DORAL FINANCIAL CORPORATION
Filed 3/22/02
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] 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
8.35% NONCUMULATIVE MONTHLY INCOME PREFERRED STOCK, SERIES B
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.
$1,436,320,462 , approximately, based on the last sale price of $36.72
per share on the NASDAQ National Market System on March 6, 2002. 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: 47,823,184 shares as of March 6, 2002.
(continued)
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DOCUMENTS INCORPORATED BY REFERENCE
PART II
Item 5 Market for Registrant's Common Equity Information in response 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, 2001 (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.
PART III
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 2002 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.
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DORAL FINANCIAL CORPORATION
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business...............................................................................................1
Item 2. Properties............................................................................................21
Item 3. Legal Proceedings.....................................................................................22
Item 4. Submission of Matters to a Vote of Security Holders...................................................22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................22
Item 6. Selected Financial Data...............................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................23
Item 8. Financial Statements and Supplementary Data...........................................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................23
PART III
Item 10. Directors and Executive Officers of the Registrant...................................................23
Item 11. Executive Compensation...............................................................................23
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................23
Item 13. Certain Relationships and Related Transactions.......................................................23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................24
PART I
ITEM 1. BUSINESS
GENERAL
Doral Financial Corporation ("Doral Financial" or the "Company") is a
diversified financial services company engaged in mortgage banking, banking,
broker-dealer and investment banking and insurance agency activities. Its
activities are principally conducted in Puerto Rico and in the New York City
metropolitan area. Doral Financial is the leading mortgage banking institution
in Puerto Rico as measured by mortgage loan origination volume on single-family
residences and as measured by mortgage loan servicing volume. As of December
31, 2001, Doral Financial had consolidated assets of approximately $6.7 billion
and consolidated stockholders' equity of approximately $762.1 million.
Doral Financial's principal strategy is to further develop its
mortgage banking business while expanding into other financial services such as
branch banking, broker-dealer and insurance agency services. Doral Financial
seeks to leverage its reputation as the leading mortgage banker in Puerto Rico,
as well as its base of over 300,000 clients, to cross-sell other financial
services. Doral Financial also intends to explore opportunities to expand
geographically within the mainland United States, particularly within the New
York City metropolitan area and other areas with large Hispanic or minority
populations, through the establishment of new operations, acquisitions or a
combination of both.
Doral Financial seeks to increase its volume of loan originations by
emphasizing quality customer service and by maintaining the most extensive
branch office system of any mortgage banking institution in Puerto Rico. Doral
Financial strives to increase its servicing portfolio primarily through
internal loan originations and supplements these originations with purchases of
loans and mortgage servicing rights from third parties. Doral Financial seeks
to maximize net interest income by holding mortgage-backed securities,
primarily Puerto Rico tax-exempt mortgage-backed securities backed by Puerto
Rico mortgages and guaranteed by the Government National Mortgage Association,
or GNMA securities, for longer periods prior to sale than most U.S. mortgage
banking companies. This strategy reduces Doral Financial's overall effective
tax rate. Doral Financial 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 that generate interest income that is
not subject to income taxation to Doral Financial for Puerto Rico or U.S.
income tax purposes.
Doral Financial was founded in 1972 under the laws of the Commonwealth
of Puerto Rico. Doral Financial's principal executive offices are located at
1159 Franklin D. Roosevelt Avenue, San Juan, Puerto Rico, and its telephone
number is (787) 749-7100.
MORTGAGE BANKING BUSINESS
Doral Financial conducts its mortgage banking activities in Puerto Rico
primarily through its HF Mortgage Bankers division, and through its
subsidiaries, Doral Mortgage Corporation, Centro Hipotecario de Puerto Rico,
Inc. and Sana Investment Mortgage Bankers, Inc. On the United States mainland,
Doral Financial conducts its mortgage banking activities through Doral Mortgage
Corporation and through its indirect subsidiary, Doral Money, Inc. Doral
Financial operates 50 mortgage banking offices in Puerto Rico and 2 offices on
the United States mainland.
MORTGAGE LOAN ORIGINATION
Mortgage Loan Products. Doral Financial 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").
Doral Financial 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. Doral Financial 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.
Doral Financial's current principal mortgage loan products are
summarized below:
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, 2001, the maximum loan amount for a VA loan was $240,000 and for
FHA loans the maximum ranged from $144,336 to $197,600, for a one-family
dwelling and, depending on the location of the mortgaged property, could go as
high as $312,000 for a four-family dwelling.
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,
2001, 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
January 1, 2002, the maximum loan amount for conforming conventional loans
was $300,700.
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. Doral
Financial uses its own credit system to evaluate these loans and generally
requires lower loan-to-value ratios and higher borrower equity. Doral Financial
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. Doral Financial has traditionally offered loans
secured by second mortgage liens on single family residences as one of its
non-conforming loan products.
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. Doral Financial's mortgage banking units also
originate 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. However,
most construction loans for real estate development projects are originated by
Doral Bank PR. See "Banking Activities."
For additional information on Doral Financial's mortgage loan
originations, refer to Table I 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
servicing portfolio primarily by originations through its retail branch network.
Doral Financial supplements retail originations with wholesale originations
that encompass purchases of loans from third parties and referrals from
mortgage brokers. In Puerto Rico, Doral Financial maintains specialized units
for the origination of construction loans and loans to finance purchases of
residences in new housing developments. The principal origination channels of
Doral Financial's mortgage banking units are summarized below.
Retail branch network. The Company operates 50 mortgage banking
offices on the Island and two branch offices in the United States. 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.
Wholesale activities. Doral Financial purchases mortgage loans from
other mortgage bankers in Puerto Rico consisting primarily of FHA loans and VA
loans for securitization and resale to institutional investors in the form
2
of GNMA securities. Doral Financial also purchases mortgage loans on a
wholesale basis from U.S. financial institutions. For the years ended December
31, 2001 and 2000 total loan purchases amounted to approximately $1.3 billion
and $1.1 billion, respectively.
New housing unit. In Puerto Rico, Doral Financial 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. Doral Financial originated approximately $381
million of mortgage loans to finance the purchase of homes within new housing
projects during the year ended December 31, 2001, compared to $367 million for
the year ended December 31, 2000.
New York multi-family and commercial real estate lending unit. During
1998, Doral Financial established a lending unit in the New York City
metropolitan area, Doral Money, that specializes in originating mortgage loans
secured by income producing multi-family residential and commercial properties.
During the years ended December 31, 2001 and 2000, this unit originated
approximately $51 million and $26 million, respectively, of this type of
mortgage product.
Construction Loans. Construction loans on residential housing
developments are originated by a specialized unit within the HF Mortgage
Bankers Division and by Doral Bank PR. See "Banking Activities."
For more information on Doral Financial's loan origination channels,
refer to Table J in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section incorporated by reference in this
report.
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 Doral Financial'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. Doral Financial's
underwriting personnel, while operating within Doral Financial's loan offices,
make underwriting decisions independent of Doral Financial's mortgage loan
origination personnel. Under Doral Financial's quality control plan, Doral
Financial reverifies a portion of the mortgage loans funded each month, to
provide reasonable assurance that Doral Financial'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% (90% for
certain qualifying home purchase transactions) 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 Doral Financial 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. Doral Financial 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, Doral
Financial'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.
3
Doral Financial's mortgage loan servicing portfolio is subject to
reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, Doral Financial may sell mortgage
loan servicing rights from time to time to other institutions if market
conditions are favorable. Refer to Table K 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 Doral Financial'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. Doral Financial
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 servicing rights, Doral Financial 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,
Doral Financial may become liable for the unpaid principal and interest on
defaulted loans. In such a case, Doral Financial may be required to repurchase
the mortgage loan and bear any subsequent loss related to the loan. To date,
the impact on earnings of loans repurchased as a result of borrower
misrepresentations has not been material.
Doral Financial'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
Doral Financial'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 Doral
Financial'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 Risk Management" which is incorporated by reference
in this report.
HRW, 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 Doral Financial
based on the volume of mortgage loans serviced. Such fees are determined at
fair market value and amounted to approximately $1,581,000, $1,404,000 and
$1,319,000, for the years ended December 31, 2001, 2000 and 1999, respectively.
SALE OF LOANS AND SECURITIZATION ACTIVITIES
Residential Mortgage Loans. Doral Financial customarily sells or
securitizes most of the residential mortgage loans that it originates, except
for certain residential loans held by its banking subsidiaries. As described
below, Doral Financial utilizes various channels to sell its mortgage products.
Doral Financial 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 (generally $2.5 million for serial notes) for sale primarily to
broker-dealers and other institutional investors. During the years ended
December 31, 2001, 2000 and 1999, Doral Financial issued
4
approximately $743 million, $651 million and $697 million, respectively, in
GNMA-guaranteed mortgage-backed securities.
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 Doral Financial sells to
broker-dealers. In connection with such exchanges, Doral Financial pays
guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed securities
provides Doral Financial 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 years ended December 31, 2001 and 2000,
Doral Financial securitized approximately $890 million and $457 million,
respectively, of loans into FNMA and FHLMC mortgage-backed securities. In
addition, for the years ended December 31, 2001 and 2000, Doral Financial sold
approximately $296.3 million and $3.6 million, respectively, of loans through
the FNMA and FHLMC cash window program.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(non-conforming loans) are sold in bulk to local financial institutions or to
FNMA or FHLMC. Doral Financial's bulk sales generally operate very similar to
securitization transactions because when Doral Financial 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 Doral Financial. The
pass-through rate paid to the investors may be a fixed rate or a variable rate
generally based on a spread over the three-month Libor rate. The present value
of the future cash flow retained by Doral Financial above standard servicing
fees for FNMA or FHLMC are recognized on Doral Financial's financial statements
as interest only strips ("IOs"). The fair values assigned to the IOs and the
mortgage servicing rights reduce the carrying amount of the loan sold. The gain
realized on the sale of the loan is determined by the difference of the sales
price for the loan over the carrying amount. Since the values of Doral
Financial's servicing rights and IOs are based on the present value of expected
future distributions on the underlying mortgage loans they are subject to
substantial fluctuation as a result of changes in prevailing interest rates. See
"Management's Discussion Analysis of Financial Condition and Results of
Operations - Amortization of IOs and Servicing Assets" incorporated herein by
reference for a more detailed discussion of the impact of IOs on Doral
Financial's financial statements. Currently, a liquid secondary market for IOs
does not exist in Puerto Rico. Doral Financial, however, in the past has been
able to sell IOs to financial institutions in private transactions on a regular
basis.
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.
Doral Financial generally sells non-conforming loans on a limited or
full recourse basis. As of December 31, 2001, Doral Financial was servicing
mortgage loans with an aggregate principal amount of $2.1 billion on a full or
limited recourse basis. As of December 31, 2001, 2000 and 1999, Doral
Financial's maximum aggregate recourse obligation relating to its mortgage
servicing portfolio was approximately $1.0 billion, $770.8 million and $608.9
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. 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, 2001 and 2000, the Company had
outstanding $18.4 million and $43.5 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, 2001 and 2000,
no loans or mortgage-backed securities were sold with put options by the
Company.
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.
5
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 Doral Financial 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
Doral Financial is engaged in commercial banking activities in Puerto
Rico through its subsidiary, Doral Bank PR. As of December 31, 2001, Doral Bank
PR operated through 29 branches in Puerto Rico. Doral Bank PR offers a variety
of mortgage products similar to those offered by Doral Financial's mortgage
banking units. Like Doral Financial's mortgage banking units, Doral Bank PR's
lending activities are concentrated primarily on the origination of residential
mortgage loans. Most of such residential loans are classified as held-for-sale
because Doral Bank PR originates these loans with the intent of selling them in
the near future. Residential mortgage loans originated by Doral Bank PR are
usually sold through Doral Financial's mortgage banking units. As of December
31, 2001, Doral Bank PR had a portfolio of mortgage loans held-for-sale of
approximately $1.5 billion, which includes mortgage loans held-for-sale by
Doral Bank PR's wholly-owned subsidiaries, Doral Money and Doral International.
Doral Bank PR also originates construction loans to finance the construction of
residential homes and, to a lesser extent, commercial real estate projects.
Doral Bank PR is a party to a Master Loan Production Agreement with
Doral Financial's mortgage banking units whereby these units have agreed to
assist Doral Bank PR meet its stated mortgage loan production goals by, among
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.
On October 14, 1999, Doral Financial entered the retail banking
business in the New York City metropolitan area through a newly-chartered
federal savings bank subsidiary, Doral Bank NY. Doral Bank NY offers retail
banking services and products and currently operates three branch locations in
the New York City metropolitan area. Doral Bank NY expects to open two
additional branches in the New York City metropolitan area during 2002. To
date, Doral Bank, NY has focused its lending activities on loans secured by
multi-family apartment buildings and commercial properties located in the New
York City metropolitan 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.
In addition to originating residential mortgage loans, construction
loans and commercial loans secured by multi- family buildings, Doral Bank PR
and Doral Bank NY also originate consumer loans, unsecured commercial loans and
loans secured by undeveloped real property. See "Management's Discussion and
Analysis of Financial
6
Condition and Results of Operations - Loans Receivable" incorporated by
reference into this Form 10-K for detailed information regarding Doral
Financial's portfolio of loans receivable.
Doral Bank PR and Doral Bank NY complement their lending activities by
earning fee income, collecting service charges for deposit accounts and other
traditional banking services.
For detailed information regarding the deposit accounts of Doral
Financial's banking subsidiaries please refer to the Liquidity and Capital
Resources section of the Management's Discussion and Analysis of Financial
Condition and Results of Operation incorporated by reference into this Form
10-K.
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. In December
2001, Doral Financial entered into an agreement with UBS PaineWebber to sell
its retail securities division. This transaction is expected to close during
the second quarter of 2002. As part of the transaction, UBS PaineWebber
Incorporated of Puerto Rico ("UBS PaineWebber") agreed to provide retail
securities services in selected Doral Financial bank branch locations and to
pay Doral Financial a portion of all commissions earned with respect to sales
of securities at these locations. UBS PaineWebber has also agreed to pay Doral
Financial a continuing fee over a four-year period computed on the amount of
retail brokerage assets transferred as part of the transaction that are
maintained with UBS PaineWebber during this period.
As a result of the sale of its retail unit, Doral Securities will now
concentrate its efforts on sales to institutional clients as well as investment
banking services in both the public and private capital markets. Doral
Securities also earns interest revenues by acting as an intermediary between
borrowers, including Doral Financial, and lenders of funds utilizing repurchase
and reverse repurchase agreements. As of December 31, 2001, Doral Securities had
$147.6 million in outstanding reverse repurchase agreements, of which
approximately $139.8 million consisted of funds loaned to Doral Financial and
its subsidiaries and which are eliminated in the preparation of Doral
Financial's Consolidated Financial Statements.
OTHER INVESTMENT ACTIVITIES
As a result of Doral Financial's mortgage securitization activities,
Doral Financial maintains a substantial portfolio of mortgage-backed securities
as held-for-trading. As a way of earning interest income, Doral Financial also
invests in investment securities that are classified either as
available-for-sale or held-to-maturity. Doral Financial has organized two
international banking entities under Puerto Rico law that are not generally
subject to Puerto Rico income taxation on the interest earned on the securities
held by them. Moreover, because Doral Financial and its Puerto Rico subsidiaries
are considered foreign corporations for U.S. income tax purposes they generally
are entitled to a deduction for U.S. tax purposes equal to the interest earned
on such securities.
Refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Investment Securities" and to Notes 5, 6 and 7 to
Doral Financial's Consolidated Financial Statements for more detailed
information on Doral Financial's investment activities.
INSURANCE AGENCY ACTIVITIES
Taking advantage of the opportunities provided by financial
modernization legislation, Doral Financial entered the insurance agency business
in Puerto Rico commencing on December 1, 2000. Doral Insurance Agency currently
earns commissions by acting as agent in connection with the issuance of
insurance policies by unaffiliated insurance companies. During 2001, Doral
Insurance Agency produced insurance fees and commissions of $4.4 million. Doral
Insurance Agency anticipates continued growth as it expands the products and
services it provides and continues to cross market its services to Doral
Financial's existing customer base.
7
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").
Doral Financial is also subject to an alternative minimum tax of 22%
on its alternative minimum taxable income. In computing Doral Financial'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 Doral Financial holds FHA loans or VA loans and other tax 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. Doral Financial 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, Doral Financial and its subsidiaries are generally only required
to pay United States income tax on their income, if any, derived from the
active conduct of a trade or business within the United States (excluding
Puerto Rico) or from certain investment income earned from United States
sources. 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 in the United
States.
EMPLOYEES
At March 1, 2002, Doral Financial employed 1,930 persons. Of these, 918
were employed in the mortgage banking units with 709 involved in loan production
activities and 209 involved in loan servicing activities. As of such date, Doral
Financial's banking, broker-dealer and insurance operations employed 729, 20,
and 9 employees, respectively. None of Doral Financial's employees are
represented by a labor union and Doral Financial considers its employee
relations to be good.
SEGMENT DISCLOSURE
For information regarding Doral Financial's operating segments, please
refer to Note 31 to Doral Financial's Consolidated Financial Statements
"Segment Information" and the information provided under the caption "Operating
Segments" in the Management's Discussion and Analysis of Financial Conditions
and Results of Operation incorporated by reference into this Form 10-K.
Puerto Rico is the principal market for Doral Financial. Doral
Financial's Puerto Rico based operations accounted for 96% of the Doral
Financial's consolidated assets as of December 31, 2001 and 97% of Doral
Financial's consolidated revenues for the year then ended. Approximately, 95%
of total loan originations were made in Puerto Rico. The following table sets
forth the geographic composition of Doral Financial's loan originations:
8
DECEMBER 31,
-------------------------------------
2001 2000 1999
---- ---- ----
Puerto Rico:
Metropolitan Area ....................... 62% 59% 50%
Outside the Metropolitan Area ........... 33% 38% 39%
United States: ...............................
Illinois and adjoining states ........... -- -- 6%
New York/New Jersey ..................... 4% 3% 5%
Florida ................................. 1% (1) (1)
---------
(1) Less than one percent.
MARKET AREA AND COMPETITION
Puerto Rico is Doral Financial's primary service area. The competition
in Puerto Rico for the origination of mortgages loans is substantial.
Competition comes not only from other mortgage bankers but also from major
commercial banks, 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 the United States Census Bureau, the population of
Puerto Rico was 3.8 million in 2000. 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, 2000,
approximately 88% of Puerto Rico's exports went to the United States mainland,
which was also the source of approximately 56% of Puerto Rico's imports. For
the fiscal year ended June 30, 2000, Puerto Rico experienced a positive
merchandise trade balance of $11.4 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 $30.4 billion for fiscal 1996 to $41.4
billion ($34.8 billion in 1996 prices) for fiscal 2000. Since fiscal 1985,
personal income per capita has increased consistently each fiscal year. In
fiscal 2000, personal income per capita was $9,870. Average employment
increased from 1,092,000 in fiscal 1996 to 1,159,470 in fiscal 2000. Average
unemployment decreased from 13.8% in fiscal 1996 to 11.0% in fiscal 2000.
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.
REGULATION--MORTGAGE BANKING BUSINESS
Doral Financial'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. Doral
Financial 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 Doral
Financial'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 Doral Financial.
Each of Doral Financial'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, Doral
Financial 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 Doral Financial being
unable to receive such authorization in the future. Doral Financial'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 a 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.
10
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 System (the
"Federal Reserve") under the Bank Holding Company Act of 1956 (the "BHC Act"),
as 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.
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. Doral Financial's 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 Doral
Financial'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 subsidiary organized by Doral Financial in the future, are subject
to restrictions under Federal law that govern certain transactions between
Doral Financial or other nonbanking subsidiaries of Doral Financial, whether in
the form of loans, other extensions of credit, investments or asset purchases
and sales. Such transactions by any depository institution subsidiary to Doral
Financial, or to any one nonbanking subsidiary of Doral Financial, 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 Doral Financial 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 with the organization of Doral Bank NY
in 1999, 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
11
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 Doral Financial 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 March 11, 2000, Doral Financial became a financial holding company
as permitted by the Gramm-Leach- Bliley Act. 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.
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 Federal Reserve could require Doral
Financial to divest control of its depository institution subsidiaries or
alternatively to cease conducting activities that are not permissible for bank
holding companies that are not FHCs.
The Gramm-Leach-Bliley Act also modified other laws, including laws
related to financial privacy and community reinvestment. The new financial
privacy provisions generally prohibit financial institutions, including Doral
Financial's mortgage banking and banking subsidiaries from disclosing
non-public personal financial information to third parties unless customers
have the opportunity to "opt out" of the disclosure.
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 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").
12
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 average 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 a 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, 2001, based on existing Federal Reserve, FDIC and
OTS guidelines.
WELL
CAPITALIZED
DORAL FINANCIAL DORAL BANK PR DORAL BANK NY MINIMUM
--------------- ------------- ------------- -----------
Tier 1 capital ratio (Tier 1 capital to risk weighted assets) 18.1% 12.7% 28.9% 6.0%
Total capital ratio (total capital to risk weighted assets) 18.4% 13.0% 29.2% 10.0%
Leverage ratio(1) 11.6% 7.6% 12.9% 5.0%
---------
(1) Tier 1 capital to average assets in the case of Doral Financial and
Doral Bank PR and Tier 1 Capital to adjusted total assets in the case
of Doral Bank NY.
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.
On November 29, 2001, the federal banking and thrift regulatory
agencies adopted a final rule that changes the regulatory capital treatment of
recourse obligations, residual interests and direct credit substitutes. The new
rules are effective on January 1, 2002, for transactions settled on or after
January 1, 2002. For transactions entered into before January 1, 2002, Doral
Financial is not required to implement the rule until December 31, 2002. The new
rule attempts to more consistently treat recourse obligations for the agencies'
risk-based capital requirements. The rule also imposes a new dollar-for-dollar
capital requirement on residual interests retained in sale or securitization
13
transactions and a 25% limit on the amount of Tier 1 capital that may consist
of credit-enhancing interest-only strips, a subset of residual interests.
The rule clarifies that, subject to certain exceptions, the entire
amount of assets sold with recourse, not just the contractual amount of the
recourse obligation is converted into an on-balance sheet credit equivalent
amount. The credit equivalent amount, less any recourse liability reflected on
the balance sheet, is then risk weighted for purposes of applying the
applicable capital requirement. The risk weighting for residential mortgage
loans is currently 50%. As of December 31, 2001, Doral Financial's outstanding
balance of loans sold with recourse was $2.1 billion.
