box 363566
San Juan PR 00936-3566
Telephone (787) 754-9090
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Doral Financial Corporation:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of Doral Financial Corporation and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 25, 2000
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1603153 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 47
<PAGE> 49
[LOGO]
DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except per share information)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,793 $ 31,945
----------- -----------
Money market investments:
Securities purchased under agreements to resell 21,430 120,733
Time deposits with other banks 246,010 51,549
Other short term investments, at cost 102,796 140,469
----------- -----------
Total money market investments 370,236 312,751
----------- -----------
Investment securities and other instruments:
Trading securities, at fair value 862,698 606,918
Securities available-for-sale, at fair value 66,325 408,888
Securities held-to-maturity, at amortized cost 1,509,060 190,778
Federal Home Loan Bank of NY (FHLB) stock, at cost 21,645 6,914
----------- -----------
Total investment securities and other instruments 2,459,728 1,213,498
----------- -----------
Loans:
Mortgage loans held-for-sale, at lower of cost or market 1,015,703 883,048
Loans receivable, net 231,184 166,987
----------- -----------
Total loans 1,246,887 1,050,035
----------- -----------
Receivables and mortgage servicing advances 56,021 32,568
Broker-dealer's operations receivable 158,798 144,486
Accrued interest receivable 42,021 23,570
Servicing assets, net 109,721 72,568
Property, leasehold improvements and equipment, net 37,444 19,273
Cost in excess of fair value of net assets acquired, net 9,964 5,475
Real estate held for sale, net 3,910 2,987
Prepaid and other assets 16,820 8,957
----------- -----------
Total assets $ 4,537,343 $ 2,918,113
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ 1,927,956 $ 1,197,328
Loans payable 353,460 426,704
Deposits 1,010,424 533,113
Notes payable 461,053 199,733
Advances from FHLB 134,000 32,000
Broker-dealer's operations payable 154,210 142,002
Accrued expenses and other liabilities 111,258 117,674
----------- -----------
Total liabilities 4,152,361 2,648,554
----------- -----------
Commitments and contingencies (Note 23)
----------- -----------
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; 7% Noncumulative Monthly Income Preferred Stock,
$1 par value (liquidation preference $50 per share) 1,495,000
shares issued and outstanding 1,503 8
Common stock, $1 par value, 200,000,000 shares authorized; 40,484,920 shares issued;
40,428,920 shares outstanding in 1999 and 1998 40,485 40,485
Paid-in capital 140,822 70,252
Legal surplus 3,596 2,499
Retained earnings 205,875 156,315
Accumulated other comprehensive income, net of taxes (7,243) 56
Treasury stock at par value, 56,000 shares held (56) (56)
----------- -----------
Total stockholders' equity 384,982 269,559
----------- -----------
Total liabilities and stockholders' equity $ 4,537,343 $ 2,918,113
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
DORAL FINANCIAL CORPORATION
48 1999 ANNUAL REPORT
<PAGE> 50
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except per share information) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Loans $ 78,258 $ 54,694 $ 32,768
Mortgage-backed securities 58,756 55,276 45,464
Investment securities 60,235 32,278 5,454
Money market investments 14,430 7,803 6,445
-------- -------- --------
Total interest income 211,679 150,051 90,131
-------- -------- --------
Interest expense:
Loans payable 24,292 26,131 13,325
Securities sold under agreements to repurchase 72,726 55,561 31,665
Deposits 35,784 17,326 10,014
Other borrowed funds 28,993 15,768 6,434
-------- -------- --------
Total interest expense 161,795 114,786 61,438
-------- -------- --------
Net interest income 49,884 35,265 28,693
Provision for loan losses 2,626 883 792
-------- -------- --------
Net interest income after provision for loan losses 47,258 34,382 27,901
-------- -------- --------
Non-interest income:
Net gain on mortgage loan sales 80,184 49,551 16,883
Trading account profit 12,914 6,056 10,129
Gain on sale of investment securities 3,068 6,052 1,576
Servicing income 24,936 19,782 14,995
Gain on sale of servicing assets -- 1,829 --
Commissions, fees and other income 5,809 3,070 1,703
-------- -------- --------
Total non-interest income 126,911 86,340 45,286
-------- -------- --------
Non-interest expense:
Compensation and benefits 44,838 21,158 8,111
Taxes, other than payroll and income taxes 2,610 1,747 1,403
Advertising 5,875 5,824 3,554
Professional services 5,473 4,920 3,283
Telephone 3,626 2,780 2,171
Rent 4,467 3,273 2,518
Amortization of servicing assets 10,988 6,670 3,437
Depreciation and amortization 4,534 3,669 2,657
Maintenance 1,497 1,566 971
Other 13,648 9,276 7,285
-------- -------- --------
Total non-interest expense 97,556 60,883 35,390
-------- -------- --------
Income before income taxes and extraordinary item 76,613 59,839 37,797
-------- -------- --------
Income taxes 8,687 7,007 5,249
-------- -------- --------
Income before extraordinary item 67,926 52,832 32,548
Extraordinary item non-cash loss on extinguishment of debt -- -- 12,317
-------- -------- --------
Net income $ 67,926 $ 52,832 $ 20,231
======== ======== ========
Earnings per share:
Basic:
Income before extraordinary item $ 1.55 $ 1.31 $ 0.89
Extraordinary item -- -- (0.34)
-------- -------- --------
Net income $ 1.55 $ 1.31 $ 0.55
======== ======== ========
Diluted:
Income before extraordinary item $ 1.50 $ 1.26 $ 0.85
Extraordinary item -- -- (0.32)
-------- -------- --------
Net income $ 1.50 $ 1.26 $ 0.53
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 49
<PAGE> 51
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 8 $ 8 $ --
Shares issued (8% convertible) -- -- 8
Shares issued (7% noncumulative monthly income) 1,495 -- --
-------- -------- --------
Balance at end of year 1,503 8 8
-------- -------- --------
COMMON STOCK:
Balance at beginning of year 40,485 36,851 36,500
Common stock issued -- 3,634 --
Common stock converted -- -- 351
-------- -------- --------
Balance at end of year 40,485 40,485 36,851
-------- -------- --------
PAID-IN CAPITAL:
Balance at beginning of year 70,252 33,294 11,340
Shares issued 70,570 36,958 20,768
Shares redeemed -- -- (2)
Shares converted -- -- 1,188
-------- -------- --------
Balance at end of year 140,822 70,252 33,294
-------- -------- --------
LEGAL SURPLUS:
Balance at beginning of year 2,499 1,704 --
Transfer of retained earnings per legal requirements
due to conversion of Doral Bank PR -- -- 1,200
Transfer from retained earnings 1,097 795 504
-------- -------- --------
Balance at end of year 3,596 2,499 1,704
-------- -------- --------
RETAINED EARNINGS:
Balance at beginning of year 156,315 114,253 102,925
Net income 67,926 52,832 20,231
Cash dividends declared on common stock (12,129) (9,299) (7,069)
Cash dividends declared on preferred stock (5,140) (676) (130)
Transfer to legal surplus (1,097) (795) (1,704)
-------- -------- --------
Balance at end of year 205,875 156,315 114,253
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME NET OF TAXES:
Balance at beginning of year 56 901 (81)
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes (7,299) (845) 982
-------- -------- --------
Balance at end of year (7,243) 56 901
-------- -------- --------
TREASURY STOCK-AT COST: (56) (56) (56)
-------- -------- --------
UNEARNED COMPENSATION UNDER EMPLOYMENT CONTRACTS:
Balance at beginning of year -- -- (97)
Amortization -- -- 97
-------- -------- --------
Balance at end of year -- -- --
-------- -------- --------
Total stockholders' equity $384,982 $269,559 $186,955
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
DORAL FINANCIAL CORPORATION
50 1999 ANNUAL REPORT
<PAGE> 52
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET INCOME $ 67,926 $ 52,832 $ 20,231
-------- -------- --------
Other comprehensive income, net of tax:
Unrealized net gains (losses) on securities arising during the period
(net of taxes of $4,958 - 1999, $12 - 1998 and $633 - 1997) (7,756) 18 990
Less: reclassification adjustment for (gains) losses included in net income
(net of taxes of $292 - 1999, $552 - 1998 and $5 - 1997) (457) 863 8
-------- -------- --------
Other comprehensive income (loss) (7,299) (845) 982
--------- -------- --------
Comprehensive income, net of taxes $ 60,627 $ 51,987 $ 21,213
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 51
<PAGE> 53
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 67,926 $ 52,832 $ 20,231
----------- ----------- ---------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 4,095 2,941 2,298
Amortization of interest-only strips 6,897 3,738 3,980
Amortization of cost in excess of fair value of net assets acquired 439 728 359
Amortization of servicing assets 10,988 6,670 3,437
Extraordinary item -- -- 12,317
Deferred tax provision 2,917 419 1,293
Gain on sale of servicing assets -- (1,829) --
Provision for loan losses 2,626 883 792
Origination and purchases of mortgage loans held for sale (2,571,568) (2,275,178) (977,505)
Principal repayments and sales of mortgage loans held for sale 1,131,161 621,711 434,487
Purchases of securities held for trading (1,559,411) (1,051,826) (694,120)
Increase in interest-only strips, net (37,922) (16,848) (8,395)
Principal repayments and sales of securities held for trading 2,640,736 1,765,783 805,575
Increase in servicing assets (48,141) (32,876) (28,884)
Increase in receivables and mortgage servicing advances (23,453) (8,099) (6,728)
Increase in broker-dealer's operations receivable (14,312) (124,440) (19,239)
Increase in accrued interest receivable (18,451) (10,033) (3,446)
Decrease in payable related to short sales -- -- (9,983)
Increase in interest payable 18,875 7,657 1,252
Increase in broker-dealer's operations payable 12,208 122,961 19,011
(Decrease) increase in accrued expenses and other liabilities (23,235) 32,685 12,613
Amortization of unearned compensation under employment contracts -- -- 97
(Increase) decrease in prepaid and other assets (7,863) 2,377 (2,627)
----------- ----------- ---------
Total adjustments (473,414) (952,576) (453,416)
----------- ----------- ---------
Net cash used in operating activities (405,488) (899,744) (433,185)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity (819,499) (28,919) (158,939)
Principal repayments and maturities of securities held-to-maturity 73,703 97,352 122,627
Origination of loans receivable (150,551) (37,709) (59,494)
Principal repayments of loans receivable 85,400 3,311 55,205
Purchases of securities available-for-sale (699,455) (522,038) (331,052)
Principal repayments and sales of securities available-for-sale 457,260 724,161 210,850
Purchase of FHLB stock (14,731) (2,222) (1,200)
Purchase of property, leasehold improvements and equipment (22,266) (11,366) (3,786)
Increase in goodwill related to the purchase of subsidiary (4,928) -- --
(Increase) decrease in real estate held for sale (923) 38 (779)
Proceeds from sale of servicing assets -- 1,883 --
----------- ----------- ---------
Net cash (used) provided by investing activities (1,095,990) 224,491 (166,568)
----------- ----------- ---------
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements
DORAL FINANCIAL CORPORATION
52 1999 ANNUAL REPORT
<PAGE> 54
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 477,311 232,619 141,591
Increase in securities sold under agreements to repurchase 730,628 359,186 450,491
(Decrease) increase in loans payable (73,244) 187,934 78,646
Increase (decrease) in common stock, net -- 40,592 (3)
Issuance of preferred stock, net 72,065 -- --
Proceeds from FHLB advances 102,000 -- 17,000
Increase in notes payable 261,320 34,799 12,808
Dividends declared and paid (17,269) (9,975) (7,199)
----------- ----------- -----------
Net cash provided by financing activities 1,552,811 845,155 693,334
----------- ----------- -----------
Net increase in cash and cash equivalents 51,333 169,902 93,581
Cash and cash equivalents at beginning of year 344,696 174,794 81,213
----------- ----------- -----------
Cash and cash equivalents at the end of year $ 396,029 $ 344,696 $ 174,794
=========== =========== ===========
Cash and cash equivalents include:
Cash and due from banks $ 25,793 $ 31,945 $ 17,390
Money market investments 370,236 312,751 157,404
----------- ----------- -----------
$ 396,029 $ 344,696 $ 174,794
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Loan securitizations $ 1,306,609 $ 1,084,568 $ 398,329
=========== =========== ===========
Reclassification of trading securities to held-to-maturity category $ -- $ 115,680 $ --
=========== =========== ===========
Reclassification of available-for-sale to held-to-maturity category $ 592,200 $ -- $ --
=========== =========== ===========
Conversion of subordinated debentures $ -- $ -- $ 1,540
=========== =========== ===========
Extinguishment of debt $ -- $ -- $ 8,460
=========== =========== ===========
Supplemental Cash Flows Information:
Cash used to pay interest $ 142,920 $ 102,799 $ 60,186
=========== =========== ===========
Cash used to pay income taxes $ 2,470 $ 10,173 $ 1,640
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 53
<PAGE> 55
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DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. REPORTING ENTITY
Doral Financial Corporation ("DFC" or the "Company") is a bank holding company
(see Note 3) engaged in mortgage banking, commercial banking, savings bank and
broker-dealer activities through its wholly owned subsidiaries Doral Mortgage
Corporation, SANA Investment Mortgage Bankers, Inc., Centro Hipotecario de
Puerto Rico, Inc., Doral Bank ("Doral Bank PR"), Doral Bank, FSB ("Doral Bank
NY"), Doral Securities, Inc., Doral Money, Inc., and Doral Properties, Inc.