While Doral Financial its still examining the new requirements
regarding residuals and credit-enhancing interest-only strips, it currently
understands that its IOs created in connection with the sale of non-conforming
loans will generally be treated as credit-enhancing interest-only strips and
thus will be subject to a dollar-for-dollar capital requirement for risk based
capital purposes and to the 25% concentration limit for Tier 1 capital purposes.
Substantially all of Doral Financial's recourse obligations and IOs
are recorded at the parent company level and, accordingly, the new rule will
only directly impact the regulatory requirements applicable to Doral Financial
as a bank holding company. While the full implementation of the new rule which
will be effective on December 31, 2002 is expected to reduce Doral Financial's
regulatory capital ratios at the holding company level, Doral Financial
anticipates that it will continue to comply with all applicable capital
requirements. Set forth below, are Doral Financial's pro-forma capital ratios
for risk-based capital purposes as of December 31, 2001 assuming the new rule
had been in effect on such date and that all of Doral Financial's IOs will be
treated as credit-enhancing interest-only strips for purposes of the rule.
DORAL FINANCIAL
---------------------------
Tier 1 Capital Ratio 13.2%
Total Capital Ratio 13.6%
Leverage Ratio 11.0%
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, 2000, 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.
14
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.
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
states to merge across state lines, with the approval of the appropriate
federal banking agency, unless the 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 (the "IBA"), 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 either 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
15
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 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.
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.
The Deposit Insurance Funds Act of 1996 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. The current FICO annual assessment rate is 1.96
cents per $1.00 of deposits. As of December 31, 2001, Doral Bank PR and Doral
Bank NY had a deposit base of approximately $1.5 billion and $169.6 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, 2001 and 2000, Doral Bank PR and Doral Bank NY had
a total of approximately $418.1 million and $324.4 million, respectively, of
brokered deposits. Doral Bank PR and Doral Bank NY use brokered deposits as a
source of long-term funding. Doral Financial does not believe that the FDIC's
brokered deposit regulations has had or will have a material adverse effect on
the funding or liquidity of its banking subsidiaries.
16
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, 2001, Doral Bank PR had an adequate reserve fund established.
Section 27 of the Banking Law also provides that when a bank suffers a
loss, the loss 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.
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. The Office of the Commissioner has
permitted up to 50% of retained earnings. As of December 31, 2001, the legal
lending limit for Doral Bank PR under this provision based solely on its
paid-in capital and reserve fund was approximately $29.1 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, 2001, the lending
limit for loans secured by collateral worth at least 25% more than the amount
of the loan was $64.6 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 two
subsidiaries, Doral Money, Inc., which engages in mortgage banking activities
in the mainland United States, and Doral International, Inc., which is licensed
as an international banking entity under the International Banking Center
Regulatory Act of Puerto Rico (the "IBC Act").
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
and credit cards. Currently, there is no maximum rate set for installment sales
contracts or credit cards.
17
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, 2001, the legal lending limit for Doral Bank NY
under this regulation was approximately $4.5 million. Doral Bank NY's legal
lending limit may be increased 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 $7.6 million as of
December 31, 2001.
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 Puerto Rico Mortgage Banking Law also requires
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 Doral
Financial and may limit the ability of persons, other than Doral Financial
directors duly authorized by Doral Financial's board of directors, to solicit
or exercise proxies, or otherwise exercise voting rights, in connection with
matters submitted to a vote of Doral Financial's stockholders.
18
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.
REGULATION - INSURANCE OPERATIONS
Doral Insurance Agency, Inc. is registered as a corporate agent and
general agency with the office of the Commissioner of Insurance of Puerto Rico
(the "Commissioner of Insurance"). Doral Insurance Agency is subject to
regulation by the Commissioner of Insurance relating to, among other things,
licencing of employees, sales practices, charging of commissions and
obligations to customers.
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS.
This Form 10-K and the information incorporated by reference into this
Form 10-K contains forward looking statements. In addition, Doral Financial may
make forward looking statements in its press releases or in other public or
shareholder communications, and its senior management may make forward looking
statements orally to analysts, investors, the media and others. These
"forward-looking statements" are identified by the use of words or phrases such
as "would be," "will allow," "intends to," "Will likely result," "are expected
to," "will continue," "is anticipated," "estimate," "project" or similar
expressions.
Doral Financial cautions you not to place undue reliance on any of
these forward-looking statements since they speak only as of the date made and
represent Doral Financial's expectations of future conditions or results and
are not guarantees of future performance. By their nature, forward-looking
statements are subject to risks and uncertainties. Various factors, including
regional and national economic conditions, substantial changes in levels of
market interest rates, credit and other risks of lending and investment
activities, competitive and regulatory factors and legislative changes, could
affect Doral Financial's financial performance and could cause Doral
Financial's actual results for future periods to differ materially from those
anticipated or projected. Except to the extent required by applicable laws or
regulations, Doral Financial does not undertake and specifically disclaims any
obligation to update any forward looking statements to reflect occurrences or
unanticipated events or circumstances after the date of those statements. Some
of the factors that could cause Doral Financial's actual results for future
periods to differ materially from those anticipated are discussed below.
Fluctuations in interest rates may negatively impact Doral Financial's
business.
Doral Financial's results are very sensitive to interest rate
fluctuations. Changes in interest rates affect the following areas of its
business:
- the number of mortgage loans it originates and purchases;
- the interest income it earns on loans and securities;
- its gain on the sale of loans;
- the value of its securities holdings; and
- the value of its servicing asset and interest only strips.
Higher interest rates increase the cost of mortgage loans to consumers
and therefore reduce consumer demand for mortgage loans. Reduced demand for
mortgage loans negatively impacts Doral Financial's profits because it results
in lower loan originations by Doral Financial and lower mortgage origination
income. Demand for refinance loans is generally sensitive to increases in
interest rates. Because a significant portion of Doral Financial's refinance
loans are for debt consolidation purposes and, therefore, not as sensitive to
increases in interest rates, a significant future increase in mortgage rates in
Puerto Rico may adversely affect Doral Financial's operations if it results in a
significant decrease in demand for mortgage loans.
19
Increases in short-term interest rates reduce net interest income,
which makes up an important part of Doral Financial's earnings. Net interest
income is the difference between the interest received by Doral Financial on
its assets and the interest paid on its borrowings. Most of Doral Financial's
assets, like its mortgage loans and mortgage-backed securities, are long-term
assets with fixed interest rates. In contrast, most of Doral Financial's
borrowings are short-term. When interest rates rise, Doral Financial must pay
more in interest on its borrowings while the interest earned on its assets does
not rise as quickly. This causes profits to decrease.
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 it
sells the loan, Doral Financial may realize a reduced gain or a loss on that
sale.
Increases in interest rates may reduce the value of Doral Financial's
financial assets and may have an adverse impact on its earnings and financial
condition. Doral Financial owns a substantial portfolio of mortgage loans,
mortgage-backed securities and other debt securities with fixed interest rates.
The market value of an obligation with a fixed interest rate generally
decreases when prevailing interest rates rise.
Decreases in interest rates lead to increases in the prepayment of
mortgages by borrowers, which may reduce the value of Doral Financial's
servicing assets and interest only strips, or IOs. The servicing assets are the
estimated present value of the fees Doral Financial expects to receive on the
mortgages it services over their expected term. IOs are the estimated present
value of cash flows Doral Financial expects to receive on the economic interest
it retains in loans sold or securitized. If prepayments increase above expected
levels, the value of Doral Financial's servicing assets and IOs will decrease
because the amount of future fees or cash flows expected to be received by
Doral Financial from the servicing assets and IOs will decrease. Doral Financial
may be required to recognize this decrease in value by taking a charge against
its earnings.
Doral Financial is subject to default risk in connection with the
loans it originates for its own portfolio or that it sells but retains
all or a portion of the credit risk associated with such loans.
Doral Financial is subject to the risk of loss from loan defaults and
foreclosures with respect to the loans originated for its own portfolio, as
well as the loans that it sells and retains all or part of the credit risk
through recourse arrangements. Doral Financial establishes provisions for loan
losses, which are charged to operations, in order to maintain its allowance for
loans losses at a level which management deems to be appropriate based upon
management's assessment of prior loss experience, the volume and type of
lending being conducted, industry standards, past due loans, general economic
conditions in its market area and other factors related to the collectibility
of the loan portfolio. Similarly, Doral Financial maintains a reserve for
possible losses resulting from complying with its recourse obligations.
Although Doral Financial's management utilizes its best judgment in providing
for loan losses and reserves for recourse arrangements, there can be no
assurance that management has accurately estimated the level of future loan
losses or losses on recourse arrangements or that Doral Financial will not have
to increase its provisions for loan losses or reserves for recourse
arrangements in the future as a result of future increases in non-performing
loans or for other reasons beyond its control. Any such increases in Doral
Financial's provisions for loan losses or reserve for recourse arrangements or
any loan losses in excess of its provisions for loan losses and reserve for
recourse arrangements could have a negative impact on Doral Financial's future
financial condition and results of operations.
Increases in Doral Financial's originations of construction and
commercial loans have increased Doral Financial's credit risks.
Doral Financial's recent increase in originations of construction
loans and mortgage loans secured by income producing residential buildings and
commercial properties has increased the credit risks that Doral Financial
faces. These types of loans involve greater credit risks than residential
mortgage loans because they are larger in size and concentrate more risk in a
single borrower. The properties securing these loans are also harder to dispose
of in foreclosure.
Doral Financial is exposed to greater risk because its business is
concentrated in Puerto Rico.
Doral Financial's business activities and credit exposure are
concentrated in Puerto Rico. Consequently, its financial condition and results
of operations are highly dependent on economic conditions in Puerto Rico.
Adverse political or economic developments or nature-related occurrences, such
as hurricanes, could result in a downturn in loan originations, an increase in
the level of nonperforming assets, an increase in the rate of foreclosure loss
on
20
mortgage loans and a reduction in the value of Doral Financial's loans and loan
servicing portfolio, all of which would negatively affect Doral Financial's
profitability.
Doral Financial is subject to risks in servicing loans for others.
Doral Financial's profitability may also be adversely affected by
mortgage loan delinquencies and defaults on mortgage loans that it services for
third parties. Under many of its servicing contracts, Doral Financial must
forward all or part of the scheduled payments to the owner of a mortgage loan,
even when mortgage loan payments are delinquent. In addition, in order to
protect their liens on mortgaged properties, owners of mortgage loans usually
require that Doral Financial, as servicer, pay mortgage and hazard insurance
and tax payments on schedule even if sufficient escrow funds are not available.
Doral Financial generally recovers its advances from the mortgage owner or from
liquidation proceeds when the mortgage loan is foreclosed. However, in the
interim, Doral Financial must absorb the cost of the funds it advances during
the time the advance is outstanding. Doral Financial must also bear the
increased costs of attempting to collect on delinquent and defaulted mortgage
loans. In addition, if a default is not cured, the mortgage loan will be
canceled as part of the foreclosure proceedings and Doral Financial will not
receive any future servicing income with respect to that loan.
Competition with other financial institutions could adversely affect
the profitability of Doral Financial's U.S. operations.
Doral Financial will encounter greater competition as it expands its
operations on the United States mainland. Many institutions with which Doral
Financial competes on the U.S. mainland have significantly greater assets,
capital, name recognition and other resources. As a result, many of Doral
Financial's competitors on the U.S. mainland have advantages in conducting
certain businesses and providing certain services. Increased competition could
force Doral Financial to increase the rates it offers on deposits or lower the
rates it charges on loans and, consequently, could adversely affect the
profitability of Doral Financial's U.S. operations.
Changes in statutes and regulations could adversely affect Doral
Financial.
As a financial institution, Doral Financial is subject to extensive
federal and local governmental supervision and regulation. Any change in
regulation, whether by applicable regulators or as a result of legislation
enacted by the United States Congress or by the applicable local legislatures,
could have a substantial impact on Doral Financial's operations and
profitability.
ITEM 2. PROPERTIES
During the first quarter of 2002, Doral Financial will move its
principal administrative and executive offices to a new office building known
as the Doral Financial Plaza, located at 1451 F.D. Roosevelt Avenue in San
Juan, Puerto Rico. The Doral Financial Plaza is owned by Doral Financial and
has approximately 200,000 square feet of office and administrative space and 900
parking spaces.
Doral Financial also leases administrative office spaces at the following
locations:
APPROXIMATE TERMINATION OR
LOCATION SQUARE FOOTAGE RENEWAL DATE
1159 F.D. Roosevelt Avenue (1) Various dates
San Juan, Puerto Rico 32,700 through August 2002
305 F.D. Roosevelt Avenue (1)
Hato Rey, Puerto Rico 5,000 October 2003
1569 Alda Street (1)
Urb. Caribe
Rio Piedras, Puerto Rico 4,500 Month to Month
279 Ponce De Leon Avenue,
Hato Rey, Puerto Rico 6,500 April 2002
268 Ponce De Leon Avenue
Hato Rey, Puerto Rico 4,200 August 2002
387 Park Avenue South (2)
New York, NY 8,500 December 2019
------------------
(1) Retail mortgage banking branch also located here.
(2) Federal Savings Bank branch also located here.
In addition to the administrative offices and branches listed above,
Doral Financial maintains 47 retail mortgage banking branches in Puerto Rico and
one in the State of Florida and one in the New York metropolitan area, 29
commercial banking branches in Puerto Rico and one broker-dealer branch in
Puerto Rico, all except for one of which are leased, with an aggregate of
approximately 225,000 square feet of office space and 2 banking branches in New
York, all of which are leased, with an aggregate of approximately 7,800 square
feet of office space.
21
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.
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, 2001 filed as Exhibit 13 to this
Form 10-K (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 the Selected Financial Data table commencing on
page 23 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 are as follows:
YEAR ENDED DEC. 31,
----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Ratio of Earnings to Combined Fixed Charges
Including Interest on Deposits ........................ 1.55x 1.33x 1.46x 1.51x 1.61x
Excluding Interest on Deposits ........................ 1.74x 1.41x 1.59x 1.61x 1.72x
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
Including Interest on Deposits ........................ 1.49x 1.29x 1.41x 1.50x 1.60x
Excluding Interest on Deposits ........................ 1.65x 1.37x 1.52x 1.59x 1.72x
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.
The principal balance of Doral Financial's long-term obligations
(excluding deposits) and the aggregate liquidation preference of its
outstanding preferred stock on a consolidated basis as of December 31 of each
of the last five years is set forth below.
22
YEAR ENDED DEC. 31,
-------------------------------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
---------- ---------- ---------- -------- --------
Long-term obligations .............. $1,927,892 $1,465,175 $1,061,304 $189,685 $155,100
Cumulative preferred stock ......... -- -- $ 8,460 $ 8,460 $ 8,460
Non-Cumulative preferred stock ..... $ 124,750 $ 124,750 $ 74,750 -- --
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 Risk 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 15, 2002, included as part of the
Annual Report to Shareholders are incorporated herein by reference.
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 2002 Annual Meeting
of stockholders (the "Proxy Statement") filed with the Securities and Exchange
Commission on March 20, 2001.
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.
23
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 following consolidated financial statements
of Doral Financial and its subsidiaries, together with the
report thereon of the Company's independent auditors
PricewaterhouseCoopers dated February 16, 2002, appearing in
the Annual Report to Shareholders, are incorporated herein by
reference:
Report of Independent Accountants
Consolidated Statements of Financial Condition as of December
31, 2001 and 2000
Consolidated Statements of Income for each of the years in
the three-year period ended December 31, 2001
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the three-year period ended December
31, 2001
Consolidated Statements of Comprehensive Income for each of
the years in the three-year period ended December 31, 2001
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2001
Notes to Consolidated Financial Statements
(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.
24
EXHIBIT
NUMBER Description
------ -----------
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 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.)
3.1(f) Certificate of Designation creating the 8.35% Noncumulative Monthly Income Preferred Stock,
Series B, (Incorporated herein by reference to exhibit number 3.3 of the Company's
Registration Statement on Form 8-A filed with the Commission on August 29, 2000.)
3.1(g) Certificate of Incorporation of Doral Financial, as currently in effect. (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, 2000.)
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.)
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.)
4.12 Form of Stock Certificate for 7% Noncumulative Monthly Income Preferred Stock, Series A.
(Incorporated herein by reference to exhibit number 4.1 of the Company's Registration Statement on
Form 8-A filed with the Commission on February 17, 1999.)
4.13 Form of Stock Certificate for 8.35% Noncumulative Monthly Income Preferred Stock, Series B.
(Incorporated herein by reference to exhibit number 4.1 of the Company's Registration Statement on
Form 8-A filed with the Commission on August 29, 2000.)
4.14 First Supplemental Indenture, dated as of March 30, 2001, between Doral Financial and Bankers Trust
Company, as trustee. (Incorporated by reference to exhibit number 4.9 to the Company's Current Report
on Form 8-K dated March 27, 2001.)
25
EXHIBIT
NUMBER Description
------ -----------
4.15 Form of 7.65% Senior Note of Doral Financial. (Incorporated by reference to exhibit number 4.10 to
the Company's Current Report on Form 8-K dated March 27, 2001.)
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.)
10.32 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.)
10.40 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.)
10.42 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.)
10.52 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.)
10.62 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.)
26
EXHIBIT
NUMBER Description
------ -----------
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.)
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 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.)
10.85(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.)
10.88 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 March 5, 2002, between the Company and Salomon Levis. (Filed
herewith.)
10.91 Employment Agreement, dated as of March 5, 2002, between the Company and Zoila Levis. (Filed
herewith.)
10.92 Employment Agreement, dated as of March 5, 2002, between the Company and Richard F. Bonini.
(Filed herewith.)
10.93 Employment Agreement, dated as of March 5, 2002, between the Company and Mario S. Levis. (Filed
herewith.)
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.
(Incorporated herein by reference to same exhibit number of the Company's Annual Report on Form
10-K for the year ended December 31, 1999.)
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.
(Incorporated herein by reference to same exhibit number of the Company's Annual Report on Form
10-K for the year ended December 31, 1999.)
27
EXHIBIT
NUMBER Description
------ -----------
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.
(Incorporated herein by reference to same exhibit number of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.)
10.99 Master Loan and Security Agreement, dated as of December 30, 1999, between Doral Financial and
Morgan Stanley Mortgage Capital Inc. (Incorporated herein by reference to same exhibit number of
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.)
10.100 Employment Agreement, dated as of March 5, 2002, among Doral Financial, Doral Mortgage
Corporation and Edison Velez. (Filed herewith.)
10.101 Second Amendment, dated as of June 23, 2000, to Amended and Restated Credit Agreement
(Warehouse Facility), dated as of June 25, 1999, between Doral Financial, Doral
Mortgage Corporation, the lenders party thereto and Bankers Trust Company, as agent
and lender. (Incorporated herein by reference from the same exhibit number of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.)
10.102 Second Amendment, dated as of June 23, 2000, to Amended and Restated Credit Agreement (Servicing
Facility), dated as of June 25, 1999, between Doral Financial, 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, 2000.)
10.103 Amended and Restated Master Repurchase Agreement, dated as of June 1, 2000, between
Bear Stearns Mortgage Capital Corporation and Doral Financial Corporation (Incorporated herein by
reference to the same exhibit number to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000.)
10.104 Amendment No. 2, dated as of November 6, 2000, to Master Loan and Security Agreement,
dated as of December 30, 1999, between Doral Financial and Morgan Stanley Dean Witter Mortgage Capital
Inc. (Formerly Morgan Stanley Mortgage Capital Inc.) (Incorporated herein by reference to
the same number of the Company's Annual Report or Form 10-K for the year ended December
31, 2000.)
10.105 Amendment No.3, dated as of December 22, 2000, to Master Loan and Security Agreement, dated
as of December 30, 1999, between Doral Financial and Morgan Stanley Dean Witter Mortgage Capital
Inc. (Formerly Morgan Stanley Mortgage Capital Inc.) (Incorporated herein by reference to
the same number of the Company's Annual Report or Form 10-K for the year ended December
31, 2000.)
10.106 Administrative Procedures governing Fixed and Floating Rate Medium-Term Notes, Series A, dated
as of May 14, 1999. (Incorporated by reference to exhibit number 99 of the Company's
Current Report on Form 8-K dated May 14, 1999.)
10.107 Amendment No. 1, dated as of August 5, 2000, to Master Repurchase Agreement, dated as of
January 12, 1995, between Merrill Lynch Mortgage Capital Inc., Doral Financial and Doral Mortgage
Corporation. (Incorporated herein by reference to the same number of the Company's Annual Report
or Form 10-K for the year ended December 31, 2000.)
10.108 Third Amendment, dated as of June 22, 2001, to Amended and Restated Credit Agreement
(Warehouse Facility), dated as of June 25, 1999, between Doral Financial, Doral
Mortgage Corporation, the lenders party thereto and Bankers Trust Company, as agent
and lender. (Incorporated herein by reference to the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
10.109 Third Amendment, dated as of June 22, 2001, to Amended and Restated Credit Agreement (Servicing
Facility), dated as of June 25, 1999, between Doral Financial, Doral Mortgage Corporation,
the lenders party thereto and Bankers Trust Company, as agent and lender. (Incorporated herein
by reference to the same exhibit number to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.)
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, 2001. (Filed herewith.)
21 List of Doral's subsidiaries. (Filed herewith.)
23 Consent of PricewaterhouseCoopers LLP. (Filed herewith.)
28
The Company has not filed as exhibits certain instruments defining the
rights of holders of debt of the Company not exceeding 10% of the total assets
of the Company and its consolidated subsidiaries. The Company will furnish any
such instruments to the Securities and Exchange Committee upon request.
(b) Reports on Form 8-K.
(1) Current report of Form 8-K, dated December 17, 2001,
reporting under Item 5 the sale of the retail
securities business of Doral Securities, Inc. to UBS
PaineWebber Incorporated of Puerto Rico.
29
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 22, 2002
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:
Chairman of the Board and
/s/ Salomon Levis Chief Executive Officer March 22, 2002
--------------------------
Salomon Levis
Director and
/s/ Richard F. Bonini Chief Financial Officer March 22, 2002
--------------------------
Richard F. Bonini
Director
--------------------------
Edgar M. Cullman, Jr.