("Doral Properties").
The Company operates through 40 mortgage banking offices in Puerto Rico, one
mortgage banking office in Florida, one mortgage banking office in New York, 16
commercial banking branches in Puerto Rico, two broker-dealer offices in Puerto
Rico, and one Federally chartered savings bank branch in New York, for a total
of 61 offices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Doral
Financial Corporation and its wholly owned subsidiaries. Accounting and
reporting policies conform with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company is primarily engaged in the origination, purchase, securitization
and sale of FHA, VA, conventional and non-conforming first and second mortgage
loans and, to a lesser extent, in providing and/or arranging for interim
financing for the construction of residential and other types of real estate
developments and permanent financing on multifamily and commercial real estate.
The Company, together with its subsidiaries, services FHA-insured, VA-guaranteed
and conventional mortgage loans pooled for issuance of Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC") backed securities and
collateralized mortgage obligation certificates issued by grantor trusts
established by the Company ("CMO Certificates"). The Company also services loans
for private investors, originates loans for investment and provides banking
services through a Puerto Rico commercial bank and a Federal Savings Bank in New
York, and provides brokerage services through Doral Securities, Inc.
The following summarizes the most significant accounting policies followed in
the preparation of the accompanying consolidated financial statements:
Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Because of uncertainties inherent in the estimation
process, it is possible that actual results could differ from those estimates.
Securities Held for Trading
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as securities held for trading and reported at
fair value based on quoted market prices. Realized and unrealized changes in
market value are recorded separately in the trading profit or loss account in
the period in which the changes occur. Interest income and expense arising from
trading instruments are included in the income statement as part of net interest
income rather than in the trading profit or loss account. The securitization of
mortgage loans held-for-sale is recorded as a sale of mortgage loans and the
purchase of a mortgage-backed security, and are classified in accordance with
Statement of Financial Accounting Standards No.115.
The Company recognizes as interest-only strips ("IOs") amounts equal to the
present value of servicing fees to be received in excess of rates normally paid
to federally sponsored secondary market makers. The amounts recognized are
estimated based upon the expected lives of the loans and using interest rates
that reflect the risks of the assets. The Company includes these IOs as
securities held for trading. The IOs are realized over time through the receipt
of the excess service fees. The Company periodically evaluates the net
realizable value of its IOs based on the present value of the estimated
remaining future excess servicing fees revenue, using current prepayment speed
assumptions determined from market sources for similar types of loans and the
same discount rate used to calculate the original excess servicing fees
receivable asset. The IOs are amortized over a straight-line basis over their
estimated life. The amortization is recorded as a reduction of interest income.
Any impairment in the recorded value due to acceleration in anticipated
prepayment experience is recognized as a reduction in income.
Securities Held-to-Maturity
Securities which the Company has the ability and intent to hold until their
maturity are classified as held-to-maturity
DORAL FINANCIAL CORPORATION
54 1999 ANNUAL REPORT
<PAGE> 56
[LOGO]
and reported at amortized cost. Premiums and discounts are amortized as an
adjustment to interest income over the life of the related securities using a
method that approximates the interest method.
Securities Available-for-Sale
Securities not classified as either securities held-to-maturity or trading
securities are classified as available-for-sale and reported at fair value based
on quoted market prices, with unrealized gains and losses excluded from earnings
and reported, net of taxes, as a separate component of stockholders' equity.
Cost of securities sold is determined on the specific identification method.
Securities Transactions of Broker-Dealer
Securities transactions of the Company's broker-dealer operation are recorded on
the trade date basis. At the end of the period, unsettled purchase transactions
are recorded as part of the Company's position and as a payable, while unsettled
sales transactions are deducted from the Company's position and recorded as a
receivable.
Mortgage Loans Held-for-Sale
Mortgage loans held for sale are carried at the lower of cost or market computed
on an aggregate portfolio basis. The amount by which cost exceeds market value,
if any, is accounted for as a loss. Changes in the valuation allowance are
included in the determination of income in the period in which the change
occurs. Loan origination fees and direct loan origination costs related to loans
held-for-sale are deferred as an adjustment to the carrying basis of such loans
until these are sold.
Loans Receivable
Loans receivable are held principally for investment purposes. These mainly
consist of construction, residential first and second mortgages, commercial real
estate, land and consumer loans.
Loans receivable are stated at their unpaid balance, less unearned interest, net
deferred loan fees or costs, undisbursed portion of construction loans and
allowance for loan losses. Unearned interest on consumer loans is amortized
using a method that results in a uniform level rate of return. Loan origination
fees and costs incurred in the origination of loans held-for-investment are
deferred and amortized using the interest method throughout the life of the loan
as a yield adjustment.
Allowance for Losses
An allowance for losses is provided for estimated losses on loans receivable and
mortgage loans held for sale. The allowance for loan losses is established based
upon a review of the loan portfolio, loss experience, economic conditions and
other pertinent factors. Loan losses are charged and recoveries are credited to
the allowance for loan losses while increases to the allowance are charged to
operations.
Recognition of interest on loans receivable is discontinued when loans are more
than 90 days in arrears, except on residential mortgage loans held by the
Company's mortgage banking units. At that time, any interest accrued is reversed
against interest income. Such interest, if ultimately collected, is credited to
income in the period of the recovery. Loans for which the recognition of
interest has been discontinued are designated as non-accruing. Such loans are
not reinstated to accrual status until principal and interest payments are
brought up to date.
The Company measures impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral, if the loan is collateral dependent. The Company performs
impairment evaluation for small-balance homogeneous loans on a group basis.
Loans that are measured at fair value, or at the lower of cost or fair value,
are excluded. Loans are considered impaired when, based on management's
evaluation, a borrower will not be able to fulfill its obligation under the
original terms of the loan.
Servicing Assets
The Company sells or securitizes substantially all of the residential mortgage
loans it produces and retains the related servicing rights. These servicing
rights entitle the Company to a future stream of cash flows based on the
outstanding principal balance of the mortgage loans and the contractual
servicing fee. These fees are credited to income on a monthly basis. Servicing
rights retained in a sale or securitization are measured by allocating the
carrying value of the loans between the assets sold and the interest retained,
if any, based on their relative fair values, if practicable, at the date of sale
or securitization and are presented in the accompanying statements of financial
condition as servicing assets.
Purchased servicing assets are initially recorded at their fair value, which
equals the amount paid. The amount capitalized is amortized in proportion to,
and over the period of, estimated net servicing income. Amortization is adjusted
prospectively to reflect changes in prepayment experience. Any unamortized
balance related to rights sold is charged to income at time of sale.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 55
<PAGE> 57
[LOGO]
Servicing assets are evaluated for impairment. In determining impairment,
servicing assets are disaggregated into pools based on their predominant risk
characteristic, which has been determined to be interest rates. Impairment is
recognized whenever the prepayment pattern of a particular mortgage pool
indicates that the fair value of the related servicing assets is less than its
carrying amount. Impairment is recognized by charging such excess to income.
Real Estate Held for Sale
The Company acquires real estate through foreclosure proceedings. These
properties are held for sale and are stated at the lower of fair value less
estimated costs to sell, or cost.
Property, Leasehold Improvements and Equipment
Property, leasehold improvements and equipment are carried at cost. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the assets or the terms of the leases, if shorter, for leasehold
improvements. These range from five to ten years for leasehold improvements and
equipment, and forty years for office facilities.
The Company measures impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, an estimate of the future cash flows
expected to result from the use of the asset and its eventual disposition must
be made. If the sum of the future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
The Company recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished, as required by
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125").
From time to time, the Company may sell mortgage loans and mortgage-backed
securities subject to put arrangements and/or other recourse provisions.
Pursuant to recourse arrangements, the Company agrees to retain or share the
credit risk with the purchaser of such mortgage loans. Pursuant to put
arrangements, the Company grants the buyer an option that allows the buyer to
sell the loans or securities back to the Company at a negotiated price but does
not restrict the purchaser from selling such securities to a third party at any
time. The Company estimates the fair value of the retained recourse obligation
or any liability incurred at the time of sale and makes an allocation from the
proceeds of the sale. Put options are recorded at fair value at the time of sale
as a liability on the Company's statement of financial condition, and
subsequently carried at fair value.
Money Market Investments
Money market investments are treated as short-term investments. These
investments are carried at cost. For securities purchased under agreements to
resell, the securities underlying the agreements are not recorded in the asset
accounts of the Company.
Securities Sold under Agreements to Repurchase
As part of its financing activities the Company enters into sales of securities
under agreements to repurchase the same or substantially similar securities.
Amounts received under these agreements represent short-term borrowings and the
securities underlying the agreements remain in the asset accounts. These
transactions are carried at the amounts at which transactions will be settled.
Amortization of Loan Origination Costs and Fees
Loan origination fees and related direct loan origination costs are deferred and
amortized to income as an adjustment of the yield throughout the average
expected life of the related mortgage loans. Such fees and costs related to
mortgage loans held-for-sale are deferred and recognized in income as a
component of the gain on sale of mortgage loans when the related loans are sold
or securitized.
Amortization of Debt Issuance Costs
Costs related to the issuance of debt are amortized under a method which
approximates the interest method, and are shown as deferred expenses in the
prepaid and other assets category.
Interest Rate Risk Management
The Company has various mechanisms to reduce its exposure to interest rate
fluctuations including, among others, entering into transactions dealing with
financial derivatives such as futures contracts, options and interest rate
swaps. Such instruments are purchased or entered into as hedges against future
fluctuations in interest rates and/or market values of specifically identified
assets or liabilities. For financial reporting purposes, it is the
DORAL FINANCIAL CORPORATION
56 1999 ANNUAL REPORT
<PAGE> 58
[LOGO]
Company's general policy to account for such instruments on a marked-to-market
basis with gains or losses on such instruments included in the results of
operations as part of trading account profit, as they occur, except for the
interest rate swaps at Doral Bank PR.
From time to time, the Company may designate some of those instruments as
accounting hedges. In such circumstances, the cost of unexpired options, net of
premiums collected on written options, designated as accounting hedges, is
capitalized as part of the carrying cost and charged to income in relation to
the life of the underlying security being hedged.
Loan Servicing
The Company pools FHA-insured and VA-guaranteed mortgages for issuance of GNMA
mortgage-backed securities. Conventional loans are pooled and issued as FNMA or
FHLMC mortgage-backed securities and CMO certificates as well as sold in bulk to
investors with servicing retained. Under most of the servicing agreements, the
Company is required to advance funds to make scheduled payments to investors, if
payments due have not been received from the mortgagors. The Company is also
required to foreclose on loans in the event of default by the mortgagor. At
December 31, 1999, accounts receivable include advances to investors of
approximately $17,229,000 (1998 - $9,936,000).
Income Taxes
The Company follows an asset and liability approach that requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. A valuation allowance is recognized for
any deferred tax asset which, based on management's evaluation, is more likely
than not (a likelihood of more than 50%) that some portion or all of the
deferred tax asset will not be realized.