/s/ John L. Ernst Director March 22, 2002
--------------------------
John L. Ernst
/s/ Efraim Kier Director March 22, 2002
--------------------------
Efraim Kier
/s/ Zoila Levis Director March 22, 2002
--------------------------
Zoila Levis
/s/ A. Brean Murray Director March 22, 2002
--------------------------
A. Brean Murray
/s/ Harold D. Vicente Director March 22, 2002
--------------------------
Harold D. Vicente
Senior Vice President and
/s/ Ricardo Melendez Principal Accounting Officer March 22, 2002
--------------------------
Ricardo Melendez
30
EXHIBIT 10.90
DORAL FINANCIAL CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of March 5, 2002
Mr. Salomon Levis
650 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Dear Mr. Levis:
You were previously employed pursuant to an Agreement (the "Prior
Employment Agreement") dated as of December 22, 1999 by Doral Financial
Corporation, a Puerto Rico corporation ("DFC"). You have had wide experience
during your employment by DFC in the financial services industry, have been
employed by DFC or its predecessors since 1983, and have served as Chairman of
the Board of Directors and Chief Executive Officer of DFC since February 1,
1990. Because of your experience, DFC deems it in its best interests to
continue to have the benefit of your services as Chairman of the Board and
Chief Executive Officer.
It is expected that in such capacity, in addition to your duties as
Chairman and Chief Executive Officer of DFC you will continue to manage the
business of DFC substantially in the manner in which you have prior to the date
hereof. The Board of Directors of DFC has authorized the execution of this
Agreement with regard to your employment on the conditions outlined in the
following sections of this letter. With respect to any period after December
31, 2001, this Agreement supersedes and cancels all prior employment, personal
service, consulting or similar agreement between you and DFC and its
subsidiaries, divisions and ventures, including the Prior Employment Agreement.
1. TERM OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
on January 1, 2002 and ending December 31, 2003, unless sooner terminated as
herein provided.
2. POSITION AND RESPONSIBILITIES
You will serve as Chairman and Chief Executive Officer of
DFC. By your acceptance of this Agreement, you undertake to accept such
employment and to devote your full time and attention to DFC, and to use your
best efforts, ability and fidelity in the performance of the duties attaching
to such employment. During the term of your employment hereunder, you shall not
perform any services for any other company, which services conflict in any way
with your obligations under the two preceding sentences of this Section 2,
whether or not such company is competitive with the businesses of DFC,
provided, however, that nothing in this Agreement shall preclude you from
devoting reasonable periods required for
Mr. Salomon Levis
As of March 5, 2002
Page 2
(i) serving as a director or member of a committee of
any organization involving no conflict or potential conflict of interest with
the interests of DFC;
(ii) delivering lectures, fulfilling speaking
engagements, teaching at educational institutions;
(iii) engaging in charitable and community activities; and
(iv) managing your personal and family investments,
provided that such activities do not interfere with the regular performance of
your duties and responsibilities under this Agreement.
You shall, at all times during the term hereof, be subject to
the supervision and direction of the Board of Directors of DFC with respect to
your duties, responsibilities and the exercise of your powers.
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $1,800,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive bonus (commencing with the year
ended December 31, 2002) equal to 15% of the amount of Adjusted Net Income in
excess of a 15% Return on Equity Capital (as hereinafter defined); provided,
however, that the total salary and incentive compensation payable to you
pursuant to this Agreement shall not exceed $3.6 million per annum; and
(ii) The incentive bonus shall be payable
annually by DFC within 30 days following the date on which its Annual Report on
Form 10-K for the fiscal year ended the prior December 31 shall have been filed
with the United States Securities and Exchange Commission; provided that such
amount shall only be payable if you shall have served as Chairman of the Board
and Chief Executive Officer to DFC pursuant to this Agreement for the entire
fiscal year to which such payments relate. As used in this Section 3, "Adjusted
Net Income" means the annual consolidated net income by DFC and its
subsidiaries after all taxes (including net income from equity interests held
by DFC in any other venture and net income of any successor of DFC which may be
formed by merger, consolidation or sale of substantially all of the assets of
DFC) during the calendar year preceding the payment as determined in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved and as shown by DFC's published consolidated
financial statements audited by its independent accountants (hereinafter
referred to as "GAAP"), such net income to be adjusted (A) by adding back to
such net income any payments made pursuant to Section 3(b)(i) hereof and
payments of similar incentive compensation to other executive officers of DFC,
(B) by deducting from such net income dividends on shares of preferred stock
that are excluded from the definition of "Equity Capital" set forth below and
(C) by adjusting such net income by any extraordinary items of income and
expense such as merger related expenses. As used in Section 3, (1) "Equity
Capital" means DFC's consolidated Stockholders Equity (excluding preferred
stock or other similar instruments that are not convertible into shares of
Common Stock) at the December 31 immediately preceding the beginning of the
fiscal year for which the calculation is being made, determined in accordance
with GAAP and (2) "Return on Equity Capital" for any fiscal year means the
percentage determined by
Mr. Salomon Levis
As of March 5, 2002
Page 3
dividing DFC's consolidated net income after all taxes determined in accordance
with GAAP for such fiscal year by Equity Capital for such preceding December
31; provided that such calculation shall be adjusted as set forth in the
immediately succeeding sentence. If DFC sells securities that constitute Equity
Capital during the fiscal year, Equity Capital shall be increased by the net
proceeds to DFC (after expenses) of such sale multiplied by a fraction the
numerator of which shall be the number of days in such fiscal year which had
elapsed from the date of the closing of such sale to the end of such fiscal
year and the denominator of which shall be 365.
(c) You shall be entitled to receive stock options to
acquire 300,000 shares of DFC's Common Stock subject to the terms and
conditions of DFC's 1997 Employee Stock Option Plan and of the stock option
awards made on the date hereby by DFC's Compensation Committee.
(d) You shall be entitled to participate in the other
benefit plans of DFC upon the terms and conditions on which such benefits are
made available to other officers of DFC. Nothing herein shall obligate DFC to
continue any existing benefit plan or to establish any replacement benefit
plan.
(e) You shall be entitled to reimbursement for
reasonable travel and entertainment expenses incurred in connection with the
rendering of your services hereunder in compliance with DFC policy. Nothing
contained herein shall authorize you to make any political contributions,
including but not limited to payments for dinners and advertising in any
political party program or any other payment to any person which might be
deemed a bribe, kickback or otherwise and improper payment under corporate
policy or practice and no portion of the compensation payable hereunder is for
any such purpose.
(f) Payments under this Agreement shall be subject to
reduction by the amount of any applicable federal, Commonwealth, state or
municipal income, withholding, social security, state disability insurance, or
similar or other taxes or other items which may be required or authorized to be
deducted by law or custom.
(g) No additional compensation shall be due to you for
services performed or offices held in any subsidiary, division, affiliate, or
venture of DFC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER
MATTERS
(a) Your acceptance of this Agreement will confirm that
you understand and agree that the granting of the incentive compensation
referred to in Section 3(b) and the receipt of any incentive bonus thereunder
(the "incentive compensation") and of the stock options referred in Section
3(c), and any action thereunder, does not involve any statement or
representation of any kind by DFC as to its business, affairs, earnings or
assets, or as to the tax status of the incentive compensation or stock options
or the tax consequences of any payment or exercise thereof, or otherwise. You
further agree that any action at any time taken by or on behalf of DFC or by
its directors or any committee thereof, which might or shall at any time
adversely affect you or the incentive compensation, may be freely taken
notwithstanding any such adverse effect without your being thereby or otherwise
entitled to any right or claim against DFC or any other person or party by
reason thereof.
Mr. Salomon Levis
As of March 5, 2002
Page 4
(b) The incentive compensation is personal to you and,
except as provided or contemplated in Section 3(b) above, in the event of your
death or incapacity, is not transferable or assignable either by your act or by
operation of law, and no assignee, trustee in bankruptcy, receiver or other
party whosoever shall have any right to demand any incentive compensation or
any other right with respect to it. If, in the event of your death or
incapacity, your legal representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references
to "you" shall apply to said representative.
(c) If and when questions arise from time to time as to
the intent, meaning or application of any one or more of the provisions hereof
such questions will be decided by the Board of Directors of DFC or any
Committee appointed to consider such matters, or, in the event DFC is merged
into or consolidated with any other corporation, by the Board of Directors (or
a Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to
what is a fair and equitable settlement of each such question or as to what is
a fair and proper interpretation of any provision hereof or thereof, whatever
the effect of such a decision may be, beneficial or adverse, upon the incentive
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) DFC may seek to retain, offset, attach
or similarly place a lien on such funds in circumstances where you have been
discharged for cause and shall be entitled to do so for (x) malfeasance
damaging to DFC, (y) conversion to you of an DFC opportunity, or (z) a
violation of DFC's conflict of interest policy, in each case as determined in
the sole discretion of the Board of Directors, and (2) in the event DFC is
unable to make any payment under this Agreement because of insolvency,
bankruptcy or similar status or proceedings, you will be treated as a general
unsecured creditor of DFC and may be entitled to no priority under applicable
law with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one
year after you cease to be an employee of DFC or an affiliate of DFC, you will
not, without the prior written consent of DFC, (a) accept employment or render
service to any person, firm or corporation, directly or indirectly, in
competition with DFC, or any affiliate thereof for any purpose which would be
competitive with the business of DFC and its affiliates within the Commonwealth
of Puerto Rico or any other geographic area in which DFC or any affiliate of
DFC by which you were employed, conducted operations (the "Restricted Area") or
any business as to which studies or preparations relating to the entry into
which were made by DFC or any affiliate of DFC by which you were employed
within one year prior thereto (collectively, the "Restricted Businesses") or
(b) directly or indirectly, enter into or in any manner take part in or lend
your name, counsel or assistance to any venture, enterprise, business or
endeavor, wither as proprietor, principal, investor, partner, director,
officer, employee, consultant, adviser, agent, independent contractor or in any
other capacity whatsoever for any purpose which would be competitive with the
Restricted Businesses in the Restricted Area. An investment not exceeding 5% of
the outstanding stock in any corporation regularly traded on any national
securities exchange or in the over-the-counter market shall not be deemed to
violate this provision, provided that you shall not render any services for
such corporation.
Mr. Salomon Levis
As of March 5, 2002
Page 5
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for
dishonesty, death, incapacity, or inability to perform the duties of your
employment on a daily basis, resulting from physical or mental disability
caused by illness, accident or otherwise or refusal to perform the duties and
responsibilities of you employment hereunder, or breach of fidelity to DFC.
(b) At any time following a "Change in Control" of DFC,
this Agreement may be terminated by DFC or you on 30 days' written notice to
you or DFC, as the case may be, such termination to be effective as of the end
of the calendar year during which such notice is given. As used herein, a
"Change in Control" shall be deemed to have occurred at such time as (i) any
person or group becomes the beneficial owner of more than 50% of the voting
power of DFC's voting stock, or (ii) DFC consolidates with or merges into any
other corporation or conveys or otherwise disposes of all or substantially all
of its assets to any person.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of DFC hereunder shall cease, provided that in any
termination pursuant to subsection (b) of this Section 6 you shall be entitled
to receive all compensation due to pursuant to Section 3 hereof for the
calendar year in which such date of termination occurs.
You agree that this Section 6 shall create no additional
rights in you to direct the operations of DFC.
7. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between
the parties, but only by an instrument in writing signed by the party against
whom any waiver, change, discharge or termination is sought.
8. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the
event that any provision, or any portion of any provision, of this Agreement
shall be held to be void and unenforceable, the remaining provisions of this
Agreement, and the remaining portion of any provision found void or
unenforceable in part only, shall continue in full force and effect.
9. ARBITRATION
Any dispute arising under this Agreement shall be submitted
to arbitration in San Juan, Puerto Rico under the rules of the American
Arbitration Association.
Mr. Salomon Levis
As of March 5, 2002
Page 6
10. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in
a similar manner. Any notice or communication intended for DFC shall be
addressed to the attention of its Board of Directors.
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
12. MISCELLANEOUS
This Agreement shall be binding upon the successors and
assigns of DFC. This Agreement is personal to you, and you therefore may not
assign your duties under this Agreement. The headings of the Sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof or to affect the meaning hereof.
If the foregoing terms and conditions correctly embody your
mutual understanding with DFC, kindly endorse your acceptance and agreement
therewith in the space below provided, whereupon this shall become a binding
agreement.
Very truly yours,
DORAL FINANCIAL CORPORATION
By: /s/ Richard F. Bonini
----------------------------------------
Name: Richard F. Bonini
Title: Senior Executive Vice President
Accepted and Agreed to
as of the date first
above set forth:
/s/ Salomon Levis
-----------------------------
Salomon Levis
EXHIBIT 10.91
DORAL FINANCIAL CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of March 5, 2002
Mrs. Zoila Levis
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
Dear Mrs. Levis:
We are pleased to detail herein below the provisions of your
employment agreement with Doral Financial Corporation ("DFC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
on January 1, 2002 and ending on December 31, 2003, unless sooner terminated as
herein provided. With respect to any period after December 31, 2001, this
Agreement supersedes and cancels all prior employment, personal service or
similar agree ments between you and DFC and its subsidiaries, divisions and
ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as President and Chief Operating Officer of
DFC. By your acceptance of this Agreement, you undertake to accept such
employment and to devote your full time and attention to DFC, and to use your
best efforts, ability and fidelity in the performance of the duties attaching
to such employment. During the term of your employment hereunder, you shall not
perform any services for any other company, which services conflict in any way
with your obligations under the two preceding sentences of this Section 2,
whether or not such company is competitive with the businesses of DFC,
provided, however, that nothing in this Agreement shall preclude you from
devoting reasonable periods required for
(i) serving as a director or member of a committee of
any organization involving no conflict or potential conflict of interest with
the interests of DFC;
(ii) delivering lectures, fulfilling speaking
engagements, teaching at educational institutions;
(iii) engaging in charitable and community activities; and
(iv) managing your personal and family investments,
provided that such activities do not interfere with the regular performance of
your duties and responsibilities under this Agreement.
Mrs. Zoila Levis
As of March 5, 2002
Page 2
You shall, at all times during the term hereof, be subject to
the supervision and direction of the Chairman of the Board and Chief Executive
Officer and the Board of Directors of DFC with respect to your duties,
responsibilities and the exercise of your powers.
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $750,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive bonus
(commencing with the year ending December 31, 2002) equal to
5% of the amount of Adjusted Net Income in excess of a 15%
Return on Equity Capital (as hereinafter defined); provided,
however, that the total salary and incentive compensation
payable to you pursuant to this Agreement shall not exceed
$1,500,000 per annum; and
(ii) The incentive bonus shall be payable
annually by DFC within 30 days following the date on which
its Annual Report on Form 10-K for the fiscal year ended the
prior December 31 shall have been filed with the United
States Securities and Exchange Commission; provided that
except as provided in Section 6(c)(ii) hereof such amount
shall only be payable if you shall have served as President
to DFC pursuant to this Agreement for the entire fiscal year
to which such payments relate. As used in this Section 3,
"Adjusted Net Income" means the annual consolidated net
income by DFC and its subsidiaries after all taxes (including
net income from equity interests held by DFC in any other
venture and net income of any successor of DFC which may be
formed by merger, consolidation or sale of substantially all
of the assets of DFC) during the calendar year preceding the
payment as determined in accordance with generally accepted
accounting principles applied on a consistent basis
throughout the periods involved and as shown by DFC's
published consolidated financial statements audited by its
independent accountants (hereinafter referred to as "GAAP"),
such net income to be adjusted (A) by adding back to such net
income any payments made pursuant to Section 3(b)(i) hereof
and payments of similar incentive compensation to other
executive officers of DFC, (B) by adding back to such net
income dividends on shares of preferred stock that are
excluded from the definition of "Equity Capital" set forth
below and (c) by adjusting such net income for any
extraordinary items of income and expense such as merger
related expenses. As used in this Section 3, (1) "Equity
Capital" means DFC's consolidated Stockholders Equity
(excluding preferred stock or other similar instruments that
are not convertible into shares of Common Stock) at the
December 31 immediately preceding the beginning of the fiscal
year for which the calculation is being made, determined in
accordance with GAAP and (2) "Return on Equity Capital" for
any fiscal year means the percentage determined by dividing
DFC's consolidated net income after all taxes determined in
accordance with GAAP for such fiscal year by Equity Capital
for such preceding December 31; provided that such
calculation shall be adjusted as set forth in the immediately
succeeding sentence. If DFC sells securities constituting
Equity Capital during the fiscal year, Equity Capital shall
be increased by the net proceeds to DFC (after expenses) of
such sale multiplied by a fraction the numerator of which
shall be the number of days in such fiscal year which had
Mrs. Zoila Levis
As of March 5, 2002
Page 3
elapsed from the date of the closing of such sale to the end
of such fiscal year and the denominator of which shall be
365.
(c) You shall be entitled to receive stock options to
acquire 150,000 shares of DFC's Common Stock subject to the terms and
conditions of DFC's 1997 Employee Stock Option Plan and the stock option awards
made on the date hereof by DFC's Compensation Committee.
(d) You shall be entitled to participate in the other
benefit plans of DFC upon the terms and conditions on which such benefits are
made available to other officers of DFC. Nothing herein shall obligate DFC to
continue any existing benefit plan or to establish any replacement benefit
plan.
(e) You shall be entitled to reimbursement for
reasonable travel and entertainment expenses incurred in connection with the
rendering of your services hereunder in compliance with DFC policy. Nothing
contained herein shall authorize you to make any political contributions,
including but not limited to payments for dinners and advertising in any
political party program or any other payment to any person which might be
deemed a bribe, kickback or otherwise and improper payment under corporate
policy or practice and no portion of the compensation payable hereunder is for
any such purpose.
(f) Payments under this Agreement shall be subject to
reduction by the amount of any applicable federal, Commonwealth, state or
municipal income, withholding, social security, state disability insurance, or
similar or other taxes or other items which may be required or authorized to be
deducted by law or custom.
(g) No additional compensation shall be due to you for
services performed or offices held in any subsidiary, division, affiliate, or
venture of DFC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER
MATTERS
(a) Your acceptance of this Agreement will confirm that
you understand and agree that the granting of the incentive compensation
referred to in Section 3(b) (the "incentive compensation") or the stock options
referred in Section 3(c), and any action thereunder, does not involve any
statement or representation of any kind by DFC as to its business, affairs,
earnings or assets, or as to the tax status of the incentive compensation or
the stock options or the tax consequences of any payment or exercise thereof,
or otherwise. You further agree that any action at any time taken by or on
behalf of DFC or by its directors or any committee thereof, which might or
shall at any time adversely affect you or the incentive compensation, may be
freely taken notwithstanding any such adverse effect without your being thereby
or otherwise entitled to any right or claim against DFC or any other person or
party by reason thereof.
(b) The incentive compensation is personal to you and,
except as provided as contemplated in Section 3(b) above, in the event of your
death or incapacity, is not transferable or assignable either by your act or by
operation of law, and no assignee, trustee in bankruptcy, receiver or other
party whosoever shall have any right to demand any incentive compensation or
any other right with respect to it. If, in the event of your death or
incapacity, your legal representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references
to "you" shall apply to said representative.
Mrs. Zoila Levis
As of March 5, 2002
Page 4
(c) If and when questions arise from time to time as to
the intent, meaning or application of any one or more of the provisions hereof
such questions will be decided by the Board of Directors of DFC or any
Committee appointed to consider such matters, or, in the event DFC is merged
into or consolidated with any other corporation, by the Board of Directors (or
a Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to
what is a fair and equitable settlement of each such question or as to what is
a fair and proper interpretation of any provision hereof or thereof, whatever
the effect of such a decision may be, beneficial or adverse, upon the incentive
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) DFC may seek to retain, offset, attach
or similarly place a lien on such funds in circumstances where you have been
discharged for cause and shall be entitled to do so for (x) malfeasance
damaging to DFC, (y) conversion to you of an DFC opportunity, or (z) a
violation of DFC's conflict of interest policy, in each case as determined in
the sole discretion of the Board of Directors, and (2) in the event DFC is
unable to make any payment under this Agreement because of insolvency,
bankruptcy or similar status or proceedings, you will be treated as a general
unsecured creditor of DFC and may be entitled to no priority under applicable
law with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one
year after you cease to be an employee of DFC or an affiliate of DFC, you will
not, without the prior written consent of DFC, (a) accept employment or render
service to any person, firm or corporation, directly or indirectly, in
competition with DFC, or any affiliate thereof for any purpose which would be
competitive with the business of DFC and its affiliates within the Commonwealth
of Puerto Rico or any other geographic area in which DFC or any affiliate of
DFC by which you were employed, conducted operations (the "Restricted Area") or
any business as to which studies or preparations relating to the entry into
which were made by DFC or any affiliate of DFC by which you were employed
within one year prior thereto (collectively, the "Restricted Businesses") or
(b) directly or indirectly, enter into or in any manner take part in or lend
your name, counsel or assistance to any venture, enterprise, business or
endeavor, whether as proprietor, principal, investor, partner, director,
officer, employee, consultant, adviser, agent, independent contractor or in any
other capacity whatsoever for any purpose which would be competitive with the
Restricted Businesses in the Restricted Area. An investment not exceeding 5% of
the outstanding stock in any corporation regularly traded on any national
securities exchange or in the over-the-counter market shall not be deemed to
violate this provision, provided that you shall not render any services for
such corporation.
6.TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for
dishonesty, death, incapacity, or inability to perform the duties of your
employment on a daily basis, resulting from physical or mental disability
caused by illness, accident or otherwise or refusal to perform the duties and
responsibilities of you employment hereunder, or breach of fidelity to DFC.
(b) At any time following a "Change in Control" of DFC,
this Agreement may be terminated by DFC or you on 30 days' written notice to
you or DFC, as the case may be, such termination to be effective
Mrs. Zoila Levis
As of March 5, 2002
Page 5
as of the end of the calendar year during which such notice is given. As used
herein, a "Change in Control" shall be deemed to have occurred at such time as
(i) any person or group becomes the beneficial owner of more than 50% of the
voting power of DFC's voting stock, or (ii) DFC consolidates with or merges
into any other corporation or conveys or otherwise disposes of all or
substantially all of its assets to any person.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of DFC hereunder shall cease, provided that (i) in
any termination pursuant to subsection (b) of this Section 6 you shall be
entitled to receive all compensation due to pursuant to Section 3 hereof for
the calendar year in which such date of termination occurs, or (ii) should you
decide to voluntarily terminate your employment after June 30, 2003, you shall
be entitled to receive a pro-rata share of the incentive bonus payable to you
pursuant to subsection (b) of Section 3 herein for calendar year 2003 with the
Adjusted Net Income computed on the basis of financial results for the period
ending on the quarter next succeeding the date of termination and on the number
of days actually worked over the number days in the period used to compute the
Adjusted Net Income.
You agree that this Section 6 shall create no additional
rights in you to direct the operations of DFC.
7. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between
the parties, but only by an instrument in writing signed by the party against
whom any waiver, change, discharge or termination is sought.
8. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the
event that any provision, or any portion of any provision, of this Agreement
shall be held to be void and unenforceable, the remaining provisions of this
Agreement, and the remaining portion of any provision found void or
unenforceable in part only, shall continue in full force and effect.
9. ARBITRATION
Any dispute arising under this Agreement shall be submitted
to arbitration in San Juan, Puerto Rico under the rules of the American
Arbitration Association.
Mrs. Zoila Levis
As of March 5, 2002
Page 6
10. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in
a similar manner. Any notice or communication intended for DFC shall be
addressed to the attention of its Board of Directors.
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
12. MISCELLANEOUS
This Agreement shall be binding upon the successors and
assigns of DFC. This Agreement is personal to you, and you therefore may not
assign your duties under this Agreement. The headings of the Sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof or to affect the meaning hereof.
If the foregoing terms and conditions correctly embody your
mutual understanding with DFC, kindly endorse your acceptance and agreement
therewith in the space below provided, whereupon this shall become a binding
agreement.
Very truly yours,
DORAL FINANCIAL CORPORATION
By: /s/ Salomon Levis
----------------------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
Accepted and Agreed to
as of the date first
above set forth:
/s/ Zoila Levis
----------------------------
Zoila Levis
EXHIBIT 10.92
DORAL FINANCIAL CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of March 5, 2002
Mr. Richard F. Bonini
387 Park Avenue South
New York, NY 10016
Dear Mr. Bonini:
We are pleased to detail herein below the provisions of your
employment agreement with Doral Financial Corporation ("DFC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
on to January 1, 2002 and ending on December 31, 2003, unless sooner terminated
as herein provided. With respect to any period after December 31, 2001, this
Agreement supersedes and cancels all prior employment, personal service or
similar agreements between you and DFC and its subsidiaries, divisions and
ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as Senior Executive Vice President, Secretary
and Chief Financial Officer of DFC. By your acceptance of this Agreement, you
undertake to accept such employment and to devote your full time and attention
to DFC, and to use your best efforts, ability and fidelity in the performance
of the duties attaching to such employment. During the term of your employment
hereunder, you shall not perform any services for any other company, which
services conflict in any way with your obligations under the two preceding
sentences of this Section 2, whether or not such company is competitive with
the businesses of DFC, provided, however, that nothing in this Agreement shall
preclude you from devoting reasonable periods required for
(i) serving as a director or member of a committee of
any organization involving no conflict or potential conflict of interest with
the interests of DFC;
(ii) delivering lectures, fulfilling speaking
engagements, teaching at educational institutions;
(iii) engaging in charitable and community activities; and
(iv) managing your personal and family investments,
provided that such activities do not interfere with the regular performance of
your duties and responsibilities under this Agreement.
You shall, at all times during the term hereof, be subject to
the supervision and direction of the Chairman of the Board and Chief Executive
Officer and the President of DFC with respect to your duties, responsibilities
and the exercise of your powers.
Mr. Richard F. Bonini
As of March 5, 2002
Page 2
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $400,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive bonus
(commencing with the year ending December 31, 2002) equal to
5% of the amount of Adjusted Net Income (as hereinafter
defined) in excess of a 15% Return on Equity Capital (as
hereinafter defined); provided, however, that total salary
and incentive compensation payable to you pursuant to this
Agreement shall not exceed $625,000 per annum; and
(ii) The incentive bonus shall be payable
annually by DFC within 30 days following the date on which
its Annual Report on Form 10-K for the fiscal year ended the
prior December 31 shall have been filed with the United
States Securities and Exchange Commission; provided that such
amount shall only be payable if you shall have served as
Senior Executive Vice President to DFC pursuant to this
Agreement for the entire fiscal year to which such payments
relate. As used in this Section 3, "Adjusted Net Income"
means the annual consolidated net income by DFC and its
subsidiaries after all taxes (including net income from
equity interests held by DFC in any other venture and net
income of any successor of DFC which may be formed by merger,
consolidation or sale of substantially all of the assets of
DFC) during the calendar year preceding the payment as
determined in accordance with generally accepted accounting
principles applied on a consistent basis throughout the
periods involved and as shown by DFC's published consolidated
financial statements audited by its independent accountants
(hereinafter referred to as "GAAP"), such net income to be
adjusted (A) by adding back to such net income any payments
made pursuant to Section 3(b)(i) hereof and payments of
similar incentive compensation to other executive officers of
DFC, (B) by deducting from such net income dividends on
preferred stock that are excluded from the definition of
"Equity Capital" set forth below and (C) by adjusting such
net income for any extraordinary items of income and expense
such as merger related expenses. As used in this Section 3,
(1) "Equity Capital" means DFC's consolidated Stockholders
Equity (excluding preferred stock or other similar instrument
that are not convertible into shares of Common Stock) at the
December 31 immediately preceding the beginning of the fiscal
year for which the calculation is being made, determined in
accordance with GAAP and (2) "Return on Equity Capital" for
any fiscal year means the percentage determined by dividing
DFC's consolidated net income after all taxes determined in
accordance with GAAP for such fiscal year by Equity Capital
for such preceding December 31; provided that such
calculation shall be adjusted as set forth in the immediately
succeeding sentence. If DFC sells equity securities during
the fiscal year, Equity Capital shall be increased by the net
proceeds to DFC (after expenses) of such sale multiplied by a
fraction the numerator of which shall be the number of days
in such fiscal year which had elapsed from the date of the
closing of such sale to the end of such fiscal year and the
denominator of which shall be 365.
Mr. Richard F. Bonini
As of March 5, 2002
Page 3
(c) You shall be entitled to receive stock options to
acquire 150,000 shares of DFC's Common Stock subject to the terms and
conditions of the stock option awards made on the date hereof by DFC's
Compensation Committee.
(d) You shall be entitled to participate in the other
benefit plans of DFC upon the terms and conditions on which such benefits are
made available to other officers of DFC, except that DFC agrees to pays you as
amount equal to $30,000 per year in lieu of granting you participation in a
company pension plan. This $30,000 payment to be reduced by any matching
contribution made by DFC under any 401-K or profit-sharing plan maintained for
DFC's U.S. based employees. Nothing herein shall obligate DFC to continue any
existing benefit plan or to establish any replacement benefit plan.
(e) You shall be entitled to reimbursement for
reasonable travel and entertainment expenses incurred in connection with the
rendering of your services hereunder in compliance with DFC policy. Nothing
contained herein shall authorize you to make any political contributions,
including but not limited to payments for dinners and advertising in any
political party program or any other payment to any person which might be
deemed a bribe, kickback or otherwise and improper payment under corporate
policy or practice and no portion of the compensation payable hereunder is for
any such purpose.
(f) Payments under this Agreement shall be subject to
reduction by the amount of any applicable federal, Commonwealth, state or
municipal income, withholding, social security, state disability insurance, or
similar or other taxes or other items which may be required or authorized to be
deducted by law or custom.
(g) No additional compensation shall be due to you for
services performed or offices held in any subsidiary, division, affiliate, or
venture of DFC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER
MATTERS
(a) Your acceptance of this Agreement will confirm that
you understand and agree that the granting of the incentive compensation
referred to in Section 3(b) (the "incentive compensation"), and any action
thereunder, does not involve any statement or representation of any kind by DFC
as to its business, affairs, earnings or assets, or as to the tax status of the
incentive compensation or stock options or the tax consequences of any payment
or exercise thereof, or otherwise. You further agree that any action at any
time taken by or on behalf of DFC or by its directors or any committee thereof,
which might or shall at any time adversely affect you or the incentive
compensation, may be freely taken notwithstanding any such adverse effect
without your being thereby or otherwise entitled to any right or claim against
DFC, Doral or any other person or party by reason thereof.
(b) The incentive compensation is personal to you and,
except as provided as contemplated in Section 3(b) above, in the event of your
death or incapacity, is not transferable or assignable either by your act or by
operation of law, and no assignee, trustee in bankruptcy, receiver or other
party whosoever shall have any right to demand any incentive compensation or
any other right with respect to it. If, in the event of your death or
incapacity, your legal representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references
to "you" shall apply to said representative.
Mr. Richard F. Bonini
As of March 5, 2002
Page 4
(c) If and when questions arise from time to time as to
the intent, meaning or application of any one or more of the provisions hereof
such questions will be decided by the Board of Directors of DFC or any
Committee appointed to consider such matters, or, in the event DFC is merged
into or consolidated with any other corporation, by the Board of Directors (or
a Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to
what is a fair and equitable settlement of each such question or as to what is
a fair and proper interpretation of any provision hereof or thereof, whatever
the effect of such a decision may be, beneficial or adverse, upon the incentive
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) DFC may seek to retain, offset, attach
or similarly place a lien on such funds in circumstances where you have been
discharged for cause and shall be entitled to do so for (x) malfeasance
damaging to DFC, (y) conversion to you of an DFC opportunity, or (z) a
violation of DFC's conflict of interest policy, in each case as determined in
the sole discretion of the Board of Directors, and (2) in the event DFC is
unable to make any payment under this Agreement because of insolvency,
bankruptcy or similar status or proceedings, you will be treated as a general
unsecured creditor of DFC and may be entitled to no priority under applicable
law with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one
year after you cease to be an employee of DFC or an affiliate of DFC, you will
not, without the prior written consent of DFC, (a) accept employment or render
service to any person, firm or corporation, directly or indirectly, in
competition with DFC, or any affiliate thereof for any purpose which would be
competitive with the mortgage banking business within the Commonwealth of
Puerto Rico or any other geographic area in which DFC or any affiliate of DFC
by which you were employed, conducted operations (the "Restricted Area") or any
business as to which studies or preparations relating to the entry into which
were made by DFC or any affiliate of DFC by which you were employed within two
years prior thereto (collectively, the "Restricted Businesses") or (b) directly
or indirectly, enter into or in any manner take part in or lend your name,
counsel or assistance to any venture, enterprise, business or endeavor, whether
as proprietor, principal, investor, partner, director, officer, employee,
consultant, adviser, agent, independent contractor or in any other capacity
whatsoever for any purpose which would be competitive with the Restricted
Businesses in the Restricted Area. An investment not exceeding 5% of the
outstanding stock in any corporation regularly traded on any national
securities exchange or in the over-the-counter market shall not be deemed to
violate this provision, provided that you shall not render any services for
such corporation.
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for
dishonesty, death, incapacity, or inability to perform the duties of your
employment on a daily basis, resulting from physical or mental disability
caused by illness, accident or otherwise or refusal to perform the duties and
responsibilities of you employment hereunder, or breach of fidelity to DFC.
(b) At any time following a "Change in Control" of DFC,
this Agreement may be terminated by DFC or you on 30 days' written notice to
you or DFC, as the case may be, such termination to be effective as of the end
of the calendar year during which such notice is given. As used herein, a
"Change in Control" shall be deemed to have occurred at such time as (i) any
person or group becomes the beneficial owner of
Mr. Richard F. Bonini
As of March 5, 2002
Page 5
more than 50% of the voting power of DFC's voting stock, or (ii) DFC
consolidates with or merges into any other corporation or conveys or otherwise
disposes of all or substantially all of its assets to any person.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of DFC hereunder shall cease, provided that in any
termination pursuant to subsection (b) of this Section 6 you shall be entitled
to receive all compensation due to pursuant to Section 3 hereof for the
calendar year in which such date of termination occurs.
You agree that this Section 6 shall create no additional
rights in you to direct the operations of DFC.
7. MEMBERSHIP ON BOARD OF DIRECTORS. DFC agrees to nominate or
cause you to be nominated for election to DFC's Board of Directors.
8. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between
the parties, but only by an instrument in writing signed by the party against
whom any waiver, change, discharge or termination is sought.
9. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the
event that any provision, or any portion of any provision, of this Agreement
shall be held to be void and unenforceable, the remaining provisions of this
Agreement, and the remaining portion of any provision found void or
unenforceable in part only, shall continue in full force and effect.
10. ARBITRATION
Any dispute arising under this Agreement shall be submitted
to arbitration in New York, New York under the rules of the American
Arbitration Association.
11. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in
a similar manner. Any notice or communication intended for DFC shall be
addressed to the attention of its Board of Directors.
Mr. Richard F. Bonini
As of March 5, 2002
Page 6
12. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
13. MISCELLANEOUS
This Agreement shall be binding upon the successors and
assigns of DFC. This Agreement is personal to you, and you therefore may not
assign your duties under this Agreement. The headings of the sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof or to affect the meaning hereof.
If the foregoing terms and conditions correctly embody your
mutual understanding with DFC, kindly endorse your acceptance and agreement
therewith in the space below provided, whereupon this shall become a binding
agreement.
Very truly yours,
DORAL FINANCIAL CORPORATION
By: /s/ Salomon Levis
----------------------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
Accepted and Agreed to
as of the date first
above set forth:
/s/ Richard F. Bonini
------------------------------
Richard F. Bonini
EXHIBIT 10.93
DORAL FINANCIAL CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of March 5, 2002
Mr. Mario S. Levis
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Dear Mr. Levis:
We are pleased to detail herein below the provisions of your
employment agreement with Doral Financial Corporation ("DFC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
on January 1, 2002 and ending on December 31, 2003, unless sooner terminated as
herein provided. With respect of any period after December 31, 2001, this
Agreement supersedes and cancels all prior employment, personal service or
similar agreements between you and DFC and its subsidiaries, divisions and
ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as Executive Vice President and Treasurer of
DFC. By your acceptance of this Agreement, you undertake to accept such
employment and to devote your full time and attention to DFC, and to use your
best efforts, ability and fidelity in the performance of the duties attaching
to such employment. During the term of your employment hereunder, you shall not
perform any services for any other company, which services conflict in any way
with your obligations under the two preceding sentences of this Section 2,
whether or not such company is competitive with the businesses of DFC,
provided, however, that nothing in this Agreement shall preclude you from
devoting reasonable periods required for
(i) serving as a director or member of a
committee of any organization involving no conflict or potential conflict of
interest with the interests of DFC;
(ii) delivering lectures, fulfilling speaking
engagements, teaching at educational institutions;
(iii) engaging in charitable and community
activities; and
(iv) managing your personal and family
investments, provided that such activities do not interfere with the regular
performance of your duties and responsibilities under this Agreement.
You shall, at all times during the term hereof, be subject to
the supervision and direction of the Chairman of the Board and Chief Executive
Officer and the President of DFC with respect to your duties, responsibilities
and the exercise of your powers.
Mr. Mario S. Levis
As of March 5, 2002
Page 2
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $400,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive bonus (commencing with the year
ended December 31, 2002) equal to 5% of the amount of Adjusted Net Income (as
hereinafter defined) in excess of a 15% Return on Equity Capital (as
hereinafter defined); provided, however, that total salary and incentive
compensation payable to you pursuant to this Agreement shall not exceed
$825,000 per annum; and
(ii) The incentive bonus shall be payable
annually by DFC within 30 days following the date on which its Annual Report on
Form 10-K for the fiscal year ended the prior December 31 shall have been filed
with the United States Securities and Exchange Commission; provided that such
amount shall only be payable if you shall have served as Executive Vice
President and Treasurer to DFC pursuant to this Agreement for the entire fiscal
year to which such payments relate. As used in this Section 3, "Adjusted Net
Income" means the annual consolidated net income by DFC and its subsidiaries
after all taxes (including net income from equity interests held by DFC in any
other venture and net income of any successor of DFC which may be formed by
merger, consolidation or sale of substantially all of the assets of DFC) during
the calendar year preceding the payment as determined in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved and as shown by DFC's published consolidated
financial statements audited by its independent accountants (hereinafter
referred to as "GAAP"), such net income to be adjusted (A) by adding back to
such net income any payments made pursuant to Section 3(b)(i) hereof and
payments of similar incentive compensation to other executive officers of DFC,
(B) by adjusting such net income for any extraordinary items of income and
expense such as merger related expenses and (C) by deducting from net income
dividends on shares of preferred stock that are excluded from the definition of
"Equity Capital" set forth below. As used in this Section 3, (1) "Equity
Capital" means DFC's consolidated Stockholders Equity (excluding preferred
stock or other similar instruments that are not convertible into shares of
Common Stock) at the December 31 immediately preceding the beginning of the
fiscal year for which the calculation is being made, determined in accordance
with GAAP and (2) "Return on Equity Capital" for any fiscal year means the
percentage determined by dividing DFC's consolidated net income after all taxes
determined in accordance with GAAP for such fiscal year by Equity Capital for
such preceding December 31; provided that such calculation shall be adjusted as
set forth in the immediately succeeding sentence. If DFC sells securities
representing Equity Capital during the fiscal year, Equity Capital shall be
increased by the net proceeds to DFC (after expenses) of such sale multiplied
by a fraction the numerator of which shall be the number of days in such fiscal
year which had elapsed from the date of the closing of such sale to the end of
such fiscal year and the denominator of which shall be 365.
(c) You shall be entitled to receive stock options to
acquire 150,000 shares of DFC's Common Stock subject to the terms and
conditions of DFC's 1997 Employee Stock Option Plan and the stock option awards
made on the date hereto by DFC's Compensation Committee.
(d) You shall be entitled to participate in the other
benefit plans of DFC upon the terms and conditions on which such benefits are
made available to other officers of DFC. Nothing herein shall obligate DFC to
continue any existing benefit plan or to establish any replacement benefit
plan.
(e) You shall be entitled to reimbursement for
reasonable travel and entertainment expenses incurred in connection with the
rendering of your services hereunder in compliance with DFC policy. Nothing
Mr. Mario S. Levis
As of March 5, 2002
Page 3
contained herein shall authorize you to make any political contributions,
including but not limited to payments for dinners and advertising in any
political party program or any other payment to any person which might be
deemed a bribe, kickback or otherwise and improper payment under corporate
policy or practice and no portion of the compensation payable hereunder is for
any such purpose.
(f) Payments under this Agreement shall be subject to
reduction by the amount of any applicable federal, Commonwealth, state or
municipal income, withholding, social security, state disability insurance, or
similar or other taxes or other items which may be required or authorized to be
deducted by law or custom.
(g) No additional compensation shall be due to you for
services performed or offices held in any subsidiary, division, affiliate, or
venture of DFC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER
MATTERS
(a) Your acceptance of this Agreement will confirm that
you understand and agree that the granting of the incentive compensation
referred to in Section 3(b) (the "incentive compensation") and the stock
options referred in Section 3(c), and any action thereunder, does not involve
any statement or representation of any kind by DFC as to its business, affairs,
earnings or assets, or as to the tax status of the incentive compensation or
stock options or the tax consequences of any payment or exercise thereof, or
otherwise. You further agree that any action at any time taken by or on behalf
of DFC or by its directors or any committee thereof, which might or shall at
any time adversely affect you or the incentive compensation, may be freely
taken notwithstanding any such adverse effect without your being thereby or
otherwise entitled to any right or claim against DFC or any other person or
party by reason thereof.
(b) The incentive compensation is personal to you and,
except as provided as contemplated in Section 3(b) above, in the event of your
death or incapacity, is not transferable or assignable either by your act or by
operation of law, and no assignee, trustee in bankruptcy, receiver or other
party whosoever shall have any right to demand any incentive compensation or
any other right with respect to it. If, in the event of your death or
incapacity, your legal representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references
to "you" shall apply to said representative.
(c) If and when questions arise from time to time as to
the intent, meaning or application of any one or more of the provisions hereof
such questions will be decided by the Board of Directors of DFC or any
Committee appointed to consider such matters, or, in the event DFC is merged
into or consolidated with any other corporation, by the Board of Directors (or
a Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to
what is a fair and equitable settlement of each such question or as to what is
a fair and proper interpretation of any provision hereof or thereof, whatever
the effect of such a decision may be, beneficial or adverse, upon the incentive
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) DFC may seek to retain, offset, attach
or similarly place a lien on such funds in circumstances where you have been
discharged for cause and shall be entitled to do so for (x) malfeasance
damaging to DFC, (y) conversion to you of an DFC opportunity, or (z) a
violation of DFC's conflict of interest policy, in each case as determined in
the sole discretion of the Board of Directors, and (2) in the event DFC is
unable to make any payment under this Agreement because
Mr. Mario S. Levis
As of March 5, 2002
Page 4
of insolvency, bankruptcy or similar status or proceedings, you will be treated
as a general unsecured creditor of DFC and may be entitled to no priority under
applicable law with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one
year after you cease to be an employee of DFC or an affiliate of DFC, you will
not, without the prior written consent of DFC, (a) accept employment or render
service to any person, firm or corporation, directly or indirectly, in
competition with DFC, or any affiliate thereof for any purpose which would be
competitive with the business of DFC and its affiliates within the Commonwealth
of Puerto Rico or any other geographic area in which DFC or any affiliate of
DFC by which you were employed, conducted operations (the "Restricted Area") or
any business as to which studies or preparations relating to the entry into
which were made by DFC or any affiliate of DFC by which you were employed
within one year prior thereto (collectively, the "Restricted Businesses") or
(b) directly or indirectly, enter into or in any manner take part in or lend
your name, counsel or assistance to any venture, enterprise, business or
endeavor, whether as proprietor, principal, investor, partner, director,
officer, employee, consultant, adviser, agent, independent contractor or in any
other capacity whatsoever for any purpose which would be competitive with the
Restricted Businesses in the Restricted Area. An investment not exceeding 5% of
the outstanding stock in any corporation regularly traded on any national
securities exchange or in the over-the-counter market shall not be deemed to
violate this provision, provided that you shall not render any services for
such corporation.
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for
dishonesty, death, incapacity, or inability to perform the duties of your
employment on a daily basis, resulting from physical or mental disability
caused by illness, accident or otherwise or refusal to perform the duties and
responsibilities of you employment hereunder, or breach of fidelity to DFC.
(b) At any time following a "Change in Control" of DFC,
this Agreement may be terminated by DFC or you on 30 days' written notice to
you or DFC, as the case may be, such termination to be effective as of the end
of the calendar year during which such notice is given. As used herein, a
"Change in Control" shall be deemed to have occurred at such time as (i) any
person or group becomes the beneficial owner of more than 50% of the voting
power of DFC's voting stock, or (ii) DFC consolidates with or merges into any
other corporation or conveys or otherwise disposes of all or substantially all
of its assets to any person.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of DFC hereunder shall cease, provided that in any
termination pursuant to subsection (b) of this Section 6 you shall be entitled
to receive all compensation due to pursuant to Section 3 hereof for the
calendar year in which such date of termination occurs.