Legal Surplus
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of
10% of Doral Bank PR's net income for the year be transferred to a legal surplus
account until such surplus equals paid-in capital. The surplus account is not
available for payment of dividends to shareholders.
Statement of Cash Flows
Cash and cash equivalents include cash and due from banks, securities purchased
under agreements to resell, time deposits and other short-term investments with
a maturity of three months or less when purchased.
Earnings per Share
Basic net income per share is determined by dividing net income, after deducting
any dividends on preferred stock, by the weighted average number of shares
outstanding during the period. The average number of shares considers the
dilutive effect of restricted stock awards and stock options after giving effect
to common stock splits.
Diluted net income per share has been computed based on the assumption that all
of the shares of convertible instruments will be converted into common stock.
The calculation gives effect to the elimination of interest expense, net of
income taxes, applicable to convertible subordinated debt.
Fair Value of Financial Instruments
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that may be realized in the future.
Stock Option Plan
Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), superseded and amended the guidance offered by
Accounting Principles Board Opinion ("APB") No. 25 relating to stock-based
compensation. SFAS No. 123 states that the cost associated with the stock option
plan under which certain employees receive options to buy shares of stock of an
entity must be recognized either by the fair value-based method or the intrinsic
value-based method. Under the fair value-based method, cost is measured at the
grant date based on the fair value of the stock option. Cost is recognized
ratably over the service period of the option, which is usually the vesting
period. Under the intrinsic value-based method, compensation expense is
recognized for the excess, if any, of the quoted market price of the stock on
the measurement date over the amount an employee must pay to acquire the stock.
SFAS No. 123, which establishes preference for the use of the fair value-based
method, allows entities to continue reporting its stock-based compensation
arrangements under the intrinsic value-based method established in APB No. 25.
In adopting SFAS No. 123, the Company continued to account for its stock option
plan in accordance with APB No. 25 (see Note 25).
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 57
<PAGE> 59
[LOGO]
Reporting Comprehensive Income
In January 1998, the Company adopted the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.130"). This
statement established standards for reporting and displaying comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. This statement requires an enterprise to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial condition. In the Company's case, in
addition to net income, other comprehensive income results from the changes in
the unrealized gains and losses on securities that are classified as
available-for-sale.
Disclosures about Segments Information of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement established
the standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports issued to shareholders.
As required by SFAS No. 131, a public business enterprise needs to report
financial and descriptive information about its reportable segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. It also requires reporting descriptive information about the way
that the operating segments were determined, the products and the services
provided by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's general purpose
financial statements, and the changes in the measurement of segment amount from
period to period. DFC's management determined that the segregation that best
fulfills the segment definition described above is by line of business.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative and Similar Financial Instruments and for Hedging
Activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities." This new standard, as
amended, becomes effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Application is permitted as of the beginning of any fiscal
quarter subsequent to June 15, 1999. SFAS No. 133 established accounting and
reporting standards for derivative financial instruments and for hedging
activities. The SFAS requires all derivatives to be measured at fair value and
to be recognized as either assets or liabilities in the statement of financial
condition. Under this standard, derivatives used in hedging activities should be
designated into one of the following categories: (a) fair value hedge; (b) cash
flow hedge; and (c) foreign currency exposure hedge. Gains and losses resulting
from the changes in fair value 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 believes that such adoption will not have a material
effect on the Company's financial condition or results of operations.
Reclassifications
Certain amounts reflected in the 1998 and 1997 consolidated financial statements
have been reclassified to conform to the presentation for 1999.
3. REGULATORY REQUIREMENTS
Holding Company Requirements
In October 1997, the Company became a bank holding company subject to the
provisions of the Bank Holding Company Act ("BHC Act"). As a bank holding
company, the Company is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System. The Company's activities and those of
its banking and nonbanking subsidiaries are limited to the business of banking
and activities closely related or incidental to banking, and the Company may
not, directly or indirectly, acquire the ownership or control of more than 5% of
any class of voting shares or substantially all of the assets of any company in
the United States, including a bank, without the prior approval of the Federal
Reserve. In addition, bank holding companies are generally prohibited under the
BHC Act from engaging in nonbanking activities, subject to certain exceptions.
Banking Charters
Effective October 1, 1997, the Company's commercial banking subsidiary, Doral
Bank PR, converted its charter from a federal savings bank to a Puerto Rico
commercial bank under the laws of the Commonwealth of Puerto Rico. Concurrently,
it changed its name to Doral Bank. Deposits remained insured by the FDIC.
DORAL FINANCIAL CORPORATION
58 1999 ANNUAL REPORT
<PAGE> 60
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Effective October 4, 1999, Doral Bank NY, the Company's savings bank subsidiary,
received its Federal savings bank charter from the Office of Thrift Supervision
and insurance of accounts from the FDIC. Doral Bank NY opened for business to
the public on October 14, 1999.
Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table) of Total and Tier I capital (as defined in the regulations) to
risk weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Company and all of its banking subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the FDIC, dated as of
July 30, 1998, categorized Doral Bank PR as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, Doral Bank PR must maintain minimum Total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the following table. There
are no conditions or events since the FDIC notification that management believes
have changed Doral Bank PR's category.
Savings Bank Requirements
Doral Bank NY is a Federally chartered savings bank subject to regulation and
supervision by the Office of Thrift Supervision and the FDIC. Doral Bank NY is
subject to the same regulatory capital requirements of Doral Bank PR as set
forth above. Additionally, as a condition for FDIC insurance of accounts, the
Company has agreed with the FDIC to maintain Doral Bank NY's ratio of Tier 1
capital to average assets at not less than 8.0% throughout its first three years
of operations. As of December 31, 1999, Doral Bank NY was in compliance with the
capital requirements for a well capitalized institution and the Tier 1 to
average assets ratio imposed by the FDIC.
DFC's, Doral Bank PR's and Doral Bank NY's actual capital amounts and ratios are
presented in the following table. Totals of $10,053,000 (1998 - $12,846,000) and
$189,000 (1998 - $307,000) representing non-allowable assets, such as goodwill
and portions of servicing assets, were deducted from the capital of DFC and
Doral Bank PR, respectively. There were no non-allowable assets in Doral Bank NY
as of December 31, 1999.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO (%) AMOUNT RATIO (%) AMOUNT RATIO (%)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total capital (to risk-weighted assets):
DFC Consolidated $388,364 18.4 $169,136 >8.0 N/A N/A
-
Doral Bank PR $125,094 16.7 $ 59,965 >8.0 $74,957 >10.0
- -
Doral Bank NY $ 24,611 155.3 $ 1,268 >8.0 $ 1,585 >10.0
- -
Tier I capital (to risk-weighted assets):
DFC Consolidated $382,228 18.1 $ 84,568 >4.0 N/A N/A
-
Doral Bank PR $122,463 16.3 $ 29,983 >4.0 $44,974 >6.0
- -
Doral Bank NY $ 24,602 155.3 $ 634 >4.0 $ 951 >6.0
- -
Tier I capital (to average assets):
DFC Consolidated $382,228 8.8 $173,926 >4.0 N/A N/A
-
Doral Bank PR $122,463 9.6 $ 51,279 >4.0 $64,099 >5.0
- -
Doral Bank NY $ 24,602 79.5 $ 1,239 >4.0 $ 1,548 >5.0
- -
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 59
<PAGE> 61
[LOGO]
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO (%) AMOUNT RATIO (%) AMOUNT RATIO (%)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total capital (to risk-weighted assets):
DFC Consolidated $261,879 16.8 $124,430 >8.0 N/A N/A
-
Doral Bank PR $ 50,025 13.3 $ 30,204 >8.0 $37,754 >10.0
- -
Tier I capital (to risk-weighted assets):
DFC Consolidated $256,713 16.5 $ 62,215 >4.0 N/A N/A
-
Doral Bank PR $ 49,718 13.2 $ 15,102 >4.0 $22,653 >6.0
- -
Tier I capital (to average assets):
DFC Consolidated $256,713 9.2 $111,693 >4.0 N/A N/A
-
Doral Bank PR $ 49,718 8.0 $ 24,780 >4.0 $30,975 >5.0
- -
</TABLE>
Housing and Urban Development Requirements
The Company's mortgage operation is a U.S. Department of Housing and Urban
Development approved, supervised mortgagee, and is required to maintain an
excess of current assets over current liabilities and minimum net worth, as
defined by the various regulatory agencies. The Company is also required to
maintain fidelity bonds and errors and omission's insurance coverages based on
the balance of its servicing portfolio.
Registered Broker-Dealer Requirements
Doral Securities is registered as a broker-dealer with the Securities and
Exchange Commission ("SEC") and the Puerto Rico Office of the Commissioner of
Financial Institutions (the "CFI"). Doral Securities is a member of the National
Association of Securities Dealers (the "NASD"). As a registered broker-dealer,
it is subject to regulation by the SEC, the NASD and the CFI in matters relating
to the conduct of its securities business, including record keeping and
reporting requirements, supervision and licensing of employees and obligations
to customers. In particular, Doral Securities is subject to net capital rules,
which specify minimum net capital requirements for registered broker-dealers.
These are designed to ensure that such institutions maintain adequate regulatory
capital in relation to their liabilities and the size of their customer
business.
The Company is in compliance with these regulatory requirements.
4. MONEY MARKET INVESTMENTS
At December 31, 1999, the carrying value of securities purchased under
agreements to resell included in money market investments and the estimated
collateral value of the underlying securities is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) COLLATERAL
CARRYING ESTIMATED
TYPE OF COLLATERAL PLEDGED VALUE MARKET VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Mortgage-backed securities $15,992 $16,944
US Government securities 4,738 4,806
Other securities 700 768
------- -------
$21,430 $22,518
------- -------
</TABLE>
These securities were held on behalf of the Company by the dealers that arranged
the transactions.
5. MORTGAGE LOANS HELD FOR SALE
At December 31, mortgage loans held for sale consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Conventional single family
residential loans $ 660,700 $640,744
FHA/VA loans 136,087 137,742
Mortgage loans on
residential multifamily 128,191 53,074
Construction and commercial
real estate loans 87,712 46,253
Consumer loans secured
by mortgages 3,013 5,235
---------- --------
$1,015,703 $883,048
========== ========
</TABLE>
DORAL FINANCIAL CORPORATION
60 1999 ANNUAL REPORT
<PAGE> 62
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At December 31, the aggregate amortized cost and approximate market value of
these loans were as follows:
(In thousands)
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED APPROXIMATE
AMORTIZED COST HOLDING GAINS HOLDING LOSSES MARKET VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $ 1,015,703 $ 7,851 $ 4,975 $ 1,018,579
=========== ======== ======= ===========
1998 $ 883,048 $ 24,051 $ 2,662 $ 904,437
=========== ======== ======= ===========
</TABLE>
6. SECURITIES HELD FOR TRADING
Securities held for trading consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage-backed securities:
GNMA $ 680,606 $ 496,973
CMO certificates 39,993 38,593
FHLMC and FNMA 36,481 25,109
Interest-only strips 84,293 42,202
US Treasury 198 202
US Agencies 14,843 --
PR Government and Agencies 6,284 --
Other -- 3,839
--------- ---------
$ 862,698 $ 606,918
========= =========
</TABLE>
CMO certificates include, among others, the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest only certificates $ 14,008 $ 13,630
Subordinated certificates, CMO's established by the Company 5,716 5,421
Residual certificates, CMO's established by the Company 7,910 2,752
-------- --------
$ 27,634 $ 21,803
======== ========
</TABLE>
Net unrealized holding losses on trading
securities included in earnings for the
year ended December 31, 1999 amounted to
approximately $13,309,000 (1998 -
$2,791,000, 1997 - $2,427,000).