You agree that this Section 6 shall create no additional
rights in you to direct the operations of DFC.
Mr. Mario S. Levis
As of March 5, 2002
Page 5
7. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between
the parties, but only by an instrument in writing signed by the party against
whom any waiver, change, discharge or termination is sought.
8. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the
event that any provision, or any portion of any provision, of this Agreement
shall be held to be void and unenforceable, the remaining provisions of this
Agreement, and the remaining portion of any provision found void or
unenforceable in part only, shall continue in full force and effect.
9. ARBITRATION
Any dispute arising under this Agreement shall be submitted
to arbitration in San Juan, Puerto Rico under the rules of the American
Arbitration Association.
10. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in
a similar manner. Any notice or communication intended for DFC shall be
addressed to the attention of its Board of Directors.
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
12. MISCELLANEOUS
This Agreement shall be binding upon the successors and
assigns of DFC. This Agreement is personal to you, and you therefore may not
assign your duties under this Agreement. The headings of the sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof or to affect the meaning hereof.
Mr. Mario S. Levis
As of March 5, 2002
Page 6
If the foregoing terms and conditions correctly embody your mutual
understanding with DFC, kindly endorse your acceptance and agreement therewith
in the space below provided, whereupon this shall become a binding agreement.
Very truly yours,
DORAL FINANCIAL CORPORATION
By: /s/ Salomon Levis
----------------------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
Accepted and Agreed to
as of the date first
above set forth:
/s/ Mario S. Levis
----------------------------
Mario S. Levis
EXHIBIT 10.100
As of March 5, 2002
Mr. Edison Velez
650 Munoz Rivera Avenue
San Juan, Puerto Rico 00920
Dear Mr. Velez
We are pleased to detail herein below the provisions of your employment
agreement with Doral Financial Corporation ("DFC") and Doral Mortgage
Corporation ("DMC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
retroactively to January 1, 2002 and ending December 31, 2003, unless sooner
terminated as herein provided. This Agreement supersedes and cancels all prior
employment, personal service or similar agreements between you and DFC or DMC
and their respective subsidiaries, divisions and ventures for any period after
December 31, 2001. Any amounts received by you as salary or bonus from DFC or
DMC prior to the date hereof shall be credited against amounts payable to you
pursuant to Section 3 hereof.
2. POSITION AND RESPONSIBILITIES
You will serve as Executive Vice President of DFC and CEO of
DMC. By your acceptance of this Agreement, you undertake to accept such
employment and to devote your full time and attention to DFC, DMC and their
affiliates, and to use your best efforts, ability and fidelity in the
performance of the duties attaching to such employment. During the term of your
employment hereunder, you shall not perform any services for any other company,
which services conflict in any way with your obligations under the two
preceding sentences of this Section 2, whether or not such company is
competitive with the businesses DMC or DFC, provided, however, that nothing in
this Agreement shall preclude you from devoting reasonable periods required for
(i) serving as a director or member of a committee of
any organization involving no conflict or potential conflict of interest with
the interests of DMC or DFC;
(ii) delivering lectures, fulfilling speaking
engagements, teaching at educational institutions;
(iii) engaging in charitable and community activities; and
(iv) managing your personal and family investments,
provided that such activities do not interfere with the regular performance of
your duties and responsibilities under this Agreement.
Mr. Edison Velez
As of March 5, 2002
Page 2
You shall, at all times during the term hereof, be subject to
the supervision and direction of the Chairman of the Board and Chief Executive
Officer and the President and DFC with respect to your duties, responsibilities
and the exercise of your powers.
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $250,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive
bonus, payable as set forth in (iii) below, equal to
the lesser of (x) $300,000 and (y) 3% of the net
income of DMC over and above Three Million Dollars
($3,000,000) derived from its Mortgage Banking
Activities (as hereinafter defined) provided that
such incentive bonus shall only be payable if you
have served as an executive officer of DFC or DMC
for the entire fiscal year to which such payments
relate.
(ii) One half (1/2) of the incentive bonus shall
be payable annually within 120 days following the
end of the preceding fiscal year, provided that such
amount shall only be payable if you shall have
served as an executive officer of DFC or DMC
pursuant to this Agreement for the entire fiscal
year to which such payments relate. The remaining
one-half (1/2) of the incentive bonus (the "Deferred
Bonus") shall be deferred pursuant to the deferred
compensation arrangement described in Exhibit A
hereto.
(iii) As used in this Section 3, "Net Income"
means the annual net income by DMC and its
subsidiaries after all taxes during the calendar
year preceding the payment as determined in
accordance with generally accepted accounting
principles applied on a consistent basis throughout
the periods involved and as shown by DMC's audited
financial statements audited by its independent
accountants (hereinafter referred to as "GAAP"). As
used in this Section 3, "Mortgage Banking
Activities" shall mean the origination, purchase,
receipt of interest, servicing and sale of mortgages
or pools of mortgages on homes in Puerto Rico and
the purchase and sale of interests in pools of
mortgages but shall not include the receipt of the
interest on investment securities. Until you have
been given notice to the contrary, all activities of
DMC shall be deemed to be Mortgage Banking
Activities, and all expenses of DMC (including all
taxes) shall be deemed to be related to its Mortgage
Banking Activities.
(c) You shall be entitled to participate in the other
benefit plans of DFC upon the terms and conditions on which such benefits are
made available to other officers of DFC and DMC. Nothing herein shall obligate
DFC or DMC to continue any existing benefit plan or to establish any
replacement benefit plan.
(d) You shall be entitled to reimbursement for
reasonable travel and entertainment expenses incurred in connection with the
rendering of your services hereunder. Nothing contained herein shall authorize
you to make any political contributions, including but not limited to payments
for dinners and advertising in any political party program or any other payment
to any person which might be deemed a
Mr. Edison Velez
As of March 5, 2002
Page 3
bribe, kickback or otherwise and improper payment under corporate policy or
practice and no portion of the compensation payable hereunder is for any such
purpose.
(e) Payments under this Agreement shall be subject to
reduction by the amount of any applicable federal, Commonwealth, state or
municipal income, withholding, social security, state disability insurance, or
similar or other taxes or other items which may be required or authorized to be
deducted by law or custom.
(f) No additional compensation shall be due to you for
services performed or offices held in any subsidiary, division, affiliate, or
venture of DFC or DMC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER
MATTERS
(a) Your acceptance of this Agreement will confirm that
you understand and agree that the granting of the incentive compensation
referred to in Section 3(b) (the "incentive compensation"), and any action
thereunder, does not involve any statement or representation of any kind by DFC
or DMC as to their business, affairs, earnings or assets, or as to the tax
status of the incentive compensation or the tax consequences of any payment
thereof, or otherwise. You further agree that any action at any time taken by
or on behalf of DFC or DMC or by their directors or any committee thereof,
which might or shall at any time adversely affect you or the incentive
compensation, may be freely taken notwithstanding any such adverse effect
without your being thereby or otherwise entitled to any right or claim against
DFC, DMC, or any other person or party by reason thereof.
(b) The incentive compensation is personal to you and,
except as provided as contemplated in Section 3(b) above, in the event of your
death or incapacity, is not transferable or assignable either by your act or by
operation of law, and no assignee, trustee in bankruptcy, receiver or other
party whosoever shall have any right to demand any incentive compensation or
any other right with respect to it. If, in the event of your death or
incapacity, your legal representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references
to "you" shall apply to said representative.
(c) If and when questions arise from time to time as to
the intent, meaning or application of any one or more of the provisions hereof
such questions will be decided by the Board of Directors of DFC or any
Committee appointed to consider such matters, or, in the event DFC is merged
into or consolidated with any other corporation, by the Board of Directors (or
a Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to
what is a fair and equitable settlement of each such question or as to what is
a fair and proper interpretation of any provision hereof or thereof, whatever
the effect of such a decision may be, beneficial or adverse, upon the incentive
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) DFC or DMC may seek to retain, offset,
attach or similarly place a lien on such funds in circumstances where you have
been discharged for cause and shall be entitled to do so for (x) malfeasance
damaging to DFC or DMC, (y) conversion to you of opportunity of DFC or DMC, or
(z) a violation of DFC's conflict of interest policy, in each case as
determined in the sole discretion of the Board of Directors, and (2) in the
event DFC is unable
Mr. Edison Velez
As of March 5, 2002
Page 4
to make any payment under this Agreement because of insolvency, bankruptcy or
similar status or proceedings, you will be treated as a general unsecured
creditor of DFC or DMC and may be entitled to no priority under applicable law
with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one
year after you cease to be an employee of DFC or an affiliate of DFC or DMC,
you will not, without the prior written consent DFC or DMC, (a) accept
employment or render service to any person, firm or corporation, directly or
indirectly, in competition with DFC or DMC, or any affiliate thereof for any
purpose which would be competitive with the mortgage banking business (the
"Restricted Business") within the Commonwealth of Puerto Rico (the "Restricted
Area") or (b) directly or indirectly, enter into or in any manner take part in
or lend your name, counsel or assistance to any venture, enterprise, business
or endeavor, whether as proprietor, principal, investor, partner, director,
officer, employee, consultant, adviser, agent, independent contractor or in any
other capacity whatsoever for any purpose which would be competitive with the
Restricted Business in the Restricted Area. An investment not exceeding 5% of
the outstanding stock in any corporation regularly traded on any national
securities exchange or in the over-the-counter market shall not be deemed to
violate this provision, provided that you shall not render any services for
such corporation.
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for
dishonesty, death, incapacity, or inability to perform the duties of your
employment on a daily basis, resulting from physical or mental disability
caused by illness, accident or otherwise or refusal to perform the duties and
responsibilities of you employment hereunder, or breach of fidelity to DFC or
DMC.
(b) At any time following a "Change in Control" of DFC,
this Agreement may be terminated by DFC or you on 30 days' written notice to
you or DFC, as the case may be, such termination to be effective as of the end
of the calendar year during which such notice is given. As used herein, a
"Change in Control" shall be deemed to have occurred at such time as any person
other than DFC or an entity controlled by or under common control with DFC
ceases to be the owner of at least 51% of the outstanding voting securities of
DMC.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of DFC hereunder shall cease, provided that in any
termination pursuant to subsection (b) of this Section 6 you shall be entitled
to receive all compensation due to pursuant to Section 3 hereof for the
calendar year in which such date of termination occurs.
You agree that this Section 6 shall create no additional rights in
you to direct the operations of DFC.
Mr. Edison Velez
As of March 5, 2002
Page 5
7. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between
the parties, but only by an instrument in writing signed by the party against
whom any waiver, change, discharge or termination is sought.
8. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the
event that any provision, or any portion of any provision, of this Agreement
shall be held to be void and unenforceable, the remaining provisions of this
Agreement, and the remaining portion of any provision found void or
unenforceable in part only, shall continue in full force and effect.
9. ARBITRATION
Any dispute arising under this Agreement shall be submitted
to arbitration in San Juan, Puerto Rico under the rules of the American
Arbitration Association.
10. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in
a similar manner. Any notice or communication intended for DFC or DMC shall be
addressed to the attention of their respective Boards of Directors.
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
12. MISCELLANEOUS
This Agreement shall be binding upon the successors and
assigns of DFC and DMC. This Agreement is personal to you, and you therefore
may not assign your duties under this Agreement. The headings of the Sections
of this Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof or to affect the meaning hereof.
Mr. Edison Velez
As of March 5, 2002
Page 6
If the foregoing terms and conditions correctly embody your
mutual understanding with DFC and DMC, kindly endorse your acceptance and
agreement therewith in the space below provided, whereupon this shall become a
binding agreement.
Very truly yours,
DORAL FINANCIAL CORPORATION
By: /s/ Salomon Levis
----------------------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
DORAL MORTGAGE CORPORATION
By: /s/ Salomon Levis
----------------------------------------
Name: Salomon Levis
Title: Chairman of the Board
Accepted and Agreed to
as of the date first
above set forth:
/s/ Edison Velez
---------------------------
Edison Velez
EXHIBIT A
DEFERRED ARRANGEMENT
1. Creation of Accounts by DMC.
(a) DMC shall create and maintain in its records a
Deferred Bonus Account for you with respect to the Deferred Bonus, if any,
earned by you under the Agreement. To that Account shall be credited the
Deferred Bonus and all interest earned thereon.
(b) DMC shall not segregate the amounts credited to you
but may utilize such amounts for such purposes as it deems appropriate,
including working capital.
(c) The Account shall bear interest (calculated on the
basis of a 360 day year consisting of twelve 30 day months) at the rate of
interest publicly announced by the Chase Manhattan Bank, N.A., New York, New
York as its "Reference Rate" on the first day of each calendar quarter less one
percentage point, which amount shall be credited to each Account as of the end
of each quarter in each year and such interest shall thereafter become a part
of the Account.
(d) DMC may withhold from the amount payable with
respect to the Deferred Bonus account, any amount which it deems necessary to
withhold by reason of applicable federal, state, Puerto Rican or municipal
income, withholding, social security, state disability insurance or similar or
other taxes or other items which may be required or authorized to be deducted
by law or custom.
2. Termination of Right to Deferred Bonus.
(a) Your right to any Deferred Bonus Account hereunder
may be terminated for dishonesty or if you otherwise breach the provisions of
your employment agreement with DMC, including the provisions of Section 5
thereof.
(b) On your death or legally determined incapacity, your
Deferred Bonus Account shall be deemed to have been transferred to your legal
representative who may within twelve months after your death or legally
determined incapacity demand payment of all your Deferred Bonus Account whether
or not five years shall have elapsed since the accrual of the Deferred Bonus
giving rise to the Deferred Bonus Account.
3. Management and Statutory Creditor.
You acknowledge that you have no right to restrict or in any
way affect the management policies or decisions of DMC and that you shall not
obtain any status as a creditor of DMC.
4. Payment of Deferred Bonus, Notice, Withholding.
(a) Subject to Sections 2(a) and 2(b), you shall be
entitled to receive on demand the full amount of your Deferred Bonus Account
five (5) or more years after such Deferred Bonus was earned.
(b) Demand for payment of the Deferred Bonus Account
shall be made by written notice, addressed to the Chairman of the Board of DMC,
specifying the amount of the then receivable Deferred Bonus Account and
requesting its payment at any time during which it is then payable. Payment
shall ordinarily be made to you within 30 days after request.
EXHIBIT 12(a)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $158,260 $ 96,152 $ 76,613 $ 59,839 $ 37,797
Plus:
Fixed Charges (excluding capitalized interest) 274,052 285,275 163,269 115,894 62,269
-------- -------- -------- -------- --------
TOTAL EARNINGS $432,312 $381,427 $239,882 $175,733 $100,066
======== ======== ======== ======== ========
FIXED CHARGES:
Interest expensed and capitalized $274,851 $283,849 $160,712 $114,396 $ 60,912
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 1,717 1,921 2,286 544 526
An estimate of the interest component within rental expense 2,384 2,034 1,474 1,080 831
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES $278,952 $287,804 $164,472 $116,020 $ 62,269
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 1.55 1.33 1.46 1.51 1.61
======== ======== ======== ======== ========
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $158,260 $ 96,152 $ 76,613 $ 59,839 $ 37,797
Plus:
Fixed Charges (excluding capitalized interest) 203,653 223,273 127,485 98,456 52,255
-------- -------- -------- -------- --------
TOTAL EARNINGS $361,913 $319,425 $204,098 $158,295 $ 90,052
======== ======== ======== ======== ========
FIXED CHARGES:
Interest expensed and capitalized $204,452 $221,847 $124,928 $ 96,916 $ 50,898
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 1,717 1,921 2,286 544 526
An estimate of the interest component within rental expense 2,384 2,034 1,474 1,080 831
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES $208,553 $225,802 $128,688 $ 98,540 $ 52,255
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 1.74 1.41 1.59 1.61 1.72
======== ======== ======== ======== ========
EXHIBIT 12 (b)
DORAL FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
INCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $158,260 $ 96,152 $ 76,613 $ 59,839 $ 37,797
Plus:
Fixed Charges (excluding capitalized interest) 274,052 285,275 163,269 115,894 62,269
-------- -------- -------- -------- --------
TOTAL EARNINGS $432,312 $381,427 $239,882 $175,733 $100,066
======== ======== ======== ======== ========
FIXED CHARGES:
Interest expensed and capitalized $274,851 $283,849 $160,712 $114,396 $ 60,912
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 1,717 1,921 2,286 544 526
An estimate of the interest component within rental expense 2,384 2,034 1,474 1,080 831
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 278,952 287,804 164,472 116,020 62,269
-------- -------- -------- -------- --------
Preferred dividend requirements 9,408 6,806 5,139 676 130
Ratio of pre tax income to net income 1.100 1.133 1.133 1.133 1.161
-------- -------- -------- -------- --------
PREFERRED DIVIDEND FACTOR 10,350 7,711 5,821 766 151
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS $289,302 $295,515 $170,293 $116,786 $ 62,420
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS 1.49 1.29 1.41 1.50 1.60
======== ======== ======== ======== ========
EXCLUDING INTEREST ON DEPOSITS
EARNINGS:
Pre-tax income from continuing operations $158,260 $ 96,152 $ 76,613 $ 59,839 $ 37,797
Plus:
Fixed Charges (excluding capitalized interest) 203,653 223,273 127,485 98,456 52,255
-------- -------- -------- -------- --------
TOTAL EARNINGS $361,913 $319,425 $204,098 $158,295 $ 90,052
======== ======== ======== ======== ========
FIXED CHARGES:
Interest expensed and capitalized $204,452 $221,847 $124,928 $ 96,916 $ 50,898
Amortized premiums, discounts, and capitalized
expenses related to indebtedness 1,717 1,921 2,286 544 526
An estimate of the interest component within rental expense 2,384 2,034 1,474 1,080 831
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES BEFORE PREFERRED DIVIDENDS 208,553 225,802 128,688 98,540 52,255
-------- -------- -------- -------- --------
Preferred dividend requirements 9,408 6,806 5,139 676 130
Ratio of pre tax income to net income 1.100 1.133 1.133 1.133 1.161
-------- -------- -------- -------- --------
PREFERRED DIVIDEND FACTOR 10,350 7,711 5,821 766 151
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS $218,903 $233,513 $134,509 $ 99,306 $ 52,406
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERENCE SECURITY DIVIDENDS 1.65 1.37 1.52 1.59 1.72
======== ======== ======== ======== ========
(LOGO) Doral Financial Corporation
2001 Annual Report
DORAL FINANCIAL CORPORATION 2001 Annual Report
[GRAPH]
NET INTEREST INCOME
(Dollars in thousands)
[GRAPH]
RETURN ON AVERAGE
COMMON EQUITY
[GRAPH]
NET INCOME
(Dollars in thousands)
[GRAPH]
CASH DIVIDENDS PAID
(Dollars in thousands)
[GRAPH]
NET INCOME PER COMMON SHARE DILUTED
[GRAPH]
MORTGAGE LOAN SERVICING PORTFOLIO
(Dollars in billions)
FINANCIAL HIGHLIGHTS
(Dollars in thousands except for per share data) Year ended December 31,
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
SELECTED INCOME STATEMENT DATA:
Net interest income $ 84,427 $ 42,304 $ 49,884 $ 35,265 $ 28,693
Provision for loan losses 4,445 4,078 2,626 883 792
Non-interest income(***) 191,132 150,317 115,923 79,670 41,849
Non-interest expense(***) 112,854 92,391 86,568 54,213 31,953
Net income 137,922(*) 84,656 67,926 52,832 20,231
Cash dividends paid: $ 30,951 $ 22,749 $ 17,269 $ 9,975 $ 7,199
Net income per common share:
Basic $ 2.87(*) $ 1.86 $ 1.55 $ 1.31 $ 0.55
Diluted 2.82(*) 1.85 1.50 1.26 0.53
OPERATING DATA:
Loan production $ 4,209,000 $3,174,000 $2,722,000 $2,313,000 $1,037,000
Mortgage loan servicing portfolio 10,006,000 8,805,000 7,633,000 6,186,000 4,655,000
SELECTED FINANCIAL RATIOS:
Return on average assets 2.23%(*) 1.66% 1.92% 2.17% 2.19%(**)
Return on average common equity 25.93%(*) 23.03% 21.92% 21.65% 19.29%(**)
(*) Before a cumulative gain-effect of a change in accounting principle of
$5.9 million for 2001.
(**) Before extraordinary non-cash loss of $12.3 million on the early
extinguishment of debt for 1997.
(***) Amortization of servicing assets, previously presented as part of
non-interest expense, has been reclassified as non-interest income.
THE COMPANY OF TODAY AND THE FUTURE
OUR MISSION
To serve a diverse and growing market in Puerto Rico and the U.S. mainland with
superior service and competitive financial products that facilitate:
- Individual home ownership and residential and commercial real
estate development through our mortgage banking units and
retail banking subsidiaries.
- Savings, the accumulation of wealth and the securing of
consumer and commercial credit through our retail banks.
- Investments that meet the financial needs of corporate and
institutional clients in the public and private sectors
through our NASD licensed broker-dealer subsidiary.
- Protection of assets by providing insurance products through
our insurance agency.
OUR OBJECTIVES
- To constantly improve our product line and provide unsurpassed
service to our clients in Puerto Rico and the U.S. mainland.
- To expand our mortgage banking market share in Puerto Rico and
the U.S. mainland.
- To increase our banking business in U.S. markets by entering
Hispanic and other underserved communities.
- To increase our banking business in Puerto Rico by optimizing
services available at existing branches, adding mortgage
banking and developing new full-service facilities.
- To promote cross-selling opportunities for Doral Insurance
Agency and our retail banking subsidiaries to our large
existing customer base.
- To maintain our financial flexibility and access to funding
and capital markets.
- To adhere to our prudent and consistent financial policies
while growing our equity base.
- To enhance shareholder value.
- To fulfill our responsibility as good corporate citizens,
always assisting the communities we serve.
Table of Contents
Our Mission and Objectives 1
The Dynamics of Puerto Rico 2
Message from the Chairman 4
Mortgage Banking 8
Retail Banking 12
Insurance & Securities 14
U.S. Expansion 16
Directors, Officers and Subsidiary Presidents 18
The Companies of Doral Financial Corporation 20
Stock Prices and Dividend Policy 21
Selected Financial Data 23
Management's Discussion and Analysis 24
Report of Independent Accountants 59
Consolidated Financial Statements 60
Corporate Directory Back Inside Cover
THE DYNAMICS OF PUERTO RICO
Strategically located at the geographic center of the Caribbean Basin, Puerto
Rico is considered an important gateway to the Americas. The nearly four million
people who reside in Puerto Rico enjoy one of the most advanced economies in all
of Latin America, with a GDP of approximately $63 billion that has grown by
31% since 1997.
As a Commonwealth of the United States, Puerto Rico has a strong bond with its
fellow citizens on the U.S. mainland that is based on a common currency, free
access to the U.S. market, and economic autonomy, making the island one of
the world's premier investment locations.
Major international banking institutions and multinational corporations have
chosen the island to establish and develop successful operations. Their
investments have made Puerto Rico one of the most dynamic economies in the
Western Hemisphere, with a unique bicultural and bilingual business environment
that benefits from the stability of operating under the American flag and
growing participation in the global economy.
For example, Puerto Rico has become the pharmaceutical capital of the world with
top multinational companies from the United States and Europe producing on the
island for worldwide markets.
Pharmaceutical exports have been the driving force of total export growth, which
reached $38.5 billion in fiscal year 2000. The value of pharmaceuticals exported
in that year amounted to $20.7 billion. Although the United Statesis Puerto
Rico's main trading partner, Europe is a growing second market, with $2.6
billion in exports, consisting mostly of pharmaceuticals, health care products
and electrical machinery.
MORE THAN 100 OF
THE FORTUNE 500
COMPANIES OPERATE
IN PUERTO RICO.
Scientific instruments, computer hardware and software and other high-technology
industries also achieve high productivity levels on the island. More than 100 of
the Fortune 500 Companies operate in Puerto Rico. Outstanding investment
incentives and a highly skilled and well-educated workforce have attracted these
companies to Puerto Rico.
Puerto Rico has always been committed to education and science. Approximately
58% of all youths between the ages of 20 and 24 are enrolled in institutions of
higher education, more than in any other area in the world with the exception of
the U.S. mainland. Local universities award almost 5,000 science and engineering
degrees each year.
Source: Government Development Bank for Puerto Rico/Puerto Rico Planning Board
(data as of fiscal 2001).
2 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[page 3]
(Photographs: left to right, Mova Pharmaceuticals facility; aerial photograph
of cruise ship docked at the Port of San Juan; Teodoro Moscoso Bridge, Isla
Verde; Computer lab at manufacturing facility; metropolitan area highway;
Ritz-Carlton San Juan Hotel & Casino, Isla Verde.)
[page 4]
(Photograph: Salomon Levis, Chairman of the Board and Chief Executive Officer)
------------------------------------------------------------------------------
MESSAGE FROM THE CHAIRMAN
The year 2001 was outstanding for Doral Financial Corporation. We achieved new
records in profitability in every category of business, and our stockholders saw
an unprecedented increase in the value of their investments. Your management is
committed to continue our excellent performance. The support of our expanding
numbers of investors from around the world motivates us to constantly improve
our performance as a diversified, growth-oriented financial services provider
with a strong commitment to excellence in customer service and sound balance
sheet management.
RECORD INCOME
This commitment enabled Doral Financial to turn in historically high growth in
net income, which rose by 63% to $137.9 million in 2001, compared to $84.7
million in the previous year. Similarly, net income per share before the
cumulative gain effect of a change in accounting principle increased by 52% to
$2.82 on a fully diluted basis from $1.85 per similar share in 2000.
Net income from banking operations increased an outstanding 83% and reached
$49.3 million in 2001, an important contributing factor to the record earnings.
Banking assets and deposits rose to $3.7 billion and $1.7 billion, respectively,
in 2001, providing a dramatic indication of the greater acceptance and market
support for our growing retail banking franchise. Furthermore, non-interest
income grew 27% in 2001, reaching $191.1 million, and net gains on the sale of
mortgage loans and fees increased by 39% to $187.2 million, reflecting our
determination to diversify income sources.
WE ACHIEVED NEW
RECORDS IN
PROFITABILITY IN
EVERY CATEGORY OF
BUSINESS, AND OUR
STOCKHOLDERS SAW
AN UNPRECEDENTED
INCREASE IN THE
VALUE OF THEIR
INVESTMENTS.
SOLID GROWTH
Total assets grew by 23% to an unprecedented $6.7 billion for the year ended
December 31, 2001. Likewise, stockholder equity increased by 51%, to reach an
all-time high of $762.1 million, following record earnings for the year and an
offering of common stock that produced net proceeds of $153.4 million. We were
able to continue our established tradition of excellence in financial per-
formance with a return on average common equity (ROE) of 25.93% and a return on
average assets (ROA) of 2.23%. The financial strength of our institution was
recognized in 2001 by Moody's Investors Service, which upgraded the investment
grade rating of our senior and subordinated debt.
Doral Financial maintains a policy of regularly sharing our excellent results
with stockholders through the distribution of quarterly dividends, which
increased in 2001 for the 12th consecutive year, going from $0.10 to $0.125 per
share. In January 2002, the quarterly dividend was further increased by 20% to
$0.15 per common share.
29TH PROFITABLE YEAR
Doral Financial's outstanding performance was accomplished in a year of general
economic slow-down that brought interest rates to their lowest levels in
decades. The low interest rate environment, however, proved to be particularly
beneficial to our position as Puerto Rico's leading residential mortgage lender,
a ranking held for 15 consecutive years, contributing to an increase in loan
production of 31% in 2001, after record-setting growth in 2000. Loan production
rose to $4.2 billion in 2001, up substantially from $3.2 billion in the previous
year.
The year 2001 was the 29th consecutive year of profitability for Doral
Financial, reaffirming the soundness of our strategic vision to structure our
core businesses around diversified sources of income that maximize profits under
all economic conditions.
The Federal Reserve's move to lower short-term interest rates 11 times during
2001 was among the conditions that favored our operations. Lower interest rates
reduced our borrowing costs and con-
4 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
tributed to the sharp increase in loan production. To maximize the benefit of
these favorable trends, we have extended the maturities of many of our
borrowings to lock in the historic low rates, and have taken prudent steps to
protect the value of our loan servicing assets and the investment portfolio.
Doral Financial is vigorously pursuing its strategic plan to continue expanding
the role of its banking subsidiaries, strengthening the mortgage loan-servicing
portfolio, maximizing tax-exempt income from U.S. government and agency
securities, and increasing non-mortgage fee income. At the same time, we
continue to dominate in the area of mortgage lending by providing unsurpassed
customer service and innovative financial products.
PUERTO RICO MARKET
Puerto Rico is our primary market and represents an extremely favorable
environment for business growth. The island's infrastructure, building codes and
zoning, social and medical services, educational system, judicial process, and
economic and political structure are stable and comparable to that of the U.S.
mainland. As the population continues to grow, demand for housing continues to
exceed the supply, particularly in affordable housing. The value of existing
homes followed the historical trend of consistent appreciation in value due to
Puerto Rico's demographics, shortage in residential units, and the lack of
alternative housing such as rental apartment units and government housing.
The government of Puerto Rico has been aggressive in stimulating home ownership
and has committed itself to support the construction of 50,000 units during the
next three years. Also, an additional 50,000 residential units should be built
in the same period of time by private developers. As the leading residential
mortgage lender on the island, Doral Financial is poised to bolster its future
production with permanent financing for the buyers of these units. In addition,
as the leading FHA/VA lender in Puerto Rico, we are well positioned to continue
to reap the benefits of tax-exempt government agency securities.
OUR SERVICE CULTURE
Doral Financial is able to maintain its leadership in the industry because of
the skill, dedication, and hard work of its employees, who are motivated by a
long-standing corporate culture that places high value on unsurpassed customer
service. Our specialists are trained to respond to the various financial needs
of clients with a diverse mix of products and a level of personalized service
that builds strong customer loyalty. Furthermore, our services are tailored to
the convenience of the customer, who benefits from extended office hours, a
highly efficient product delivery process and the application of the latest
technologies, which are all geared to achieve client satisfaction as rapidly as
possible. In addition, all business units are encouraged to actively cross
sell the broad range of products available under the Doral Financial corporate
umbrella for the benefit of our 300,000 existing customers, which further
contributes to the potential for increased profitability.
MORTGAGE BANKING
As the core of our business, mortgage banking is the strong foundation for the
success of Doral Financial and represents the most significant contributing
factor to the profitability of operations in 2001. HF Mortgage, Centro
Hipotecario, SANA, and Doral Mortgage are the four flagships of our mortgage
business in Puerto Rico. Their outstanding performance throughout the years, and
especially in 2001, have earned our institution its position of leadership as
the top residential mortgage lender in the thriving Puerto Rico real estate
market. We will continue to build on our dominant market share.
Total loan originations increased 31% to $4.2 billion in 2001, surpassing the $4
billion threshold for the first time in our long and distinguished history. The
name brand recognition of the mortgage banking units has been remarkable, as
generations of Puerto Rican families have grown to rely on Doral
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 5
Financial and its subsidiaries to meet their credit needs. To maximize market
penetration, during 2001 we added seven mortgage production offices in strategic
locations throughout the island.
Our highly visible and dominant position in the market has made it possible to
maintain our leadership in loan servicing operations as a means of providing a
recurring source of non-interest income. Surpassing the $10 billion mark in
2001, our servicing portfolio continues to be Puerto Rico's largest.
RETAIL BANKING
Doral Bank-Puerto Rico has propelled itself into the mainstream of the banking
evolution that is taking place on the island and elsewhere. The application of
new technologies and delivery systems, such as Internet banking, have turned our
branches into full-service financial centers, where a wide array of financial
needs are met by friendly, experienced and reliable service providers.
Founded in 1993, Doral Bank-Puerto Rico has quickly become a leader in the
banking community, and it is now the fastest-growing commercial bank in Puerto
Rico. Likewise, Doral Bank-New York continues to expand its presence in New
York City, serving selected communities with services and products tailored to
their particular needs. The banking subsidiaries are dedicated to a corporate
philosophy that meets the needs of customers through innovative products,
extended hours of service, convenient locations and a strong emphasis on
excellence in all service areas.
AS OF DECEMBER 31,
2001, DORAL BANK-
PUERTO RICO HAD
$3.5 BILLION IN TOTAL
ASSETS, $1.5 BILLION
IN TOTAL DEPOSITS,
AND SHAREHOLDERS'
EQUITY OF
$229 MILLION.
As of December 31, 2001, Doral Bank-Puerto Rico had $3.5 billion in total
assets, $1.5 billion in total deposits, and shareholders' equity of $229
million. The bank contributed approximately $49 million to Doral Financial's
record net income in 2001. The bank, together with all of its operating units,
maintains a strict credit policy of lending on the basis of secured real estate.
In addition, higher-yielding consumer loans are offered primarily on a carefully
controlled basis to credit-worthy existing customers of Doral Financial,
reinforcing the full-service concept. Drawing from Doral Financial's reputation
and client base, Doral Bank-Puerto Rico has also solidified its position as one
of the premier residential construction lenders working with the most
experienced developers on the island.
Most of the housing developments financed by Doral Bank-Puerto Rico are designed
to fill the significant shortage in the affordable moderate to middle-income
housing market and are undertaken on a significant pre-sold basis. Doral
Bank-Puerto Rico is vital to our strategy of diversifying revenue sources and
providing cost-effective funding for mortgage products. The bank also serves as
a vehicle to cross sell the broad range of products and services available from
Doral Financial.
Doral Bank-New York demonstrated significant progress by surpassing growth
targets in only its second fiscal year of operations. The bank was chartered in
the fourth quarter of 1999 to fill a void in the banking services available to
communities in metropolitan New York City that have been underserved by tra-
ditional financial institutions. In 2001, Doral Bank-New York posted a 61%
increase in total bank assets to $233 million and a 66% increase in total
deposits to $169.6 million.
INSURANCE AGENCY AND SECURITIES BROKER DEALER
Similarly, with net income of $2.3 million during its first full year of
operations, Doral Insurance Agency exceeded expectations. The introduction of
new insurance products and the ability to effectively cross sell
insurance-related financial services to our vast existing customer base will
substantially contribute to the further diversification of our income stream in
the immediate future.
In 2001 we agreed to sell the retail brokerage operations of Doral Securities to
UBS/PaineWebber in order to concentrate on the more profitable institutional
brokerage and investment banking business. As part of the transaction, which is
expected to close during the first quarter of 2002,
6 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
UBS/PaineWebber has agreed to sell investment products in selected branches of
Doral Bank-Puerto Rico. Doral Bank will be entitled to a portion of all the
commissions earned on such sales, which is anticipated to become a recurring
source of fee income. Doral Securities will continue to provide institutional
investment banking services as well as to assist Doral Financial in the
identification of cost-effective financing alternatives.
COMMUNITY INVOLVEMENT
As an involved and concerned corporate citizen, responsible neighbor and caring
friend, Doral Financial is committed to improving the quality of life of the
communities it serves. Our commitment extends beyond our dedication to customer
service. It reaches out to support community initiatives and programs that care
for people in need.
At no time was that commitment more important than in the aftermath of the
horrific terrorist attacks on the World Trade Center and the crash of American
Airlines Flight 587, which devastated our friends, neighbors and customers in
New York City. We responded to those events with financial support to several
charities, and our employees have generously volunteered their time and energy
to various relief efforts.
AS AN INVOLVED AND
CONCERNED
CORPORATE CITIZEN,
RESPONSIBLE
NEIGHBOR AND
CARING FRIEND,
DORAL FINANCIAL IS
COMMITTED TO
IMPROVING THE
QUALITY OF LIFE OF
THE COMMUNITIES IT
SERVES.
Our community involvement, however, does not wait for disaster to strike.
Through investments, grants, donations and employee participation, we support
community-based organizations, non-profit institutions, sports and cultural
initiatives that provide alternatives and solutions for better living and also
strengthen family values. Our contributions and personal involvement are
reflections of our institutional mission to provide the necessary resources to
make dreams come true. We strongly believe that investing in the cultural,
physical and social advancement of our communities is a moral contract we honor
with pride.
A PROMISING FUTURE
We look forward to 2002 with great enthusiasm as we celebrate Doral Financial's
30th anniversary, refusing to rest on our past achievements. Our institution is
well positioned to face the challenges of the current economic climate and
achieve continued strong growth in all segments of our business. Doral Financial
has historically benefited, even in rising interest rate cycles, when debt
consolidation refinancing increases to pay off higher levels of consumer debt.
Doral Financial adheres to the highest standards of ethical business conduct in
all economic circumstances. Historically, we have promoted and maintained
sound business practices and internal controls, followed proper accounting
rules, and we are in constant communication with our independent accountants.
PricewaterhouseCoopers LLP reviews our quarterly results, and we maintain an
internal audit group, which independently reviews the financial and operational
aspects of all Doral Financial business segments. The Internal Audit Group
reports directly to the Audit Committee of the Board of Directors, composed of
three outside directors.
We are committed to further enhance shareholder value, and management is
constantly seeking ways to improve productivity and efficiency through new
products, internal reorganization, and the application of technological
advances. We would like to express our appreciation for your interest, ongoing
support, and investment in Doral Financial Corporation.
/s/ Salomon Levis
Salomon Levis
Chairman of the Board and Chief Executive Officer
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 7
MORTGAGE BANKING
Doral Financial continues to be the dominant residential mortgage lender in
Puerto Rico with a market share of about 45%, making the mortgage-banking units
the most significant contributors to our excellent operating performance. As the
leader in origination of residential loans, loan sales in the secondary market,
issuance of mortgage-backed securities, and loan servicing, Doral Financial
provides the most innovative and competitive products in the Puerto Rico real
estate market.
Its four mortgage origination units, HF Mortgage Bankers, Doral Mortgage
Corporation, SANA Investment Mortgage Bankers, Inc. and Centro Hipotecario de
Puerto Rico Inc., cater to a range of market niches in an environment where
demand for housing continues to exceed supply. This segmented market approach,
combined with unsurpassed customer service at all levels, allows for further
market penetration resulting in unprecedented performances year after year.
The volume of loan production in 2001 reached an all-time high of $4.2 billion,
an increase of 31% compared to the record $3.2 billion set in 2000. Furthermore,
the fourth quarter of 2001 recorded the highest loan production for any given
three-month period in our history, reaching $1.2 billion, an increase of 52%
from the $792 million recorded in the fourth quarter of 2000. At the same time,
strong loan production boosted the servicing portfolio by 14% compared to 2000.
Puerto Rico housing trends provide a very attractive environment for continued
growth in the mortgage-banking segment. A 2001 study conducted by Estudios
Tecnicos, Inc., a Puerto Rico-based research firm, reports a shortage of more
than 100,000 housing units on the island. While Puerto Rico's total population
increased by 8.1% to 3.8 million in the last decade, according to the 2000 U.S.
Census, the total number of households increased by an impressive 19.3%. The
percentage of home ownership in Puerto Rico maintained its high levels at 72.9%.
Meanwhile, due to the shortage of housing and limited land, real estate values
continue to increase yearly.
As population increases, the shortage of affordable housing has prompted the
government to further stimulate home ownership and to develop a policy that
calls for the construction of 50,000 residential units over the next three
years. Meanwhile, private developers are building another 50,000 residential
units. Taking this into account, we expect mortgage production to significantly
increase in 2002, mostly fueled by an increase of tax-exempt HUD-insured loans.
Similarly, demand for mortgage refinancing is expected to continue to be strong,
even in a higher-interest rate environment, which, based on experience, could
actually increase the proportion of refinanced loans. Consumers in Puerto Rico
often use refinancing as a means of consolidating debt or cashing out their
equity. The higher borrowing costs for personal, auto, and other types of credit
make the lower mortgage interest rate a more attractive solution. In addition,
interest paid on a mortgage loan in Puerto Rico is tax deductible, while
interest expense from other non-mortgage loans is not.
HF MORTGAGE BANKERS
The HF Mortgage Bankers division specializes in the financing of the purchase of
new residential properties and works closely with Doral Bank-Puerto Rico to
provide short-term construction financing for new housing developments. HF has
become the largest FHA/VA lender on the island and the leading provider of end
loan financing on newly constructed residential units because of its expe-
rience in new housing developments and a reputation for excellence in service
with developers.
8 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[page 9]
(Photographs: A typical new residential property in Puerto Rico with details
of interiors and garden flowers)
Loan production increased by almost two-fold for HF in 2001, establishing a new
record over the previous year. Operating out of 13 branch offices throughout
Puerto Rico, HF Mortgage Bankers expects continued growth in new residential
developments, spot loans, and short-term financing. HF, which has distinguished
itself by introducing innovative products to the market, will launch a new
Internet service that clients can access at their own convenience 24 hours a day
to originate loans online and check on the status of their loans. This service
will eventually be introduced at the other Doral Financial mortgage origination
units.
DORAL MORTGAGE CORPORATION
Doral Mortgage Corporation provides a wide range of real estate-secured loan
products, including FHA/VA, conforming and non-conforming loans, with an
emphasis on consumer loans secured by first mortgages with low balances and
strong borrower equity.
These loans provide Doral Financial with an attractive yield during the period
they are held prior to their sale, and are in strong demand among local
financial institutions. With 23 offices island wide, Doral Mortgage targets the
mass market and invests aggressively in year-round marketing campaigns. These
campaigns have helped position the Doral name brand as the island's premiere
entity in mortgage lending.
CENTRO HIPOTECARIO DE PUERTO RICO
Centro Hipotecario de Puerto Rico also provides an array of FHA/VA, conforming
and non-conforming loan products through its three retail origination offices
in Puerto Rico. Specializing in real estate broker and personal client
relationships, Centro Hipotecario has developed a loyal clientele that
continuously refers new business, resulting in the expansion of its strong
customer base.
The success of Centro Hipotecario is based on personal service, including the
involvement of its top management in serving customers.
SANA INVESTMENT MORTGAGE BANKERS, INC.
SANA Investment Mortgage Bankers, acquired by the Company in 1999, targets the
affordable housing market segment and has grown to 11 offices throughout the
island. SANA has distinguished itself in the market because of its ability to
rapidly process loan applications.
Following its ongoing expansion plans, SANA Investment opened two offices during
2001 and plans to open two new facilities in 2002 to better serve its growing
customer base. A telemarketing department will be added to SANA's operations in
2002 to strengthen its marketing efforts.
DORAL MORTGAGE
CORPORATION
PROVIDES A WIDE
RANGE OF REAL
ESTATE-SECURED LOAN
PRODUCTS INCLUDING
FHA/VA,
CONFORMING AND
NON-CONFORMING
LOANS.
10 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[page 11]
(Photographs: An aerial shot of a new Monte Verde residential development with
details of construction)
RETAIL BANKING
Doral Bank had an exceptional year in 2001 as it increased its net income a
striking 81% to $49 million, compared to $27 million in 2000. This excellent
growth was the result of attracting substantial new business to the bank, which
is the fastest growing commercial bank in Puerto Rico with $3.5 billion in
assets and $1.5 billion in deposits.
In 2001, the Bank opened seven additional full-service offices for a total of 29
facilities located throughout Puerto Rico's major metropolitan centers. As part
of its strategy to increase market share, Doral Bank plans to enter the credit
card business in 2002, and will further expand its branch network by adding ten
new branches, mostly Doral Financial Centers.
Inaugurated in 1999, Doral Financial Centers provide a "one-stop shop" financial
service facility, where customers can meet all their financial needs, including
loan and deposit banking products from Doral Bank, residential mortgage loans
from one of the Company's mortgage banking units, insurance products from Doral
Insurance, and securities products through UBS/PaineWebber. With five Doral
Financial Centers in Puerto Rico already open, this concept enables the Company
to take full advantage of cross selling its diverse product line.
The inauguration of Doral Bank Plaza, its new headquarters in Puerto Rico, was
another milestone for Doral Bank in 2001. This impressive building, located in
the Hato Rey financial district of San Juan, is the nerve center for the
Company's banking operations.
These operations have grown rapidly since the bank's inception in 1993, because
of the established operating philosophy: offering innovative quality products,
extended office hours, convenient locations, and unparalleled service. Doral
Bank focuses on secured lending and, therefore, its level of credit risk is
lower than that of many other competing financial institutions. Doral Bank
branches also serve as payment centers for Doral Financial mortgage loan units,
which provide an excellent cross-selling opportunity for the bank to offer its
variety of products.
In 2001, Doral Bank became the first Federal Home Loan Bank of New York member
approved to participate in the FHLB program to facilitate the financing for
low-income families to buy their first homes.