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 61
<PAGE> 63
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7. SECURITIES HELD-TO-MATURITY
The amortized cost, unrealized holding gains and losses, approximate market
value, weighted average yield and contractual maturities of held-to-maturity
securities as of December 31, 1999 and 1998 (1997 - only amortized cost and
weighted average yield are presented) were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999
- ----------------------------------------------------------------------------------------------------------------
WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
COST GAINS LOSSES VALUE YIELD
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED
GNMA
Due from five to ten years $ 2,295 $ 51 $ -- $ 2,346 6.50%
Due over ten years 24,294 941 67 25,168 6.99%
CMO CERTIFICATES
Due from one to five years 5,227 -- 37 5,190 6.06%
Due from five to ten years 5,944 4 29 5,919 6.71%
Due over ten years 127,764 1,072 70 128,766 5.89%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from one to five years 4,994 -- 269 4,725 6.22%
Due from five to ten years 9,885 -- 435 9,450 6.42%
FEDERAL HOME LOAN
BANK NOTES
Due from one to five years 26,539 -- 1,359 25,180 7.31%
Due from five to ten years 72,592 -- 4,345 68,247 7.30%
Due over ten years 598,031 -- 30,459 567,572 6.84%
ZERO COUPON
Due from five to ten years 182,944 -- -- 182,944 7.50%
Due over ten years 146,823 -- 923 145,900 7.86%
PR HOUSING BANK NOTES
Due over ten years 5,000 -- 125 4,875 6.20%
U.S. TREASURY
Due within a year 1,597 3 -- 1,600 5.03%
Due from five to ten years 70,061 -- 2,161 67,900 6.00%
Due over ten years 225,070 -- 22,545 202,525 5.48%
---------- ------- ---------- ---------- ----
$1,509,060 $ 2,071 $ 62,824 $1,448,307 6.71%
========== ======= ========== ========== ====
</TABLE>
DORAL FINANCIAL CORPORATION
62 1999 ANNUAL REPORT
<PAGE> 64
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<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------- ---------------------
WEIGHTED WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE AMORTIZED AVERAGE
COST GAINS LOSSES VALUE YIELD COST YIELD
------------------------------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED
GNMA
Due over ten years $ 31,511 $ 385 $ 19 $ 31,877 6.96% $ 5,053 7.00%
CMO CERTIFICATES
Due within a year -- -- -- -- -- 4,895 5.70%
Due from one to five years 3,030 -- -- 3,030 5.80% 5,871 5.60%
Due from five to ten years 14,084 -- -- 14,084 8.19% 12,483 5.89%
Due over ten years 137,153 983 2 138,134 5.84% 27,227 4.81%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from five to ten years -- -- -- -- -- 40,000 7.12%
FEDERAL HOME LOAN BANK NOTES
Due from five to ten years -- -- -- -- -- 5,000 7.00%
Due over ten years -- -- -- -- -- 30,000 7.44%
P.R. HOUSING BANK NOTES
Due over ten years 5,000 -- -- 5,000 6.20% 5,000 6.20%
U.S. TREASURY NOTES
Due within a year -- -- -- -- -- 6,989 5.37%
U.S. TREASURY BILLS
Due within a year -- -- -- -- -- 1,016 5.14%
--------- -------- -------- --------- ---- -------- ----
$ 190,778 $ 1,368 $ 21 $ 192,125 6.21% $143,534 6.39%
========= ======== ======== ========= ==== ======== ====
</TABLE>
The weighted average yield is computed based on amortized cost and, therefore,
does not give effect to changes in fair value. Expected maturities of
mortgage-backed securities and certain 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.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 63
<PAGE> 65
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8. SECURITIES AVAILABLE-FOR-SALE
The amortized cost, unrealized holding gains and losses, approximate market
value, weighted average yield and contractual maturities of securities
available-for-sale as of December 31, 1999 and 1998 (1997 - only market value
and weighted average yield are presented) were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
COST GAINS LOSSES VALUE YIELD
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEBT SECURITIES
US TREASURY
Due from five to ten years $ 68,648 $ -- $ 2,323 $ 66,325 5.50%
========= ======= ======== ========= ====
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE MARKET AVERAGE
COST GAINS LOSSES VALUE YIELD VALUE YIELD
-------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED
FNMA
Due over ten years $ -- $ -- $ -- $ -- -- $ 1,959 5.69%
FHLMC
Due over ten years -- -- -- -- -- 2,087 5.50%
GNMA
Due over ten years -- -- -- -- -- 44,537 7.01%
DEBT SECURITIES
US TREASURY
Due within a year 10,326 -- -- 10,326 4.95% -- --
Due over ten years 26,609 -- 343 26,266 5.50% 25,580 6.27%
FEDERAL HOME LOAN BANK NOTES
Due within a year 24,928 -- -- 24,928 5.09% -- --
Due from one to five years 25,000 31 -- 25,031 6.75% -- --
Due from five to ten years 45,000 56 -- 45,056 6.67% -- --
Due over ten years 263,933 283 -- 264,216 6.74% 166,713 7.37%
FEDERAL FARM CREDIT NOTES
Due from one to five years 8,000 40 -- 8,040 5.95% -- --
Due from five to ten years 5,000 25 -- 5,025 6.22% -- --
--------- ----- ----- --------- ------ --------- -----
$ 408,796 $ 435 $ 343 $ 408,888 6.48% $ 240,876 6.48%
========= ===== ===== ========= ====== ========= =====
</TABLE>
The weighted average yield is computed based on amortized cost and, therefore,
does not give effect to changes in fair value.
Proceeds from sales of securities available for sale during 1999 were
approximately $437,314,000 (1998 - $507,346,000, 1997 - $199,875,000). Gross
gains of $3,648,000 (1998 - $6,556,000, 1997 - $1,576,000) were realized on
those sales. For 1999, gross losses of $580,000 (1998 - $504,000) were realized
on those sales. No losses were sustained during 1997.
Expected maturities of mortgage-backed securities and certain 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.
DORAL FINANCIAL CORPORATION
64 1999 ANNUAL REPORT
<PAGE> 66
[LOGO]
9. LOANS RECEIVABLE
Loans receivable are related to the Company's banking and construction loan
operations and consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Construction loans $ 114,853 $ 72,081
Residential mortgage loans 70,659 80,902
Commercial real estate
mortgage loans 32,383 16,443
Consumer - secured
by mortgage 3,317 5,005
Loans on savings deposits 7,793 3,676
Commercial 16,989 11,051
Consumer - other 11,629 6,290
Land secured 19,927 21,418
--------- ---------
Gross loans 277,550 216,866
--------- ---------
Less:
Undisbursed portion
of loans in process (40,571) (47,575)
Unearned interest and
deferred loan fees (3,655) (648)
Allowance for loan losses (2,140) (1,656)
--------- ---------
(46,366) (49,879)
--------- ---------
Total loans $ 231,184 $ 166,987
========= =========
</TABLE>
As of December 31, 1999, the Company had loans receivable amounting to
approximately $4,503,000 (1998 - $3,671,000) on which the accrual of interest
income had been discontinued. If these loans had been accruing interest, the
additional interest income realized would have been approximately $393,000
(1998 - $335,000, 1997 - $201,000).
The adjustable rate loans, mostly composed of construction and commercial real
estate loans, have interest rate adjustment limitations and are generally tied
to various market indexes. Future market factors may affect the correlation of
the interest rate adjustment with the rate the Company pays on the short-term
deposits that have primarily funded these loans.
At December 31, 1999, fixed rate loans and adjustable rate loans were
approximately $120,873,000 and $116,106,000, respectively.
The Company evaluated the loans receivable, some individually and others as a
homogeneous group, for purposes of determining impairment. The Company
determined that, individually and as a group of homogeneous loans, given the
characteristics of most of its loans, no impairment reserve was necessary at
December 31, 1999 and 1998.
10. ALLOWANCES FOR LOSSES
Changes in the allowances for losses were as follows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for real estate held for sale:
Balance at beginning of period $ 1,011 $ 676 $ 356
Provision for losses 620 1,402 787
Losses charged to the allowance (721) (1,067) (467)
-------- -------- --------
Balance at the end of period $ 910 $ 1,011 $ 676
======== ======== ========
Allowance for loan losses:
Balance at beginning of period $ 5,166 $ 2,866 $ 2,152
Provision for loan losses 2,626 883 792
Recoveries 358 76 46
Other adjustments -- 1,468 --
Losses charged to the allowance (2,014) (127) (124)
-------- -------- --------
Balance at the end of period $ 6,136 $ 5,166 $ 2,866
======== ======== ========
</TABLE>
The Company allocates the allowance for loan losses between loans held-for-sale
and loans receivable. At December 31, 1999, of the total allowance for loan
losses, approximately $3,996,000 and $2,140,000, was allocated to loans
held-for-sale and loans receivable, respectively.
DORAL FINANCIAL CORPORATION 65
1999 ANNUAL REPORT
<PAGE> 67
[LOGO]
11. PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Office furniture and equipment $ 17,108 $ 9,907
Leasehold improvements 12,459 7,929
Automobiles 792 579
Office building 1,865 367
-------- --------
32,224 18,782
Less - Accumulated depreciation and amortization (11,326) (7,810)
-------- --------
20,898 10,972
Land 6,344 4,607
Construction in progress 10,202 3,694
-------- --------
$ 37,444 $ 19,273
======== ========
</TABLE>
For information regarding the capitalization of costs incurred in the
construction of the Company's new headquarters, please refer to Note 33.
12. SERVICING ASSETS
The changes in servicing assets are shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 72,568 $ 46,416 $ 20,969
Capitalization of rights 45,013 26,586 13,980
Rights sold (7) (54) --
Rights purchased 3,135 6,290 14,904
Amortization:
Scheduled (10,988) (5,739) (3,437)
Unscheduled -- (931) --
--------- -------- --------
Balance at the end of period $ 109,721 $ 72,568 $ 46,416
========= ======== ========
</TABLE>
The Company's servicing portfolio amounted to approximately $7.6 billion, $6.2
billion and $4.7 billion at December 31, 1999, 1998 and 1997, respectively,
including $1.1 billion, $925 million and $393 million, respectively, of loans
serviced for the Company and its affiliates.
During the year ended December 31, 1998, the Company sold rights to service
loans amounting to approximately $103 million. There were no such sales during
the years ended December 31, 1999 and 1997. During the years ended December 31,
1999, 1998 and 1997, the Company purchased rights to service loans amounting to
approximately $238.3 million, $380.4 million and $1 billion, respectively.
DORAL FINANCIAL CORPORATION
66 1999 ANNUAL REPORT
<PAGE> 68
[LOGO]
13. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Amounts retained on mortgage
loans, generally paid
within 5 days $ 3,521 $ 16,696
Customer mortgages and
closing expenses payable 2,627 5,580
Deferred compensation plan 1,365 1,838
Incentive compensation payable 6,938 8,339
Accrued expenses and other
payables 89,111 75,469
Deferred tax liability 7,696 9,752
--------- ---------
$ 111,258 $ 117,674
========= =========
</TABLE>
14. LOANS PAYABLE
At December 31, 1999 and 1998, the Company had several mortgage warehousing
lines of credit and gestation or presale facilities totaling approximately $1.1
billion and $626 million, respectively. Advances under these facilities are
secured by loans held for subsequent inclusion in GNMA, FNMA , and FHLMC pools
or for sale to financial investors.
Loans payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Loans payable resulting from
the use of warehousing lines
of credit and gestation or
presale facilities due in 2000
at various variable rates
averaging - 6.53% and 6.69%
at December 31, 1999 and
1998, respectively, and other
financing arrangements. $ 353,460 $ 426,704
========= =========
</TABLE>
Maximum borrowings outstanding at any month-end during 1999 and 1998 were $449
million and $429 million, respectively. The approximate average outstanding
borrowings during the periods were $375 million and $364 million, respectively.
The weighted average interest rate of such borrowings, computed on a monthly
basis, was 6.48% in 1999 and 7.18% in 1998.
The existing warehousing credit facilities and other financing arrangements
require the Company to maintain certain capital ratios and to comply with other
requirements. At December 31, 1999, the Company was in compliance with these
requirements.
15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company sells mortgage-backed securities and mortgage loans under
agreements to repurchase. The securities underlying the agreements to
repurchase were delivered to, and are being held by, the counterparties with
whom the repurchase agreements were transacted. The counterparties have agreed
to resell to the Company the same or substantially similar securities at the
maturity of the agreements. The following summarizes significant data about
securities sold under agreements to repurchase for the years ended December 31,
1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Carrying amount as of
December 31, $ 1,927,956 $ 1,197,328
----------- -----------
Average monthly aggregate
balance outstanding $ 1,418,004 $ 1,073,000
----------- -----------
Maximum balance outstanding
at any month-end $ 1,927,956 $ 1,236,000
----------- -----------
Weighted average interest
rate during the year 5.13% 5.18%
----------- -----------
Weighted average interest
rate at year end 5.54% 5.26%
----------- -----------
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 67
<PAGE> 69
[LOGO]
The carrying and market values of securities available-for-sale and securities
held-to-maturity pledged as collateral at December 31, were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
CARRYING MARKET REPURCHASE REPO CARRYING MARKET REPURCHASE REPO
VALUE VALUE LIABILITY RATE VALUE VALUE LIABILITY RATE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB Discount Notes
Term up to 30 days $ 73,447 $ 70,125 $ 68,610 5.30% $ 96,981 $ 97,130 $ 93,248 5.26%
Term of 30 to 90 days 119,308 113,160 112,676 5.48% 56,125 56,240 54,275 5.49%
Term over 90 days 622,991 605,776 505,552 5.25% 152,065 152,171 144,469 5.08%
Federal Farm Cedit Notes
Term over 90 days 14,879 14,175 13,750 4.80% -- -- -- --
CMO Certificates
Term up to 30 days 41,234 41,530 40,276 5.49% 1,373 1,367 1,220 5.85%
Term of 30 to 90 days 85,446 86,093 78,300 6.20% 73,119 72,437 65,688 5.34%
US Treasury Securities
Term up to 30 days -- -- -- -- 26,609 26,265 26,375 2.24%
Term of 30 to 90 days 292,737 276,225 283,662 4.38% -- -- -- --
PRHB Notes
Term over 90 days -- -- -- -- 5,000 5,000 4,845 5.29%
---------- ---------- ---------- ---- -------- -------- -------- ----
$1,250,042 $1,207,084 $1,102,826 5.12% $411,272 $410,610 $390,120 4.93%
========== ========== ========== ==== ======== ======== ======== ====
</TABLE>
DORAL FINANCIAL CORPORATION
68 1999 ANNUAL REPORT
<PAGE> 70
[LOGO]
16. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to bank at 5.69% interest rate due on June 27, 1999 $ -- $ 10,000
Demand Note at 9% interest collateralized by CMO certificates 1,000 1,000
Unsecured notes, payable at interest rates ranging from 6.50% to 8.50%, final payment
dates ranging from February 2000 to August 2004 3,431 2,710
Note payable to bank, collateralized by CMO certificates, at variable interest
rates (7.50% and 8.00% at December 31, 1999 and 1998, respectively) and due on
February 15, 2000 2,564 2,709
Unsecured note payable to bank, at variable interest rates
(7.68 % at December 31, 1999), due April 30, 2000 15,000 --
Note payable to bank, collateralized by CMO certificates, at variable interest
rates (7.50% and 8.50% at December 31, 1999 and 1998, respectively) and due on
October 10, 2000 7,193 8,079
Term-notes payable to corporate investors, collateralized by stand-by letters of
credit issued by the Federal Home Loan Bank of New York:
at 6.50% maturing on October 13, 2000 8,100 8,100
at variable interest rates (5.46% and 5.12% at December 31, 1999 and 1998,
respectively) due on November 17, 2000 5,000 5,000
at 5.70% due on November 27, 2000 5,000 5,000
at 6.05% due on May 23, 2001 5,000 5,000
at 5.98% due on June 19, 2001 10,000 10,000
at 6.30% due on September 18, 2001 10,000 10,000
at 6.28% due on September 24, 2001 10,000 10,000
Bond payable secured by mortgage on building at fixed rates ranging from 6.10% to
6.90% with maturities ranging from June 2003 to December 2029 44,765 --
Unsecured medium term notes at 8.50%, due in May 2004 200,000 --
Unsecured senior term notes at fixed rates ranging from 8.35% to 8.55% with
maturities ranging from August 2004 to August 2007 29,000 --
7.84% Senior Notes due on October 10, 2006 75,000 75,000
Note payable to bank, collateralized by mortgage servicing rights held by the Company,
at variable interest rates ranging from 7.20% to 7.56%, due on June 23, 2000 30,000 45,000
Mortgage note secured by land at 7.56% interest rate and due on June 30, 1999 -- 2,135
-------- --------
$461,053 $199,733
======== ========
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 69
<PAGE> 71
[LOGO]
At December 31, 1999, the scheduled aggregate annual maturities of notes payable
were approximately as follows:
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000 $ 74,867
2001 35,050
2002 2,171
2003 730
2004 205,770
2005 and thereafter 142,465
--------
$461,053
========
</TABLE>
17. DEPOSIT ACCOUNTS
At December 31, deposits and their weighted average interest rates are
summarized as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
AMOUNT % AMOUNT %
---------- ---- -------- ----
<S> <C> <C> <C> <C>
Certificates of deposit $ 697,355 5.73 $305,423 5.77
Regular savings 54,732 4.62 46,593 4.74
NOW accounts 137,189 4.64 63,605 5.06
Non interest-bearing deposits 121,148 -- 117,492 --
---------- ---- -------- ----
$1,010,424 4.83 $533,113 4.30
========== ==== ======== ====
</TABLE>
At December 31, 1999 and 1998, certificates of deposit over $100,000 amounted to
approximately $510,927,000 and $176,330,000, respectively.
A summary of certificates of deposit by maturity as of December 31, 1999
follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------
<S> <C>
2000 $569,887
2001 37,408
2002 28,918
2003 41,849
2004 18,620
2005 and thereafter 673
--------
$697,355
========
</TABLE>
At December 31, 1999, Doral Bank PR had brokered certificates of deposit
amounting to $295,360,000 maturing as follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------
<S> <C>
2000 $203,651
2001 23,183
2002 23,729
2003 27,714
2004 16,956
2005 and thereafter 127
--------
$295,360
========
</TABLE>
At December 31, 1999, the banking subsidiaries had deposits from officers,
directors, employees and stockholders of the Company amounting to approximately
$2,355,000 (1998 - $1,206,000).
The Company, as a servicer of loans, is required to maintain certain balances on
behalf of the borrowers called escrow funds. At December 31, 1999, escrow funds
amounted to approximately $91,159,000 (1998 - $109,825,000), of which
$81,834,000 was deposited with Doral Bank PR (1998- $78,761,000). The remaining
escrow funds were deposited with other banks and therefore excluded from the
Company's assets and liabilities.
18. ADVANCES FROM THE FEDERAL HOME LOAN BANK
At December 31, advances from the Federal Home Loan Bank of New York ("FHLB")
consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
5.780% due on February 29, 2000 $ 30,000 $ --
6.307% due on July 21, 2000 5,000 5,000
6.090% due on August 31, 2000 15,000 --
at variable rates due on September 21,
2000 (5.583% at December 31, 1999) 20,000 --
6.445% due on July 17, 2002 5,000 5,000
5.959% due on January 29, 2003 5,000 5,000
4.795% due on February 3, 2004 12,000 --
6.454% due on October 10, 2007 10,000 10,000
6.380% due on December 31, 2007 7,000 7,000
5.270% due on July 21, 2009 25,000 --
-------- -------
$134,000 $32,000
======== =======
</TABLE>
At December 31, 1999, the Company had posted qualified collateral, in the form
of first mortgage notes and mortgage-backed securities with a market value of
$293,128,000 pledged to secure the above advances from the FHLB and stand-by
letters of credit issued by the FHLB as collateral for term-notes in aggregate
amount of $53,100,000 shown under notes payable.
DORAL FINANCIAL CORPORATION
70 1999 ANNUAL REPORT
<PAGE> 72
[LOGO]
19. INCOME TAXES
Under the provisions of Law No. 38 of May 20, 1983, the Company is exempt from
the payment of Puerto Rico income taxes on the interest earned on mortgage loans
on residential properties located in Puerto Rico which were executed after June
30, 1983, and are insured or guaranteed pursuant to the provisions of the
National Housing Act of June 27, 1934, as amended, and pursuant to the
provisions of the Servicemen's Readjustment Act of 1944, as amended. On July 22,
1997, an amendment to the Puerto Rico Internal Revenue Code was adopted that
modified the tax-exempt treatment of FHA and VA loans secured by real property
located in Puerto Rico and GNMA mortgage-backed securities backed by such loans.
Under the terms of the amendment, effective August 1, 1997, only FHA and VA
loans to finance the original acquisition of newly constructed housing in Puerto
Rico and mortgage-backed securities backed by such loans qualify for tax-exempt
treatment. The amendment grandfathered the tax-exempt status of FHA and VA loans
originated prior to August 1, 1997, and mortgage-backed securities backed by
such loans.
Given the beneficial tax characteristics of these assets, the Company holds such
loans and mortgage-backed securities for longer periods of time prior to sale in
order to maximize the tax exempt interest produced by these securities and
loans. Therefore, net interest income has generally represented a greater
proportion of the Company's total net income than that of a typical mortgage
banking institution.
Those operations of the Company conducted through Puerto Rico corporations, are
not subject to United States income tax for income derived from business in
Puerto Rico. Substantially all of the Company's operations are conducted in
Puerto Rico; therefore, the amount of U.S. income taxes is not significant.
Consolidated tax returns are not permitted under the Puerto Rico Internal
Revenue Code; therefore, income tax returns are filed individually by each
entity that conducts business as a Puerto Rico corporation.
Doral Bank as a Puerto Rico Chartered Commercial Bank
Doral Bank PR is subject to Puerto Rico income tax on its income derived from
all sources. Doral Bank PR is also subject to United States income taxes on
certain types of investment income from U.S. sources and also on income
effectively connected with any trade or business from U.S. sources. However, any
federal income tax paid by Doral Bank PR is, subject to certain conditions and
limitations, creditable as a foreign tax credit against its Puerto Rico income
tax liability.
Reconciliation of Effective Tax Rate
The provision for income taxes of the Company differs from amounts computed by
applying the applicable Puerto Rico statutory rate to income before taxes. A
reconciliation of the difference follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $76,613 $59,839 $37,797
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
% OF PRETAX % OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rates $ 29,879 39.0 $ 23,337 39.0 $ 14,741 39.0
Tax effect of exempt interest
income, net of disallowance (13,764) (18.0) (13,237) (22.1) (8,118) (21.5)
Tax effect of capital gains (1,072) (1.4) (1,925) (3.2) (840) (2.2)
Other, net (6,356) (8.3) (1,168) (2.0) (534) (1.4)
-------- ---- -------- ---- -------- ----
Provision for income taxes $ 8,687 11.3 $ 7,007 11.7 $ 5,249 13.9
======== ==== ======== ==== ======== ====
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 71
<PAGE> 73
[LOGO]
The components of income tax expense for the years ended December 31 are
summarized below
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $5,770 $6,588 $3,956
Deferred income tax expense 2,917 419 1,293
------ ------ ------
Total income tax expense $8,687 $7,007 $5,249
====== ====== ======
</TABLE>
At December 31, the components of the net deferred tax liability were:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities resulting from:
Deferred income for tax purposes $(20,645) $(23,674)
Deferred income (costs) for book purposes 100 (785)
-------- --------
(20,545) (24,459)
-------- --------
Deferred tax assets resulting from:
Unrealized losses 11,099 11,244
Undeducted expenses 1,124 1,779
Others 626 1,684
-------- --------
12,849 14,707
-------- --------
Net deferred tax liability $ (7,696) $ (9,752)
======== ========
</TABLE>
20. RELATED PARTY TRANSACTIONS
Mortgage loans held for sale include approximately $2,500,000 of loans to
officers, directors and stockholders of the Company at prevailing interest rates
(1998 - $1,590,000).
The Company paid a computer service bureau, in which it holds a 33% interest,
$1,319,000, $946,000 and $1,012,000 for services rendered during the years ended
December 31, 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998,
the value of the Company's equity interest in this service bureau was not
significant.
21. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments may include commitments to extend credit and sell mortgage-backed
securities and loans, and options on futures contracts. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial position.