IN 2001 THE BANK
OPENED SEVEN
ADDITIONAL
FULL-SERVICE OFFICES
FOR A TOTAL OF 29
FACILITIES LOCATED
THROUGHOUT THE
MAJOR METROPOLITAN
CENTERS IN
PUERTO RICO.
DORAL BANK LOCATIONS IN PUERTO RICO
[MAP]
12 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[page 13]
(Photographs: Doral "one-stop shop" in Hato Rey with detail of the Hato Rey
"golden mile" sector)
INSURANCE & SECURITIES
Exceeding expectations, Doral Insurance Agency finished its first full year of
operations with a net income of $2.3 million. This impressive launch into an
entirely new line of business was the result of the subsidiary's ability to suc-
cessfully tap Doral Financial's extensive customer base to effectively sell its
products.
Doral Insurance Agency will increase its presence in Doral Financial Centers,
where its licensed representatives can further take advantage of the
cross-selling opportunities and provide customers with the convenience of
"one-stop shopping" for financial services. We are confident that the insurance
business will continue to develop and further diversify our revenue sources.
In order to concentrate on the most profitable sources of income, Doral
Financial decided to sell the Doral Securities retail securities brokerage
business in December 2001. The sale to UBS/PaineWebber is expected to close
during the first quarter of 2002 and frees Doral Securities to focus on areas of
institutional brokerage and investment banking, which are expected to produce
greater profits.
As part of the transaction, Doral Financial entered into an agreement that will
permit UBS/PaineWebber to sell investment products at selected Doral Bank
branches. This arrangement will also allow Doral Financial to earn a portion of
the commissions on such sales, without incurring in the cost of maintaining a
retail securities sales staff.
EXCEEDING
EXPECTATIONS,
DORAL INSURANCE
AGENCY FINISHED ITS
FIRST FULL YEAR OF
OPERATIONS WITH A
NET INCOME OF
$2.3 MILLION.
14 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[page 14]
(Doral insurance Agency office with staff members and client)
[page 15]
New Doral Headquarters building (3 views)
In 2002, Doral Financial consoli-
dates its Puerto Rico operations in a
state-of-the-art building that will
enhance productivity and communi-
cation. After four years of planning,
design, and construction, the new
building features a 920-space, multi-
level parking facility and top-of-the line
technology.
[page 16]
(Doral Bank-NY branch, interior view)
U.S. EXPANSION
Doral Financial subsidiaries in the U.S. mainland include Doral Money and Doral
Bank-New York. These subsidiaries have been successful by focusing on
multi-family and other real estate-secured lending in the moderate-income areas
of New York City's five boroughs. These properties have consistently maintained
minimal vacancies and have historically weathered downturns in the economy due
to the strong demand for working class housing and the effects of New York's
rent control regulations.
Doral Bank offers a fresh banking alternative in New York with a friendly,
personal approach, competitive rates, and unsurpassed service. It initiated
operations in New York City as a federally chartered FDIC-insured savings bank
to provide services to communities underserved by the traditional banking
system. It emphasizes real estate-secured lending while offering a full range of
commercial and consumer loan products.
Metropolitan New York has a population in excess of 14 million with minorities
making up 47.6% of these residents, a situation that presents an exceptional
opportunity for Doral's U.S. operations. Doral Bank-New York expects solid
growth as it continues to penetrate new market segments.
As of 2001, after only two years in operation, Doral Bank-New York had assets of
$233 million and deposits of $169.6 million. The Bank's expansion plans call for
opening two branches by the end of 2002 and an increase in its deposit base to
$250 million.
In addition to its headquarters at 27th Street and Park Avenue South, during the
year the bank opened two full-service branches in Washington Heights in Upper
Manhattan and Astoria, Queens. Deposits in these two new branches have already
surpassed the $31 million threshold. Managed by New York talent, the bank's
branches are also staffed with bilingual employees fluent in the predominant
languages of the surrounding neighborhoods.
Right-hand page: To offer unsurpassed service, Doral Bank-New York
branches have extended their hours and open seven days a week.
16 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[page 17]
(Doral Bank-NY branch exterior view)
[page 18]
(Photographs: Group photo of Doral Financial Corporation Directors)
CORPORATE DIRECTORS
[PHOTO] [PHOTO]
SALOMON LEVIS(1) ZOILA LEVIS(2)
[PHOTO] [PHOTO]
RICHARD F. BONINI(3) EDGAR M. CULLMAN, JR.
[PHOTO] [PHOTO]
JOHN L. ERNST EFRAIM KIER
[PHOTO] [PHOTO]
A. BREAN MURRAY HAROLD D. VICENTE
[PHOTO] [PHOTO]
DAVID LEVIS EDGAR M. CULLMAN
Director Emeritus Director Emeritus
18 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
SUBSIDIARY PRESIDENTS
CORPORATE CORPORATE SUBSIDIARY [PHOTO]
DIRECTORS OFFICERS PRESIDENTS
RICHARD F. BONINI
SALOMON LEVIS(1) SALOMON LEVIS(1) RICHARD F. BONINI(3) [PHOTO]
Chairman of the Board and Chairman of the Board and President of Doral
Chief Executive Officer Chief Executive Officer Money, Inc. DAVID R. LEVIS
ZOILA LEVIS(2) ZOILA LEVIS(2) DAVID R. LEVIS [PHOTO]
President and Chief Operating President and President of HF Mortgage
Officer Chief Operating Officer EDISON VELEZ
EDISON VELEZ
RICHARD F. BONINI(3) RICHARD F. BONINI(3) President of Doral Mortgage [PHOTO]
Senior Executive Vice President, Senior Executive Vice President, Corporation
Chief Financial Officer and Chief Financial Officer and AIDILIZA LEVIS
Secretary Secretary AIDILIZA LEVIS
President of Centro [PHOTO]
EDGAR M. CULLMAN, JR. MARIO S. LEVIS(4) Hipotecario de
President and Chief Executive Executive Vice President and Puerto Rico, Inc. INGRID SCHMIDT
Officer of General Cigar Treasurer
Holdings, Inc. INGRID SCHMIDT [PHOTO]
FRANCISCO RIVERO President of SANA Investment
JOHN L. ERNST Executive Vice President Mortgage Bankers, Inc. JOSE VIGOREAUX
Chairman of the Board and Administration and Business
President of Bloomingdale Development JOSE VIGOREAUX(5) [PHOTO]
Properties, Inc. President of Doral Bank-
FREDERICK C. TEED(5) Puerto Rico ROBERT REINER
EFRAIM KIER Executive Vice President Banking
President A & M Contractors ROBERT REINER [PHOTO]
FERNANDO RIVERA- President of Doral Bank-
A. BREAN MURRAY MUNICH(6) New York FERNANDO RIVERA-
Chairman and Chief Executive Senior Vice President, MUNICH
Officer of Brean Murray & General Counsel and FERNANDO RIVERA-
Co., Inc. Assistant Secretary MUNICH(6)
President of Doral Insurance [PHOTO]
Agency, Inc.
HAROLD D. VICENTE RICARDO MELENDEZ JULIO MICHEO
Partner of Senior Vice President and Chief JULIO MICHEO
Vicente & Cuebas Accounting Officer President of Doral
Law Firm Securities, Inc.
CHRISTOPHER O'NEILL
Vice President
Construction Lending
DIRECTORS EMERITUS
EDGAR M. CULLMAN CARLOS VINA
Chairman of the Board of General Vice President
Cigar Holdings, Inc.
DAVID LEVIS OSCAR APONTE
Former Chairman of the Board of Vice President of Internal Audit
Doral Financial Corporation
(1) 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) Zoila Levis also serves as Chairman of the Board of Doral Insurance
Agency, Inc. and a Director of Doral Bank-PR and Doral Securities.
(3) Richard Bonini also serves as a Director of Doral Mortgage Corporation,
Doral Bank-PR, Doral Bank-NY, and Centro Hipotecario de Puerto Rico.
(4) Mario S. Levis also serves as a Director of Doral Securities.
(5) Fred Teed and Jose Vigoreaux also serve as Directors of Doral Bank-PR.
(6) Fernando Rivera Munich also serves as a Director of Doral Insurance
Agency, Inc.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 19
THE COMPANIES OF DORAL
FINANCIAL CORPORATION
PUERTO RICO LOCATIONS SANA INVESTMENT MORTGAGE
BANKERS, INC.
DORAL MORTGAGE DORAL MORTGAGE Bayamon (2 locations)
CORPORATION CORPORATION Caguas
Doral Financial Plaza Carolina
1451 FD Roosevelt Avenue PUERTO RICO Catano
San Juan, Puerto Rico 00920-2717 Arecibo (2 locations) Las Piedras
Bayamon (2 locations) Mayaguez
Caguas (2 locations) Ponce
HF MORTGAGE BANKERS Carolina (2 locations) Rio Piedras (3 locations)
1159 F.D. Roosevelt Avenue Cayey
Puerto Nuevo, Puerto Rico 00920-2905 Fajardo DORAL BANK-PUERTO RICO
Guayama Arecibo
CENTRO HIPOTECARIO Hato Rey (3 locations) Bayamon (3 locations)
DE PUERTO RICO, INC. Humacao Caguas (3 locations)
305 F.D. Roosevelt Avenue Mayaguez (2 locations) Carolina
Hato Rey, Puerto Rico 00918-4149 Ponce Catano (2 locations)
Rio Grande Cayey
SANA INVESTMENT MORTGAGE Rio Piedras Guaynabo
BANKERS, INC. San Juan Hato Rey (4 locations)
Urb. Caribe Trujillo Alto Humacao
#1569 Alda Street Vega Baja Las Piedras
Edificio Doral Bank, Suite 302 Mayaguez
Rio Piedras, Puerto Rico 00926-2712 U.S. MAINLAND Ponce
Miami, Florida Puerto Nuevo
DORAL BANK, PUERTO RICO Rio Grande
279 Ponce de Leon Avenue, 5th floor HF MORTGAGE BANKERS Rio Piedras (3 locations)
Hato Rey, Puerto Rico 00918-2003 Bayamon (2 locations) San Juan
Caguas Trujillo Alto
DORAL SECURITIES, INC. Catano Vega Alta
268 Munoz Rivera Avenue, Suite 1803 Guaynabo (2 locations) Vega Baja
Hato Rey, Puerto Rico 00918-2002 Hato Rey (2 locations)
Mayaguez DORAL SECURITIES, INC.
DORAL INSURANCE AGENCY, INC. Ponce Hato Rey
Doral Financial Plaza Puerto Nuevo
1451 FD Roosevelt Avenue Rio Piedras DORAL MONEY, INC.
San Juan, Puerto Rico 00920-2717 Vega Alta New York, New York
DORAL PROPERTIES, INC. CENTRO HIPOTECARIO DORAL BANK-NEW YORK
Doral Financial Plaza DE PUERTO RICO, INC. Park Avenue South, Manhattan, New York
1451 FD Roosevelt Avenue Bayamon Washington Heights, Manhattan, New York
San Juan, Puerto Rico 00920-2717 Hato Rey Astoria, Queens, New York
Manati
DORAL INTERNATIONAL, INC.
268 Ponce de Leon Avenue, Suite 1017
Hato Rey, Puerto Rico 00918-2003
NEW YORK
DORAL MONEY, INC.
387 Park Avenue South
New York, New York 10016-8810
DORAL BANK, FSB, NEW YORK
387 Park Avenue South
New York, New York 10016-8810
20 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
STOCK PRICES AND DIVIDEND POLICY
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 closing sales prices on the NASDAQ National Market and the cash dividends
declared on the Common Stock during such periods.
Calendar Price Range Dividends
Year Quarter High Low Per Share
---- ------- ------------------------ ---------
2001 1st $ 30.000 $ 22.438 $ 0.100
2nd 34.650 26.060 0.125
3rd 38.800 30.640 0.125
4th 39.380 30.150 0.125
2000 1st $ 11.812 $ 8.750 $ 0.080
2nd 12.500 10.312 0.100
3rd 16.250 11.250 0.100
4th 25.562 15.562 0.100
As of February 15, 2002, the approximate number of record holders of Doral
Financial's Common Stock was 582, 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
$33.96 per share.
The terms of Doral Financial's 8.35% Non-cumulative Monthly Income Preferred
Stock, Series B (liquidation preference $25 per share) and of Doral Financial's
7% Non-cumulative Monthly Income Preferred Stock, Series A (liquidation prefer-
ence $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.
Doral Financial's ability to pay dividends in the future is limited by
restrictive covenants contained in its debt agreements, its earnings, cash
resources and capital needs, general business conditions and other factors
deemed relevant by Doral Financial's Board of Directors. Doral Financial is
prohibited under the Indenture for its 7.84% Senior Notes due on 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
Doral Financial together with the aggregate amount of dividends paid and other
capital distributions made since October 1, 1996, exceed the sum of: (i) 50% of
its 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. As of December 31,
2001, Doral Financial could have paid up to $429.6 million in cash dividends
under this restriction. In addition, under other debt agreements, Doral
Financial may be prohibited from paying dividends if it is in default under such
agreements.
Doral Financial's ability to pay dividends may also be restricted by various
regulatory requirements and policies of bank regulatory agencies having
jurisdiction over Doral Financial 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 divi-
dend 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.
United States citizens who are not 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 Doral Financial's transfer agent 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
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 21
(DORAL LOGO)
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.
The following table sets forth certain selected consolidated financial data for
Doral Financial for each of the five years in the period ended December 31,
2001. This information should be read in conjunction with Doral Financial's
Consolidated Financial Statements and related notes thereto.
22 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
SELECTED FINANCIAL DATA
Year ended December 31,
(Dollars in thousands, except for share data) 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ------------
Selected Income Statement Data:(1)
Interest income $ 356,095 $ 325,545 $ 211,679 $ 150,051 $ 90,131
Interest expense 271,668 283,241 161,795 114,786 61,438
----------- ----------- ----------- ----------- ------------
Net interest income 84,427 42,304 49,884 35,265 28,693
Provision for loan losses 4,445 4,078 2,626 883 792
----------- ----------- ----------- ----------- ------------
Net interest income after provision for loan losses 79,982 38,226 47,258 34,382 27,901
Non-interest income 191,132 150,317 115,923 79,670 41,849
Non-interest expense 112,854 92,391 86,568 54,213 31,953
----------- ----------- ----------- ----------- ------------
Income before taxes, cumulative gain-effect of change
in accounting principle and extraordinary item 158,260 96,152 76,613 59,839 37,797
Income taxes 20,338 11,496 8,687 7,007 5,249
----------- ----------- ----------- ----------- ------------
Income before cumulative gain-effect of change in
accounting principle and extraordinary item 137,922 84,656 67,926 52,832 32,548
Cumulative gain-effect of
change in accounting principle 5,929 -- -- -- --
Extraordinary item -
non-cash charge on extinguishment of debt -- -- -- -- 12,317
----------- ----------- ----------- ----------- ------------
Net income $ 143,851 $ 84,656 $ 67,926 $ 52,832 $ 20,231
=========== =========== =========== =========== ============
Cash dividends paid $ 30,951 $ 22,749 $ 17,269 $ 9,975 $ 7,199
=========== =========== =========== =========== ============
Per Common Share Data:
Basic:
Income before cumulative gain-effect of change
in accounting principle and extraordinary item $ 2.87 $ 1.86 $ 1.55 $ 1.31 $ 0.89
Cumulative gain-effect of change
in accounting principle 0.13 -- -- -- --
Extraordinary item -- -- -- -- (0.34)
----------- ----------- ----------- ----------- ------------
Net income $ 3.00 $ 1.86 $ 1.55 $ 1.31 $ 0.55
=========== =========== =========== =========== ============
Diluted:
Income before cumulative gain-effect of change
in accounting principle and extraordinary item $ 2.82 $ 1.85 $ 1.50 $ 1.26 $ 0.85
Cumulative gain-effect of change
in accounting principle 0.13 -- -- -- --
Extraordinary item -- -- -- -- (0.32)
----------- ----------- ----------- ----------- ------------
Net income $ 2.95 $ 1.85 $ 1.50 $ 1.26 $ 0.53
=========== =========== =========== =========== ============
Dividends declared $ 0.475 $ 0.38 $ 0.30 $ 0.23 $ 0.20
Book value $ 13.33 $ 8.99 $ 7.46 $ 6.46 $ 4.85
Weighted average shares outstanding:
Basic 44,794,192 41,887,708 40,428,920 39,941,068 36,680,158
Diluted 45,502,939 42,093,509 42,421,477 41,928,186 38,728,632
Shares outstanding at end of period 47,810,334 42,393,134 40,428,920 40,428,920 36,794,920
continued next page
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 23
(DORAL LOGO)
SELECTED FINANCIAL DATA (CONTINUED)
Year ended December 31,
(Dollars in thousands, except for share data) 2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
Selected Balance Sheet Data:(1)
Mortgage loans held for sale $ 1,947,494 $1,354,605 $1,015,703 $ 883,048 $ 404,672
Securities held for trading 993,328 1,101,938 862,698 606,918 620,288
Securities held to maturity 866,335 1,558,313 1,509,060 190,778 143,534
Securities available for sale 928,179 182,374 66,325 408,888 240,876
Loans receivable, net 644,113 398,191 231,184 166,987 133,055
Servicing assets, net 154,340 139,795 109,721 72,568 46,416
Total assets 6,694,283 5,463,386 4,537,343 2,918,113 1,857,789
Loans payable 161,101 372,620 353,460 426,704 238,770
Securities sold under agreements to repurchase 2,573,772 2,275,855 1,927,956 1,197,328 838,142
Notes payable 459,543 444,746 461,053 199,733 164,934
Deposit accounts 1,669,909 1,303,525 1,010,424 533,113 300,494
Stockholders' equity 762,120 505,710 384,982 269,559 186,955
Operating Data:
Loan production $ 4,209,000 $3,174,000 $2,722,000 $2,313,000 $1,037,000
Mortgage loan servicing portfolio 10,006,000 8,805,000 7,633,000 6,186,000 4,655,000
Selected Financial Ratios:(2)(3)(4)
Return on Average Assets 2.33% 1.66% 1.92% 2.17% 1.37%
Return on Average Common Equity 27.13% 23.03% 21.92% 21.65% 11.99%
Dividend Payout Ratio for Common Stock 16.10% 20.50% 20.00% 18.25% 37.74%
Average Equity to Average Assets 10.04% 8.49% 10.04% 10.00% 11.39%
Interest Rate Spread 1.38% 0.92% 1.35% 1.64% 2.10%
Net Yield on Average Interest-Earning Assets 6.63% 7.10% 6.86% 7.30% 7.90%
Net Yield on Average Interest-Bearing Liabilities 5.25% 6.18% 5.51% 5.66% 5.80%
(1) Certain reclassifications of prior years' data have been made to
conform to 2001 classifications.
(2) Return on Average Assets, Return on Average Common Equity and Dividend
Payout Ratio for Common Stock based on income before cumulative
gain-effect of a change in accounting principle for 2001 would have
been 2.23%, 25.93% and 16.84%, respectively.
(3) Return on Average Assets, Return on 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.
(4) Average balances computed on a monthly basis except for year 2001,
which is on daily basis except for Doral Securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The year ended December 31, 2001, was a record year for Doral Financial. For the
year ended December 31, 2001, income before the cumulative gain-effect of a
change in accounting principle was $137.9 million compared to $84.7 million for
the year ended December 31, 2000, an increase of 63%. For the year ended
December 31, 2001, Doral Financial's loan production, which includes internal
originations and purchases, was $4.2 billion, a new record. As of December 31,
2001, Doral Financial's mortgage servicing portfolio totaled $10 billion. As of
December 31, 2001, Doral Financial had consolidated assets of approximately $6.7
billion and consolidated stockholders' equity of approximately $762.1 million.
CRITICAL ACCOUNTING POLICIES
Note 2 to Doral Financial's Consolidated Financial Statements contains a summary
of the most significant accounting policies followed by Doral Financial in the
preparation of its financial statements. Among the most significant accounting
policies are those relating to the determination of fair values for Doral
Financial's securities held for trading, including the determination of fair
values for Doral Financial's portfolio of tax-exempt Puerto Rico GNMA
securities, the interest-only strips ("IOs") created as part of Doral
Financial's mortgage sale and securitization activities and the derivatives used
by Doral Financial to manage its interest rate risk. Because of their
preferential tax status, tax-exempt GNMA securities cannot be valued only by
reference to market quotations for U.S.
24 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
GNMA securities with similar characteristics. Instead, Doral Financial
determines the fair value of tax-exempt Puerto Rico GNMA securities on the basis
of quotations received by locally based broker-dealers and adjusting such value
for liquidity and other factors, including prices of U.S. GNMA securities. As
described in Note 2 and herein under "Amortization of IOs and Servicing Assets,"
the value of IOs and of derivatives not quoted on a recognized market are based
on market prices for sales of similar assets and or assumptions that are often
tied to anticipated changes in interest rates and prepayments rates on mortgage
loans. Significant changes in interest rates or prepayment rates from those used
to value these assets could require Doral Financial to recognize an impairment
to the value of these assets, hereby adversely affecting its future results.
Another significant accounting policy related to Doral Financial's business is
the policy related to the recognition of servicing assets on Doral Financial's
balance sheet in connection with the mortgage servicing rights retained by Doral
Financial as part of its mortgage sale and securitization activities. As
described in Note 2 and under "Amortization of IOs and Servicing Assets," the
retained servicing assets are recorded on Doral Financial's financial statements
on the basis of prices paid for comparable mortgage servicing rights. The value
of mortgage servicing rights is also highly sensitive to changes in interest
rates. Declines in interest rates tend to reduce the value of servicing rights
because they tend to increase mortgage prepayments, thereby reducing the future
stream of cash flows associated with such servicing assets. Accordingly, large
unanticipated declines in interest rates could cause Doral Financial to increase
amortization above scheduled amortization or recognize an impairment in the
value of its mortgage servicing rights through a charge to earnings.
As discussed above, when Doral Financial sells loans through either
securitization or bulk sales, it assigns a value to the IOs or
mortgage-servicing rights retained by it in the sale. The fair values assigned
to the IOs and the servicing asset reduce the carrying basis of the loan sold.
Gain or loss on the sale of a loan is determined by the excess of the selling
price of the loan over the resulting carrying basis after reducing it for the
allocation of retained interests.