The contractual amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments. The Company's
exposure to credit losses in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit or for forward sales
is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making these commitments as it does for on-balance
sheet instruments. At December 31, 1999, commitments to extend credit amounted
to approximately $46,770,000 and commitments to sell mortgage-backed securities
and loans amounted to approximately $568,819,000. Management believes that the
Company has the ability to meet these commitments and that no loss will result
from the same. Commitments to extend credit are agreements to lend to a customer
as long as the conditions established in the contract are met. Commitments
generally have fixed expiration dates or other termination clauses. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
A geographic concentration exists within the Company's loan portfolios since
most of the Company's business activity is with customers located in Puerto Rico
and most of its loans are secured by properties located in Puerto Rico.
DORAL FINANCIAL CORPORATION
72 1999 ANNUAL REPORT
<PAGE> 74
[LOGO]
The Company controls the credit risk of its future contracts through credit
approvals, limits and monitoring procedures. Options on future contracts confer
the right from sellers to buyers to take a future position at a stated price.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movements in securities values and interest rates.
Collateral for securities purchased under agreements to resell is kept by the
seller under custody agreements. Collateral for securities sold under agreements
to repurchase is kept by the purchaser.
Recourse sales generally involve the sale of non-conforming loans to local
financial institutions and to FNMA and FHLMC. As of December 31, 1999 and 1998,
the Company's recourse obligations relating to its mortgage servicing portfolio
were approximately $608.9 million and $489.1 million, respectively.
From time to time the Company may sell loans or mortgage-backed securities with
put options. At December 31, the changes in the amounts of loans sold under
these arrangements were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 91,495 $ 175,602
Puts issued -- --
Puts expired (15,085) (64,557)
Principal repayment of
underlying loans and
mortgage-backed securities (22,833) (19,550)
-------- ---------
Ending balance $ 53,577 $ 91,495
======== =========
</TABLE>
These put arrangements expire between one to two years. If a put option is
exercised, the Company would have to buy back these securities at an agreed
price, adjusted for future prepayments. As required by SFAS No. 125, the put
options have been recorded as a liability in the accompanying consolidated
financial statements and are marked to market every quarter. At December 31,
1999 and 1998, the market value of the instruments under put options exceed the
put option exercise price.
22. PENSION AND COMPENSATION PLANS
The Company has a noncontributory target benefit pension plan (the "Plan"). The
Plan generally covers all full time Company employees who have completed one
year of service and have attained age 21.
Under the Plan, the Company contributes annually the funding amount which is
projected to be necessary to fund the targeted benefit. The target benefit is
based on years of service and employees' compensation, as defined in the Plan.
The Company has the right to terminate the Plan at any time. Upon termination,
all amounts credited to the participants' accounts will become 100% vested.
Contributions made to the Plan during the years ended December 31, 1999, 1998
and 1997 amounted to approximately $1,090,000, $998,000 and $702,000,
respectively.
The Company has unfunded deferred incentive compensation arrangements (the
"Deferred Compensation") with certain employees. The Deferred Compensation is
determined as a percentage of net income arising from the mortgage-banking
activities, as defined, and is payable to participants after a five-year vesting
period. The expense for the years ended December 31, 1999, 1998, and 1997,
amounted to approximately $200,000, $975,000 and $305,000, respectively.
The Company also has incentive compensation arrangements payable currently with
certain officers. The incentive payments are based on the amount of consolidated
net income (adjusted for certain amounts such as extraordinary gains or losses)
in excess of an established return on stockholders' equity, as defined in the
agreements. The expense under these arrangements for the years ended December
31, 1999, 1998, and 1997, amounted to approximately $6,844,000, $7,228,000 and
$4,915,000, respectively.
23. COMMITMENTS AND CONTINGENCIES
The Company has several noncancellable operating leases for office facilities
expiring from 2000 through 2005 and thereafter. Total minimum rental commitments
for leases in effect at December 31, 1999 are as follows:
(In thousands)
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------
<S> <C>
2000 $ 4,339
2001 3,755
2002 2,980
2003 2,671
2004 2,396
2005 and thereafter 19,119
-------
$35,260
=======
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 73
<PAGE> 75
[LOGO]
Total rental expense for the years ended December 31, 1999, 1998, and 1997,
amounted to approximately $4,500,000, $3,300,000 and $2,500,000, respectively.
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of business and have not been adjudicated. These actions, when
finally concluded, will not, in the opinion of management, have a material
adverse effect upon the financial position or results of operations of the
Company.
In connection with its mortgage securitization activities, the Company has
entered into Insurance and Indemnity Agreements (the "Agreements") with
insurance companies providing for the issuance of financial guaranty insurance
policies. The insurance policies cover the payment of amounts due with respect
to senior certificates issued by CMO grantor's trusts established by the
Company, and provide, among other things, that the Company cannot sell, transfer
or pledge the residual certificates issued by the trusts, (amounting to
approximately $4,236,000), without the insurance company's approval because the
residual certificates are pledged as collateral to the insurance company.
24. CAPITAL STOCK AND PAID-IN CAPITAL
The authorized number of shares of common stock was increased during 1999 from
50,000,000 to 200,000,000 shares. The number of authorized shares of preferred
stock was increased from 2,000,000 to 10,000,000 shares.
On February 22, 1999, the Company issued 1,495,000 shares of its 7%
Non-Cumulative Monthly Income Preferred Stock, Series A (the "7% Preferred
Stock") at a price of $50 per share. The 7% Preferred Stock is not convertible
into shares of common stock or any other equity security. The terms of the 7%
Preferred Stock prohibit the Company from paying dividends on the Common Stock
unless all accrued and unpaid dividends for the 12 preceding monthly dividend
periods have been paid. The holders of the 7% Preferred Stock are entitled to
receive non-cumulative cash dividends when declared by the Board of Directors at
an annual rate of 7% of its liquidation preference, payable monthly. The 7%
Preferred Stock may be redeemed at the option of the Company beginning on
February 28, 2004, at varying redemption prices that start at $51.00 per share.
On April 23, 1998, the Board of Directors of the Company declared a two-for-one
stock split of the Company's common stock held by registered shareholders as of
May 8, 1998. The stock split was effective on May 20, 1998. All amounts in the
financial statements and the accompanying notes have been restated to reflect
the stock split. The stock split did not dilute shareholders' voting rights or
their proportionate interest in the Company.
In 1995, the Company issued $10 million of 8.25% Convertible Subordinated
Debenture due on January 1, 2006. Pursuant to the Debenture Agreement, on April
29, 1997, $1,540,000 of the Convertible Subordinated Debentures was converted
into 352,000 shares of the Company's common stock at a conversion price of
$4.375 (amounts after giving effect to the stock split). On July 9, 1997, the
Company entered into an agreement to exchange the remaining Convertible
Subordinated Debentures for 8,460 shares of newly issued 8% Convertible
Cumulative Preferred Stock (liquidation preference $1,000 per share) ("8%
Preferred Stock"). The 8% Preferred Stock is convertible into common stock at a
conversion price of $4.375 (after giving effect to the stock split). The 8%
Preferred Stock has a preference in liquidation over the common stock. In
addition, the terms of the agreement prohibit the Company from paying dividends
on the common stock if the dividend of the 8% Preferred Stock is in arrears. The
holder of the 8% Preferred Stock is entitled to receive cumulative cash
dividends when declared by the Board of Directors at an annual rate 8% of the
liquidation preference.
The 8% Preferred Stock is not redeemable prior to January 1, 2001. On or after
that date, the 8% Preferred Stock becomes redeemable at the option of the
Company at the following redemption prices:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
--------------------------------------------
<S> <C>
2001 $1,020
2002 1,015
2003 1,010
2004 1,005
2005 and thereafter 1,000
</TABLE>
All other terms of the conversion agreement remained unchanged from the original
agreement. On October 22, 1997, the holder of the Convertible Subordinated
Debentures completed the exchange of the debentures for 8,460 shares of 8%
Preferred Stock with an aggregate liquidation preference of $8,460,000. In
connection with this conversion, the Company recorded an extraordinary non-cash
loss of $12.3 million (see Note 32).
DORAL FINANCIAL CORPORATION
74 1999 ANNUAL REPORT
<PAGE> 76
The ability of the Company to pay dividends in the future is limited by various
restrictive covenants contained in the debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Indenture of the Senior Notes
from paying dividends on capital stock (other than dividends payable in the form
of capital stock or stock rights) if an event of default under any such
agreements exists at such time, or if the amount of dividends payable by the
Company together with the aggregate amount of dividends paid and other capital
distributions made since specified dates exceed a defined amount. In addition,
under the Syndicated Credit Agreement, the Senior Notes Indenture and other debt
agreements of the Company, the Company is prohibited from paying dividends if it
fails to maintain specified minimum levels of net worth and dividends ratios,
and certain other financial ratios.
Present regulations limit the amount of dividends that Doral Bank PR and Doral
Bank NY may pay. Payment of such dividends is prohibited if, among other things,
the effect of such payment would cause the capital of Doral Bank PR or Doral
Bank NY to fall below the regulatory capital requirements. In addition, the
Federal Reserve Board has issued a policy statement that provides that insured
banks and bank holding companies should generally pay dividends only out of
current operating earnings.
25. STOCK OPTION PLANS
The Company has a Restricted Stock Plan and a Stock Option Plan. The Restricted
Stock Plan provides for the granting of up to 1,000,000 shares of common stock
to selected officers. Up to 1994, a total of 711,224 shares were awarded and
issued under the Restricted Stock Plan. No shares have been awarded since 1994.
The terms of the Restricted Stock Plan permit the imposition of restrictions
ranging from one to five years on the sale or disposition of the shares issued.
On April 16, 1997, the Company adopted a new employee stock option plan. This
plan allows for the granting up to 2,000,000 purchase options on shares of the
Company's common stock to employees, including officers and directors who are
also employees of the Company. The Compensation Committee of the Board of
Directors has the authority and absolute discretion to determine the number of
stock options to be granted, their vesting rights, and the option exercise
price. The vesting rights, however, cannot exceed ten years and the exercise
price may not be lower than the market value at the date of the grant.
The stock option plan also permits the Compensation Committee to grant rights to
optionees ("stock appreciation rights") under which an optionee may surrender
any exercisable stock option in return for cash equal to the excess of the fair
value of the common stock to which the option is related at the time of exercise
over the option price of the common stock at grant date. The stock option plan
provides for a proportional adjustment in the exercise price and the number of
shares that can be purchased in the event of a stock split, reclassifications of
stock and a merger or reorganization.
During 1999 and 1998, the Company granted 930,000 and 452,600 options,
respectively, to buy shares of the Company's stock that will be exercisable over
a period ranging from one to ten years. The options granted do not contain stock
appreciation rights. Fifty percent (50%) of the options granted vest on the
first anniversary of the grant date and the remaining 50% vest on the second
anniversary. The options prices equaled the quoted market price of the stock at
the grant date; therefore, no compensation cost was recognized.
The following table summarizes the exercise price and the weighted average
remaining contractual life of the options outstanding at December 31, 1999.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE AVERAGE
EXERCISE OUTSTANDING CONTRACT EXERCISE
PRICE OPTIONS LIFE (YEARS) PRICE
------------------------------------------------------
<S> <C> <C> <C>
$15.22 416,300 8.25 $15.22
====== ======= ===== ======
$11.25 930,000 10.00 $11.25
====== ======= ===== ======
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 75
<PAGE> 77
[LOGO]
As described in Note 2, the Company uses the intrinsic value-based method to
account for stock options. Accordingly, no compensation cost has been recognized
for the Company's stock option plan. Had the Company implemented the fair value
method described in SFAS No. 123, it would have recognized compensation expense
over the expected life of the options based on their fair market value, thus the
Company's net income and earnings per common share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands,
except per share information) 1999
- -------------------------------------------------------------
<S> <C>
Compensation and Benefits:
Reported $44,838
Pro forma $45,578
Net Income:
Reported $67,926
Pro forma $67,200
Basic Earnings Per Share:
Reported $ 1.55
Pro forma $ 1.54
Diluted Earnings Per Share:
Reported $ 1.50
Pro forma $ 1.48
</TABLE>
The fair value of the options granted in fiscal year 1999 was estimated using
the Black-Scholes option pricing model with the following assumptions:
- Stock Price and Exercise Price - The stock price is $11.25 and
the estimated fair value, based on the term of the awards, was
$3.50 per option.
- Expected Option Term - 4 years
- Expected Volatility - 37%
- Expected Dividend Yield - 2.67%
- Risk-Free Interest Rate - 6.35%
26. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(In thousands, except share data) (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999:
<S> <C> <C> <C>
Income before extraordinary item $ 67,926
Less: Convertible preferred stock dividend (677)
Less: Nonconvertible preferred stock dividend (4,463)
----------
Basic EPS
Income available to commonshareholders 62,786 40,428,920 $ 1.55
========== =========== ============
Effect of dilutive securities
Convertible Preferred Stock 677 1,933,714
Incremental Shares Options 58,843
---------- -----------
Diluted EPS
Income available to common shareholders
plus assumed conversions $ 63,463 42,421,477 $ 1.50
========== =========== ============
</TABLE>
76 DORAL FINANCIAL CORPORATION
1999 ANNUAL REPROT
<PAGE> 78
[LOGO]
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(In thousands, except share data) (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998:
<S> <C> <C> <C>
Income before extraordinary item $ 52,832
Less: Convertible preferred stock dividend (676)
----------
Basic EPS
Income available to common shareholders 52,156 39,941,068 $ 1.31
========== =========== ============
Effect of dilutive securities
Convertible Preferred stock 676 1,933,714
Incremental Shares Options 53,404
---------- -----------
Diluted EPS
Income available to common shareholders
plus assumed conversions $ 52,832 41,928,186 $ 1.26
========== =========== ============
AS OF DECEMBER 31, 1997:
Income before extraordinary item $ 32,548
Less: serial preferred stock dividend (130)
----------
Basic EPS
Income available to commonshareholders 32,418 36,680,158 $ 0.89
========== =========== ===========
Effect of dilutive securities
Convertible Subordinated Debentures 371 1,677,626
Serial Preferred Stock 130 370,848
---------- -----------
Diluted EPS
Income available to common shareholders
plus assumed conversions $ 32,919 38,728,632 $ 0.85
========== =========== ===========
</TABLE>
27. SUPPLEMENTAL INCOME STATEMENT INFORMATION
Employee costs and other expenses are shown in the Consolidated Statements of
Income net of direct loan origination costs. Pursuant to SFAS No. 91, direct
loan origination costs are capitalized as part of the carrying cost of mortgage
loans and are charged against mortgage loan sales and fees when the loans are
sold.
Set forth below is a reconciliation of the application of SFAS No. 91 to
employee costs and other expenses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee costs, gross $ 68,566 $ 52,152 $ 37,430
Deferred costs pursuant to SFAS No. 91 23,728 30,994 29,319
------------ ------------ -------------
Employee cost, net $ 44,838 $ 21,158 $ 8,111
============ ============ =============
Other expenses, gross $ 19,560 $ 14,388 $ 10,498
Deferred costs pursuant to SFAS No. 91 5,912 5,112 3,213
------------ ------------ -------------
Other expenses, net $ 13,648 $ 9,276 $ 7,285
============ ============ =============
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 77
<PAGE> 79
[LOGO]
28. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below presents the carrying amounts and fair values of the Company's
financial instruments at December 31, 1999 and 1998. FASB Statement No. 107,
"Disclosures about Fair Value of Financial Instruments," defines the fair value
of financial instruments as the amount at which the instruments could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Significant differences can arise between the fair
value and carrying amount of financial instruments that are recognized at
historical cost amounts.
<TABLE>
<CAPTION>
1999 1998
CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 25,793 $ 25,793 $ 31,945 $ 31,945
Money market investments 370,236 370,236 312,751 312,751
Mortgage loans held for sale 1,015,703 1,018,579 883,048 904,437
Securities held for trading 862,698 862,698 606,918 606,918
Securities held to maturity 1,509,060 1,448,307 190,778 192,125
Securities available for sale 66,325 66,325 408,888 408,888
Loans receivable 231,184 231,294 166,987 169,410
Servicing assets 109,721 138,294 72,568 86,045
FINANCIAL LIABILITIES:
Loans payable $ 353,460 $ 353,460 $ 426,704 $ 426,704
Securities sold under agreements to repurchase 1,927,956 1,918,416 1,197,328 1,196,199
Deposit accounts 1,010,424 1,007,487 533,113 532,702
Notes payable 461,053 453,756 199,733 207,249
Advances from FHLB 134,000 132,878 32,000 32,911
Off-balance sheet financial instruments -
Interest rate swap agreements in a net payable position -- $ 737 -- $ (3,491)
</TABLE>
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Cash and due from banks, money market investments and loans payable: valued at
the carrying amounts in the consolidated statements of financial condition. The
carrying amounts are reasonable estimates of fair value due to the relatively
short period to maturity.
Mortgage loans held for sale, securities held for trading, securities held to
maturity and securities available-for-sale: valued at quoted market prices, if
available. For securities without quoted prices, fair values represent quoted
market prices for comparable instruments. In a few other cases, fair values have
been estimated based on assumptions concerning the amount and timing of
estimated future cash flows and assumed discount rates reflecting varying
degrees of risk.
Loans receivable: valued on the basis of estimated future principal and interest
cash flows, discounted at various rates. Loan prepayments are assumed to occur
at speeds experienced in previous periods when interest rates were at levels
similar to current levels, adjusted for any differences in the interest rate
scenario. Future cash flows for homogeneous categories of loans, such as
residential mortgage loans, are estimated on a portfolio basis and discounted at
current rates offered for similar loan terms to new borrowers with similar
credit profiles. Quoted market prices for securities backed by similar loans,
adjusted for different loan characteristics, are also used in estimating fair
value.
Servicing assets: valued based on the market prices for comparable servicing
sales contracts based on similar types of groups of loans. To further evaluate
the estimated fair value of such servicing rights, the Company utilizes
independent valuations based on present value calculations of the expected
future cash flows associated with the
DORAL FINANCIAL CORPORATION
78 1999 ANNUAL REPORT
<PAGE> 80
[LOGO]
the servicing rights. Such valuations are based on assumptions that market
participants would use in estimating future servicing income and expense, such
as: discount rates, prepayment speeds, estimates of servicing cost, ancillary
income per loan and default rates.
Deposit accounts: for demand deposits and deposits with no defined maturities,
fair value is taken to be the amount payable on demand at the reporting date.
The fair values of fixed-maturity deposits, including certificates of deposit,
are estimated using rates currently offered for deposits of similar remaining
maturities. The value of long-term relationships with depositors is not taken
into account in estimating the fair values disclosed.
Notes payable, advances from FHLB and securities sold under agreements to
repurchase: valued utilizing discounted cash flow analysis over the remaining
term of the obligation using market rates for similar instruments.
Derivatives: fair value is estimated as the amounts that the Company would
receive or pay to terminate the contracts at the reporting date, taking into
account the current unrealized gains or losses of open contracts. Market or
dealer quotes are available for many derivatives; otherwise, pricing or
valuation models are applied to current market information to estimate fair
value.
29. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
Financial data showing results for the end of the quarters in 1999 and 1998 is
presented below. These results are unaudited. In the opinion of management all
adjustments necessary for a fair presentation have been included:
<TABLE>
<CAPTION>
Quarters
(In thousands, except per share data) 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Interest income $42,738 $46,893 $55,828 $66,220
Net interest income 10,862 12,981 13,407 12,634
Provision for loan losses 295 458 878 995
Non-interest income 28,792 30,494 33,018 34,607
Net income 15,671 17,268 17,278 17,709
Earning per common share-Basic 0.37 0.39 0.39 0.40
Earning per common share-Diluted 0.36 0.38 0.38 0.39
1998
Interest income $31,544 $35,462 $39,057 $43,988
Net interest income 8,342 9,221 8,132 9,570
Provision for loan losses 218 93 163 409
Non-interest income 15,970 19,269 22,470 28,631
Net income 11,097 13,004 13,877 14,854
Earning per common share-Basic 0.29 0.32 0.34 0.36
Earning per common share-Diluted 0.27 0.31 0.33 0.35
</TABLE>
30. RISK MANAGEMENT ACTIVITIES
The Company's principal objective in holding derivatives and certain other
financial instruments is the management of interest rate risk arising out of its
portfolio holdings and related borrowings. Risk management activities are aimed
at optimizing realization on sales of mortgage loans and/or mortgage-backed
securities and net interest income, given levels of interest rate risk
consistent with the Company's business strategies.
Asset/liability risk management activities are conducted in the context of
Company's sensitivity to interest rate changes. This sensitivity arises due to
changes in interest rates since most of the Company's assets are of a fixed rate
nature. Changes in interest rate affect the value of mortgage loans
held-for-sale and mortgage-backed securities held-for-trading from the time such
assets are originated to the time these are sold. Interest-bearing liabilities
reprice more frequently than interest-earning assets and, therefore, the
Company's net interest income is affected by changes in interest rates and the
relation of long-term and short-term interest rates.
To achieve its risk management objectives, the Company uses a combination of
derivative financial instruments, particularly, futures and options, as well as
other types of contracts such as forward sales commitments.
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 79
<PAGE> 81
[LOGO]
The following table summarizes the activity in derivative transactions, other
than interest rate swaps, for the year:
<TABLE>
<CAPTION>
(Dollars in thousands) Notional Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Average for Net
At December 31, At December 31, the period gains
Assets Liabilities Assets Liabilities Assets Liabilities (losses)
--------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Options on Futures $ 355,000 $ 316,100 $ 1,277 $ 771 $ 2,849 $ 2,082 $ 3,096
Options on Eurodollars 7,900,000 5,200,000 2,880 1,374 1,658 841 726
Forward Contracts - 30,000 - - - - 2,741
Options on Bonds and
Mortgage-Backed Securities 75,000 85,000 430 2,941 281 885 (546)
Futures - - - - - - (2,666)
---------- ---------- -------- ------ -------- -------- --------
$8,330,000 $5,631,100 $ 4,587 $5,086 $ 4,788 $ 3,808 $ 3,351
========== ========== ======== ====== ======== ======== ========
1998
Options on Futures $ 665,000 $ 587,500 $ 1,757 $2,070 $ 1,398 $ 606 $ (1,883)
Options on Eurodollars 3,000,000 1,000,000 736 172 115 14 (903)
Forward Contracts - 98,900 - - - - (235)
Options on Bonds and
Mortgage-Backed Securities - 10,000 - 141 2 358 243
Futures - - - - - - (262)
---------- ---------- -------- ------ -------- -------- --------
$3,665,000 $1,696,400 $ 2,493 $2,383 $ 1,515 $ 978 $ (3,040)
========== ========== ======== ====== ======== ======== ========
</TABLE>
Options are contracts that grant the purchaser the right to buy or sell the
underlying asset by a certain date at a specified price. The risk involved with
purchased option contracts is normally limited to the price of the options.
Interest rate futures contracts are commitments to either purchase or sell
designated instruments, such as U.S. Treasury securities, at a future date for a
specified price. Futures contracts are generally traded on an exchange, are
marked-to-market daily, and are subject to initial maintenance margin
requirements. Forward contracts are generally over-the-counter or privately
negotiated contracts to sell a specified amount of certain instruments such as
mortgage-backed securities at a specified price at a specified future date.
Because these contracts are not traded on an exchange and are not generally
marked-to-market on a daily basis, they are generally subject to greater credit
risks than futures contracts.
The risk that counterparties to both derivative and cash instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk the Company deals with 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 subject contracts with the same
counterpart in the event of default.
All derivative financial instruments are subject to market risk, the risk that
future changes in market conditions may make an instrument less valuable or more
onerous. For example, fluctuations in market prices and interest rates change
the market value of the instruments. If the instruments are recognized at market
value, these changes directly affect reported income. Exposure to market risk is
managed in accordance with risk limits set by senior management by buying or
selling instruments or entering into offsetting positions.
Doral Bank PR enters into interest rate swap agreements in managing its interest
rate exposure. Interest rate swap agreements generally involve the exchange of
fixed and floating rate interest payment obligations without the exchange of the
underlying principal. At December 31, 1999, Doral Bank PR's had outstanding
interest rate swap agreements to change Doral Bank PR's interest rate exposure.
The agreements are for a notional principal amount of $5,000,000, $50,000,000
and $50,000,000, covering Doral Bank PR's interest rate exposure. The interest
rate swap for a notional amount of $5,000,000, covers the exposure of a
$5,000,000 floating rate term-note. This agreement ends at the time the related
obligation matures. The interest rate swaps with notional amounts of $50,000,000
are designed to protect Doral Bank PR from the repricing of its short-term
liabilities. These agreements end on November 5, 2002 and January 3, 2016,
respec-
DORAL FINANCIAL CORPORATION
80 1999 ANNUAL REPORT
<PAGE> 82
[LOGO]
tively. The interest rate to be received on the $5,000,000 swap agreement is 87%
of the three-month LIBOR rate minus .125% (5.17% at December 31, 1999 and 4.84%
at December 31, 1998) and the interest rate to be paid is 4.92%. On the
$50,000,000 swap agreements, the interest rate to be received is 100% of the
three-month LIBOR rate (6.16% and 6.19% at December 31, 1999 and 5.31% and 5.35%
at December 31, 1998) and the interest rate to be paid is 6.125% and 5.495%,
respectively. Non-performance by the counterparty will expose Doral Bank PR to
interest rate risk.
31. SEGMENT INFORMATION
In 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established standards
for reporting information about a company's operating segments.
The Company has three reportable segments identified by line of business:
mortgage banking, banking (including thrift operations) and broker-dealer
operations. The segments are managed separately since 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 accounting policies followed by the segments are the same as those described
in the Summary of Significant Accounting Policies (see Note 2).
The information that follows presents net interest income after provision for
loan losses, non-interest income, net income and identifiable assets for the
Company's reportable segments.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income after provision for loan
losses Reportable segments:
Mortgage banking $ 16,364 $ 18,169 $ 17,588
Banking 27,656 14,484 9,477
Broker-dealer 2,366 1,729 836
Consolidating eliminations 872 - -
---------- ---------- ----------
Consolidated net interest income $ 47,258 $ 34,382 $ 27,901
========== ========== ==========
Non-interest income
Reportable segments:
Mortgage banking $ 112,286 $ 76,293 $ 39,465
Banking 9,788 5,321 3,380
Broker-dealer 6,838 4,951 2,506
Consolidating eliminations (2,001) (225) (65)
---------- ---------- ----------
Consolidated non-interest income $ 126,911 $ 86,340 $ 45,286
========== ========== ==========
Net income (loss) Reportable segments:
Mortgage banking $ 52,009 $ 43,672 $ 14,927
Banking 15,737 8,197 5,043
Broker-dealer 1,307 1,141 138
Consolidating eliminations (1,127) (178) 123
---------- ---------- ----------
Consolidated net income $ 67,926 $ 52,832 $ 20,231
========== ========== ==========
Identifiable assets
Reportable segments:
Mortgage banking $2,464,389 $1,883,628 $1,378,841
Banking 1,935,572 804,545 428,101
Broker-dealer 825,099 831,474 500,768
Consolidating eliminations (687,717) (601,534) (449,921)
---------- ---------- ----------
Consolidated total identifiable assets $4,537,343 $2,918,113 $1,857,789
========== ========== ==========
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 81
<PAGE> 83
[LOGO]
32. EXTRAORDINARY ITEM
During 1997, in connection with the exchange of the 8.25% Convertible
Subordinated Debentures for 8% Convertible Cumulative Preferred Stock discussed
in Note 24, the Company recorded an extraordinary non-cash loss of approximately
$12.3 million on the extinguishment of debt. This extraordinary non-cash loss
was determined based upon the difference between the estimated fair market value
of the 8% Preferred Stock and the carrying value of the convertible debentures
at the time of conversion. The fair value of the 8% Preferred Stock was
calculated utilizing the Theoretical Model. This model segregates the 8%
Preferred Stock into two different components, the equity portion and the bond
portion, and values the two individually to derive fair value.
Simultaneously with the extraordinary non-cash loss, the Company's paid-in
capital account was increased by $20.8 million. This increase represents the sum
of the extraordinary non-cash loss and the indebtedness extinguished,
represented by the Convertible Subordinated Debentures, resulting in a net
increase to the Company's stockholders equity of approximately $8.5 million.
33. DORAL PROPERTIES, INC. (A SUBSIDIARY OF DFC) FINANCIAL INFORMATION
Doral Properties, Inc., was organized on October 1999 to own, develop and
operate the Doral Financial Center, which will be the new headquarters of the
Company and its subsidiaries. The Doral Financial Center building is under
construction and should be completed by the end of 2000. Doral Properties also
purchased two adjacent properties to the Doral Financial Center and assumed the
existing leases, which expire on July 31, 2000.
The following condensed financial information presents the financial position of
Doral Properties, Inc., as of December 31, 1999, and the statement of changes in
stockholder's equity and cash flows for the three-month period ended December
31, 1999. As part of the accounting treatment of Doral Properties' operations,
all costs incurred during the construction period are capitalized and will be
amortized when the assets are ready for their intended use. Thus, there are no
activities recorded that need to be reported in a separate statement of income.
At December 31, 1999, construction in progress includes approximately $11
million of costs incurred in the construction of these facilities. Such costs
included approximately $927,000 of capitalized interest costs. During 1996, the
Company acquired a two-acre parcel of land for approximately $3.0 million for
such construction.
The financial statements of Doral Properties, Inc., as of December 31, 1999 were
as follows:
DORAL PROPERTIES, INC.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Cash $ 27
Money market investments 30,499
Accounts receivable 137
Property, leasehold improvements
and equipment 15,854
-------
Total assets $46,517
=======
Liabilities:
Bonds payable $44,765
Accrued expenses and other liabilities 1,252
-------
Total liabilities 46,017
-------
Stockholder's equity:
Common stock and paid-in capital 500
-------
Total stockholder's equity 500
-------
Total liabilities and stockholder's equity $46,517
=======
DORAL FINANCIAL CORPORATION
82 1999 ANNUAL REPORT
</TABLE>
<PAGE> 84
DORAL PROPERTIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Three-month
period ended
December 31,
(In thousands) 1999
- --------------------------------------------------------------------------------
<S> <C>
Common stock and paid-in capital:
Balance at beginning of year $ -
Common stock issued 500
---------
Total stockholder's equity at end of year $ 500
=========
</TABLE>
[LOGO]
<TABLE>
<CAPTION>
DORAL PROPERTIES, INC. DECEMBER 31,
STATEMENT OF CASH FLOWS 1999
(In thousands)
- -----------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ -
-------
Adjustments to reconcile net income to net cash
provided by operating
activities:
Increase in accounts receivable (137)
Increase in accrued expenses and other
liabilities 1,252
-------
Total adjustments 1,115
-------
Net cash provided by operating activities 1,115
-------
Cash flows from investing activities:
Purchase of property, leasehold improvements
and equipment (15,854)
-------
Net cash used by investing activities (15,854)
-------
Cash flows from financing activities:
Issuance of common stock 500
Proceeds from the issuance of bonds payable 44,765
-------
Net cash provided by financing activities 45,265
-------
Net increase in cash 30,526
Cash and cash equivalents at the beginning of year -
-------
Cash and cash equivalents at the end of year $30,526
=======
Cash and cash equivalents include:
Cash $ 27
Money market investments 30,499
-------
$30,526
=======
</TABLE>
DORAL FINANCIAL CORPORATION
1999 ANNUAL REPORT 83
<PAGE> 85
OUR MISSION
Serving a diverse and growing market in Puerto Rico and the U.S. mainland with
superior and competitive financial products that facilitate:
- - Individual home ownership, residential and commercial real estate
development through our mortgage banking units and retail banking
subsidiaries.
- - Savings, the accumulation of wealth, securing consumer and commercial
credit through our retail banks.
- - Investments that meet the financial planning objectives of individuals,
families, corporations and institutions through our licensed
broker/dealer subsidiary.
OUR VISION
Building on the preeminence that Doral has achieved as Puerto Rico's leading
mortgage banker to constantly improve service to our clients on the island and
in the U.S. mainland by:
- - Expanding mortgage banking market share in Puerto Rico.
- - Developing the banking business into U.S. markets by penetrating
Hispanic and other ethnic communities.
- - Promoting cross-selling opportunities for Doral Securities and retail
banking subsidiaries to our large existing client base.
- - Reinforcing our investment grade credit ratings.
- - Maintaining our financial flexibility and access to funding and capital
markets.
- - Adhering to our prudent and consistent financial policies and growing
our equity base.
<PAGE> 86
CORPORATE DIRECTORY
INVESTOR INQUIRIES
General inquiries from stockholders and the investment community may be
directed to:
Richard F. Bonini
Senior Executive Vice President,
Investor Relations
Doral Financial Corporation
387 Park Avenue South
New York, New York 10016
or,
Doral Financial Corporation
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Visit us online at
www.doralfinancial.com
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
450 West 33rd Street
New York, New York 10001
www.cmssonline.com
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP
BBV Tower
P.O. Box 363566
San Juan, Puerto Rico 00936-3566
SPECIAL COUNSEL
Pietrantoni Mendez & Alvarez LLP
Banco Popular Center 1901
209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
MARKET MAKERS
PaineWebber Inc.
Brean Murray & Co., Inc.
Salomon Smith Barney Inc.
Spear Leeds & Kellogg
Sherwood Securities Corp.
Knight Securities Corp.
Mayer & Schweitzer Inc.
Bear Stearns & Co., Inc.
Herzog, Heine, Geduld, Inc.
Pershing Trading Company
Anderson Strudwick, Inc.
Southwest Securities Inc.
STOCK LISTING
Common: NASDAQ
(National Association of Securities Dealers)
National Market System
Stock Symbol: DORL
7% Preferred: NASDAQ
National Market System
Stock Symbol: DORLP
<PAGE> 1
EXHIBIT 21
LIST OF DORAL FINANCIAL CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation
- ------------------ ---------------
<S> <C>
Doral Mortgage Corporation Puerto Rico
Doral Securities, Inc. Puerto Rico
Doral Bank Puerto Rico
Centro Hipotecario, Inc. Puerto Rico
Doral Money, Inc. Delaware
Sana Investment Mortgage Bankers, Inc. Puerto Rico
Doral Bank, FSB U.S.A.
</TABLE>
<PAGE> 1
EXHIBIT 23
[PRICEWATERHOUSECOOPERS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-76259) of Doral Financial Corporation of our
report dated February 25, 2000 relating to the financial statements, which
appears on page 47 of the 1999 Annual Report to Shareholders of Doral Financial
Corporation, which is incorporated by reference in Doral Financial
Corporation's Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
March 29, 2000
<PAGE> 2
EXHIBIT 23
[PRICEWATERHOUSECOOPERS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-31283) of Doral Financial Corporation of our
report dated February 25, 2000 relating to the financial statements, which
appears on page 47 of the 1999 Annual Report to Shareholders of Doral Financial
Corporation, which is incorporated by reference in Doral Financial
Corporation's Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORAL FINANCIAL CORPORATION FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1999 AND IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 25,793
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 370,236
<TRADING-ASSETS> 862,698
<INVESTMENTS-HELD-FOR-SALE> 66,325
<INVESTMENTS-CARRYING> 1,509,060
<INVESTMENTS-MARKET> 1,448,307
<LOANS> 1,253,023
<ALLOWANCE> 6,136
<TOTAL-ASSETS> 4,537,343
<DEPOSITS> 1,010,424
<SHORT-TERM> 2,356,283
<LIABILITIES-OTHER> 265,468
<LONG-TERM> 520,186
0
1,503
<COMMON> 40,485
<OTHER-SE> 342,994
<TOTAL-LIABILITIES-AND-EQUITY> 4,537,343
<INTEREST-LOAN> 78,258
<INTEREST-INVEST> 118,991
<INTEREST-OTHER> 14,430
<INTEREST-TOTAL> 211,679
<INTEREST-DEPOSIT> 35,784
<INTEREST-EXPENSE> 126,011
<INTEREST-INCOME-NET> 49,884
<LOAN-LOSSES> 2,626
<SECURITIES-GAINS> 96,166
<EXPENSE-OTHER> 97,556
<INCOME-PRETAX> 76,613
<INCOME-PRE-EXTRAORDINARY> 67,926
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,926
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 1.35
<LOANS-NON> 4,502
<LOANS-PAST> 86,490
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,166
<CHARGE-OFFS> 2,014
<RECOVERIES> 358
<ALLOWANCE-CLOSE> 6,136
<ALLOWANCE-DOMESTIC> 2,626
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