Interest income is accrued by Doral Financial when earned. Loans held in Doral
Financial's banking subsidiaries as well as construction loans are placed on
non-accrual status when any portion of principal or interest is ninety days past
due or earlier if concern exists as to the ultimate collectibility of principal
or interest. Doral Financial's mortgage banking units continue to accrue
interest, except in the case of construction loans, until a loan is one year or
more past due and concern exists as to the ultimate collectibility of principal
or interest based on the loan's loan-to-value ratio. When a loan is placed on
non-accrual status, all previously accrued and unpaid interest is charged
against income in the case of Doral Financial's banking units but not in the
case of its mortgage banking units.
Doral Financial maintains a reserve known as an allowance for loan losses to
absorb anticipated loan losses. The allowance is maintained at a level that
Doral Financial considers to be adequate to absorb losses based on a number of
factors, including historical loss experience, current delinquency rates, an
assessment of individual problem loans, an assessment of the value of underlying
collateral and economic conditions. Credit losses are charged and recoveries are
credited to the allowance. Doral Financial maintains a similar allowance for
possible losses on the disposition of real estate owned. Unanticipated increases
in the allowances for loan losses or for real estate owned could adversely
impact Doral Financial's net income in the future.
Loan origination fees, as well as discount points and certain direct origination
costs, are initially recorded as an adjustment to the cost of the loan and
reflected in Doral Financial's earnings when the loan is sold or securitized
into a mortgage-backed security.
Investors are encouraged to carefully read the following Management's Discussion
and Analysis of Financial Condition and Results of Operations, together with
Doral Financial's Consolidated Financial Statements, including the Notes to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
Doral Financial's results of operations are mainly the result of:
- its level of loan production and loan sales;
- the relationship between interest rates on its interest- bearing assets
and its cost of funds;
- the behavior of its mortgage servicing assets;
- the credit losses related to its loan activities; and
- its ability to manage its liquidity needs and capital resources.
These factors are, in turn, primarily influenced by:
- the level and direction of interest rates;
- the level of demand for mortgage credit; and
- the strength of the economy and housing markets in Puerto Rico, Doral
Financial's principal market.
The components of Doral Financial's revenues are: (1) net interest income; (2)
net gains on mortgage loan sales
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 25
(DORAL LOGO)
and fees; (3) servicing income; (4) trading activities; (5) gain on sale of
investment securities; and (6) commissions, fees and other income.
NET INCOME
Doral Financial's net income for the year ended December 31, 2001 increased to
$143.9 million, compared to $84.7 million and $67.9 million for the years
ended December 31, 2000 and 1999, respectively. Net income for 2001 included a
$5.9 million cumulative gain-effect of a change in accounting principle, related
to the implementation, effective January 1, 2001, of Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." As part of the implementation of SFAS No. 133, Doral
Financial reclassified $110 million of held to maturity securities to
available for sale securities and $130 million to trading securities. As a
result of this reclassification, in addition to the cumulative gain-effect in
earnings, Doral Financial also recognized a gain of $1.6 million (net of tax) in
other comprehensive income. Diluted earnings per common share before the
cumulative gain-effect of the change in accounting principle for 2001
increased by 52% compared to 2000, from $1.85 for 2000 to $2.82 for 2001.
Consolidated results include the operations of Doral Financial's banking
subsidiaries, which contributed approximately $49.3 million to Doral Financial's
consolidated net income in 2001, compared to $26.9 million for 2000 and $15.7
million for 1999, and Doral Securities, Doral Financial's securities
broker-dealer unit, which contributed $2.1 million, $226,000 and $1.3 million,
respectively, to consolidated net income for the years ended December 31, 2001,
2000 and 1999. Doral Insurance Agency, Doral Financial's insurance agency
subsidiary, which commenced operations on December 2000, contributed $2.3
million and $39,000, respectively, to consolidated net income for the years
ended December 31, 2001 and 2000.
Doral Financial's results of operations summarized above and discussed in
further detail below were significantly impacted by (1) the reduction in
short-term interest rates experienced during 2001 and (2) the continued growth
and expansion of Doral Financial's operations and interest-earning assets.
NET INTEREST INCOME
Net interest income is the excess of interest earned by Doral Financial on its
interest-earning assets over the interest costs incurred on its
interest-bearing liabilities. Net interest income for the years 2001, 2000 and
1999 was $84.4 million, $42.3 million, and $49.9 million, respectively. The
increase in net interest income for the year 2001 compared to 2000 is due
principally to an increase in Doral Financial's average interest-earning assets,
as well as an increase in net interest spread and margin for the period. Average
interest-earning assets grew by 17% from 2000 to 2001, from $4.6 billion to $5.4
billion, and by 48% from 1999 to 2000 from $3.1 billion to $4.6 billion. Doral
Financial's net interest spread and margin for 2001 were 1.38% and 1.57%,
compared to 0.92% and 0.93% for 2000. The net interest spread and margin were
1.35% and 1.62% for 1999.
The increase in net interest spread and margin during 2001 was due primarily to
the widening of the yield curve or the tendency of short-term rates paid by
Doral Financial on its borrowings to decline more in relative terms than the
rates earned by Doral Financial on its loans and securities. The average rate
paid by Doral Financial on its interest-bearing liabilities decreased by 93
basis points during 2001 while the average yield earned on its interest-earning
assets decreased by only 47 basis points. The decline in short-term rates is
evidenced by the decrease in the average three-month London Interbank Offered
Rate ("LIBOR") from 6.6% in the fourth quarter of 2000 to 2.1% in the fourth
quarter of 2001. Conversely, the decrease in net interest income during 2000
compared to 1999 was due to a reduction in interest rate spread and margin
caused primarily by a rising interest rate environment experienced during the
first half of 2000. During 2000, the average rate on Doral Financial's
interest-bearing liabilities increased by 67 basis points while the average
yield earned on its interest-earning assets only increased by 24 basis points.
The repurchase agreement lending operations of Doral Financial's securities
subsidiary tend to reduce Doral Financial's consolidated net interest-rate
spread and margin because these repurchase agreement transactions are
collateralized with highly rated marketable securities and thus entail
relatively small interest rate spreads. Excluding those repurchase agreement
transactions, Doral Financial's interest rate spread and margin would have been
1.47% and 1.67% for 2001 and 1.05% and 1.04% for 2000.
The following table presents, for the years indicated, Doral Financial's average
balance sheet, the total dollar amount of interest earned on its average
interest-earning assets and the interest paid on its average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin and
spread. The table has been prepared without taking into consideration the tax
effect of exempt securities. All average balances for 2001 are based on average
daily balances except for Doral Securities, which are based on month-end
balances. For the years 2000 and 1999, average balances are based on the average
of month-end balances for Doral
26 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
Financial and its non-banking subsidiaries, which Doral Financial believes
approximate average daily balances, and average daily balances for its banking
subsidiaries, in each case during the years presented.
TABLE A - AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(Dollars in thousands) 2001 2000
-------------------------------------- -------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- -------- ---------- ---------- -------- ----------
ASSETS:
Interest-Earning Assets:
Total Loans(1) $2,166,090 $162,532 7.50% $1,557,097 $124,184 7.98%
Mortgage-Backed Securities 1,557,937 96,839 6.22% 1,135,204 78,075 6.88%
Investment Securities 1,108,437 70,940 6.40% 1,540,891 101,852 6.61%
Other Interest-Earning Assets(2) 535,357 25,784 4.82% 352,033 21,434 6.09%
---------- -------- ------ ---------- -------- ------
Total Interest-Earning
Assets/Interest Income 5,367,821 $356,095 6.63% 4,585,225 $325,545 7.10%
-------- ------ -------- ------
Total Non-Interest-Earning Assets 809,906 518,681
---------- ----------
Total Assets $6,177,727 $5,103,906
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 250,277 $ 14,270 5.70% $ 447,271 $ 34,159 7.64%
Repurchase Agreements 2,449,394 121,050 4.94% 2,229,536 136,346 6.12%
Deposits 1,483,296 70,399 4.75% 1,223,374 62,002 5.07%
Other Borrowed Funds(3) 988,049 65,949 6.67% 683,779 50,734 7.42%
---------- -------- ------ ---------- -------- ------
Total Interest-Bearing
Liabilities/Interest Expense 5,171,016 $271,668 5.25% 4,583,960 $283,241 6.18%
-------- ------ -------- ------
Total Non-Interest-Bearing Liabilities 386,359 86,688
---------- ----------
Total Liabilities 5,557,375 4,670,648
Stockholders' Equity 620,352 433,258
---------- ----------
Total Liabilities
and Stockholders' Equity $6,177,727 $5,103,906
========== ==========
Net Interest-Earning Assets $ 196,805 $ 1,265
Net Interest Income on
a Non-Taxable Equivalent Basis $ 84,427 $ 42,304
======== ========
Interest Rate Spread(4) 1.38% 0.92%
====== ======
Interest Rate Margin(4) 1.57% 0.93%
====== ======
Net Interest-Earning Assets Ratio 103.81% 100.03%
====== ======
(Dollars in thousands) 1999
-------------------------------------- ----------------------------------------
Average Average
Balance Interest Yield/Rate
--------- -------- ----------
ASSETS:
Interest-Earning Assets:
Total Loans(1) $1,072,302 $ 78,258 7.30%
Mortgage-Backed Securities 857,267 58,756 6.85%
Investment Securities 891,670 60,235 6.76%
Other Interest-Earning Assets(2) 263,633 14,430 5.47%
---------- -------- ------
Total Interest-Earning
Assets/Interest Income 3,084,872 $211,679 6.86%
-------- ------
Total Non-Interest-Earning Assets 445,758
----------
Total Assets $3,530,630
==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Loans Payable $ 375,099 $ 24,292 6.48%
Repurchase Agreements 1,418,004 72,726 5.13%
Deposits 771,801 35,784 4.64%
Other Borrowed Funds(3) 372,466 28,993 7.78%
---------- -------- ------
Total Interest-Bearing
Liabilities/Interest Expense 2,937,370 $161,795 5.51%
-------- ------
Total Non-Interest-Bearing Liabilities 238,613
----------
Total Liabilities 3,175,983
Stockholders' Equity 354,647
----------
Total Liabilities
and Stockholders' Equity $3,530,630
==========
Net Interest-Earning Assets $ 147,502
Net Interest Income on
a Non-Taxable Equivalent Basis $ 49,884
========
Interest Rate Spread(4) 1.35%
=======
Interest Rate Margin(4) 1.62%
=======
Net Interest-Earning Assets Ratio 105.02%
=======
(1) Average loan balances include the average balance of non-accruing loans, on
which no interest income is recognized.
(2) Consists of money market instruments, reverse repurchase agreements and
deposits in other banks.
(3) Consists of FHLB-NY advances and notes payable.
(4) Interest rate spread represents the difference between Doral Financial's
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Interest rate margin represents net
interest income as a percentage of average interest-earning assets.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 27
(DORAL LOGO)
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
years 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.
TABLE B - NET INTEREST INCOME VARIANCE ANALYSIS
2001 compared to 2000 2000 compared to 1999
-------------------------------------- -------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to: Due to:
(Dollars in thousands) Volume Rate Total Volume Rate Total
-------------------------------- -------- -------- -------- -------- -------- --------
Interest income variance
Total loans $ 48,598 $(10,250) $ 38,348 $ 35,381 $ 10,545 $ 45,926
Mortgage-backed securities 29,084 (10,320) 18,764 19,049 270 19,319
Investment securities (28,585) (2,327) (30,912) 43,857 (2,240) 41,617
Other interest-earning assets 11,164 (6,814) 4,350 4,839 2,165 7,004
-------- -------- -------- -------- -------- --------
Total interest income variance 60,261 (29,711) 30,550 103,126 10,740 113,866
-------- -------- -------- -------- -------- --------
Interest expense variance
Loans payable (15,050) (4,839) (19,889) 4,674 5,193 9,867
Repurchase agreements 13,455 (28,751) (15,296) 41,622 21,998 63,620
Deposits 13,178 (4,781) 8,397 20,937 5,281 26,218
Other borrowed funds 22,577 (7,362) 15,215 24,233 (2,492) 21,741
-------- -------- -------- -------- -------- --------
Total interest expense variance 34,160 (45,733) (11,573) 91,466 29,980 121,446
-------- -------- -------- -------- -------- --------
Net interest income variance $ 26,101 $ 16,022 $ 42,123 $ 11,660 $(19,240) $ (7,580)
======== ======== ======== ======== ======== ========
INTEREST INCOME
Total interest income increased from approximately $211.7 million during 1999,
to $325.5 million during 2000 and to $356.1 million during 2001. The increase in
interest income is mainly due to the increase in Doral Financial's total average
interest-earning assets that increased by approximately $782.6 million during
2001 and by approximately $1.5 billion during 2000.
Interest income on loans increased by $38.3 million or 31% during 2001 compared
to 2000, and by $45.9 million or 59% during 2000 compared to 1999. The increase
during both periods reflected an increase in the level of loans held by Doral
Financial due to the increased volume of loan production.
Interest income on mortgage-backed securities increased by $18.8 million or 24%
during 2001, and by $19.3 million or 33% during 2000 compared to 1999. The
increases during these years resulted from an increase in the average balance of
mortgage-backed securities, which increased from $857.3 million during 1999 to
$1.1 billion during 2000, and to $1.6 billion during 2001. The increase in
mortgage-backed securities, which resulted primarily from the securitization of
internal loan production, reflects Doral Financial's strategy to continue to
maximize tax-exempt interest income. Mortgage- backed securities include Puerto
Rico GNMA securities that are tax exempt for Puerto Rico income tax purposes and
U.S. FHLMC and FNMA mortgage-backed securities and IOs retained as part of Doral
Financial mortgage sale and securitization activities. The interest earned on
U.S. mortgage-backed securities held by Doral Financial's international banking
entities organized under Puerto Rico law is tax exempt to Doral Financial and is
not subject to U.S. income taxation because such entities are considered foreign
corporations for U.S. income tax purposes and are entitled to the portfolio
interest deduction with respect to interest earned on such securities.
Interest income on investment securities decreased by $30.9 million or 30% from
2000 to 2001, and increased $41.6 million or 69% from 1999 to 2000. The decrease
in interest income from 2000 to 2001 on investment securities reflects the early
redemption of a significant amount of debt securities. The increase in interest
income during 2000 was due to increases in investment securities held during the
period. The average balance of investment securities was $1.1 billion for the
year ended December 31, 2001, compared to $1.5 billion and
28 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
$891.7 million for the years ended December 31, 2000 and 1999, respectively.
Interest income on other interest-earning assets increased by $4.4 million or
20% from 2000 to 2001, compared to an increase of $7.0 million or 49% from 1999
to 2000. Other interest-earning assets consist primarily of money market
instruments, overnight deposits, term deposits, and reverse repurchase
agreements. The increase from 2000 to 2001 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 continued diversification into other business
segments, including banking, investment and broker-dealer activities.
INTEREST EXPENSE
Total interest expense decreased to $271.7 million for 2001, compared to $283.2
million for 2000, a decrease of 4%, and grew by $121.4 million from 1999 to
2000, an increase of 75%. The decrease in interest expense for 2001 was due
principally to a decrease in the average cost of borrowings due to the declining
interest rate environment experienced during 2001. The increase in interest
expense for 2000 was due primarily to the growth in the average amount of
interest-bearing liabilities, which funded the growth in interest-earning
assets, and to the increase in short-term interest rates during the first half
of the year. Average interest-bearing liabilities increased to $5.2 billion at
an average cost of 5.25% for the year ended December 31, 2001, compared to $4.6
billion at an average cost of 6.18% for the year ended December 31, 2000, and
$2.9 billion at an average cost of 5.51% for the year ended December 31, 1999.
Interest expense related to loans payable amounted to $14.3 million for 2001,
compared to $34.2 million for 2000, a decrease of 58%. From 1999 to 2000 it
increased by $9.9 million or 41%. The decrease in interest expense on loans
payable for 2001 was principally due to the decrease in the average amount of
loans payable as well as the decrease on the rates paid by Doral Financial on
its warehousing lines of credit. The average balance of loans payable for 2001
was $250.3 million at an average cost of 5.70%, compared to $447.3 million at an
average cost of 7.64% for 2000 and $375.1 million at an average cost of 6.48%
for 1999.
Interest expense related to securities sold under agreements to repurchase
decreased by $15.3 million or 11% during 2001 compared to 2000, and increased
$63.6 million or 87% during 2000 compared to 1999. The decrease during 2001
reflected increased borrowings to finance mortgage-backed securities and other
investment securities that were offset by lower borrowing costs. The average
balance of borrowings under repurchase agreements for 2001 was $2.5 billion at
an average cost of 4.9%, compared to $2.2 billion at an average cost of 6.12%
for 2000 and $1.4 billion at an average cost of 5.13% for 1999.
Interest expense on deposits increased by $8.4 million or 14% during 2001
compared to 2000, and increased $26.2 million or 73% during 2000 compared to
1999. The increase in interest expense on deposits reflects the increase in
deposits held at Doral Financial's banking subsidiaries, which average balances
increased to $1.5 billion for 2001, from $1.2 billion for 2000 and $772 million
for 1999. The increase in deposits reflects the expansion of Doral Financial's
retail bank branch network which increased to 32 branches as of December 31,
2001, compared to 23 branches as of December 31, 2000. The average interest cost
of deposits was 4.75% during 2001, 5.07% during 2000 and 4.64% during 1999.
Interest expense on other borrowed funds increased by $15.2 million or 30%
during 2001 compared to 2000 and increased $21.7 million or 75% during 2000
compared to 1999. Interest expense on other borrowed funds includes various term
notes issued by Doral Bank-PR, $75 million senior notes due October 10, 2006,
$329 million in term notes maturing between 2004 and 2016, and advances from the
FHLB-NY, as well as various other borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses 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, an assessment of individual problem loans,
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 or if credit losses
increase substantially from the expectations used by Doral Financial in
determining the allowance for loan losses. Unanticipated increases in the
allowance for loan losses could result in reductions in Doral Financial's net
income.
Doral Financial made provisions to its allowance for loan losses of $4.4
million, $4.1 million and $2.6 million for the years ended December 31, 2001,
2000 and 1999, respectively. The provision increased by $300,000 from 2000 to
2001 and by $1.5 million from 1999 to 2000. The increase from 2000 to 2001
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 29
(DORAL LOGO)
is primarily related to an increase in the size of Doral Financial's loan
portfolio. The increase from 1999 to 2000 reflects an increase in the size of
the loan portfolio as well as an increase in the number of construction loans,
commercial real estate and other commercial loans that carry greater credit
risk.
NON-INTEREST INCOME
Net Gains on Mortgage Loan Sales and Fees. Net gains on mortgage loan sales and
fees increased by 39% during 2001 and by 68% from 1999 to 2000. The increases
for 2001 and 2000 were related to recording of higher gains on such sales
related primarily to the recognition of IOs retained in connection with mortgage
loan sales. Refer to "Amortization of IOs and Servicing Assets" for a discussion
of how the recognition of servicing assets and IOs in connection with mortgage
loan sales results in the recognition of income on Doral Financial's
Consolidated Statements of Income.
Loan sales were $2.2 billion for 2001, compared to $2.4 billion for 2000 and
$1.4 billion for 1999. Doral Financial recognized IOs as part of its sales
activities of $141.4 million for 2001, compared to $72.7 million for 2000 and
$46.1 million for 1999. During 2001, Doral Financial also recorded $38.2 million
in connection with the recognition of mortgage servicing assets as part of its
loan sale and securitization activities, compared to $41.7 million for 2000 and
$22.5 million for 1999. Loan origination fees were $64.9 million for 2001
compared to $51.4 million for 2000 and $53.7 million for 1999.
Net Servicing Income. Servicing income represents revenues earned for
administering mortgage loans. The main component of Doral Financial's servicing
income is loan servicing fees, which depend on the type of mortgage loan being
serviced and generally range from 0.25% to 0.50% of the declining outstanding
principal amount of the serviced loan. Doral Financial's weighted average
servicing fee for 2001 and 2000 was 0.33% compared to 0.37% for 1999.
Late fees and other servicing related fees such as prepayment fees are also
included as a component of servicing income. Late fees and other servicing
related fees were $6.6 million for 2001, compared to $5.2 million in 2000 and
$4.7 million in 1999.
Servicing income net of amortization decreased by 97% from 2000 to 2001 and by
13% from 1999 to 2000. The decreases for 2000 and 2001 were the result of
increased amortization of mortgage servicing assets. Increased amortization
offset the increase in gross servicing fees of 14% for 2001 and 6% for 2000
produced by increases in the size of the servicing portfolio. The increase in
amortization was the result of a larger servicing portfolio and, in the case of
2001, an increase in unscheduled amortization and impairment related to
increased prepayment estimates due to declining interest rates. Amortization of
servicing assets was $29.7 million, $14.3 million and $11.0 million for the
years ended December 31, 2001, 2000 and 1999, respectively. Doral Financial
recognized unscheduled amortization and impairment of $8.8 million during 2001
due to the increase in prepayment estimates associated with falling interest
rates. Doral Financial's mortgage servicing portfolio was approximately $10.0
billion at December 31, 2001, compared to $8.8 billion at December 31, 2000 and
$7.6 billion at December 31, 1999.
The components of net servicing income are shown below:
TABLE C - COMPONENTS OF SERVICING INCOME
Year ended December 31,
(In thousands) 2001 2000 1999
------------------------------------ -------- -------- --------
Servicing fees $ 23,507 $ 21,248 $ 20,227
Late charges 5,875 4,949 4,510
Other 735 221 199
-------- -------- --------
Servicing income, gross 30,117 26,418 24,936
Amortization of servicing assets:
Scheduled (20,884) (14,268) (10,988)
Unscheduled (8,844) -- --
-------- -------- --------
Servicing income, net $ 389 $ 12,150 $ 13,948
======== ======== ========
30 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
Trading Activities. Trading activities includes all gains or losses, whether
realized or unrealized, in the market value of Doral Financial's securities held
for trading and its derivative instruments used for interest rate management
purposes. For the purposes of determining unrecognized gains or losses, Doral
Financial values its trading securities and derivatives by reference to quoted
market prices for instruments traded on recognized markets. For instruments not
traded on a recognized market, Doral Financial generally determines fair value
by reference to quoted market prices for comparable instruments. In the case of
Puerto Rico tax-exempt GNMA securities, Doral Financial values these assets by
reference to quotations received from local broker-dealers after adjusting such
amount for market factors such as liquidity and the price for U.S. GNMA
securities. Doral Financial also uses valuation models to estimate fair values
based on assumptions regarding future cash flows. See "Amortization of IOs and
Servicing Assets" for an explanation as to the determination of fair values for
IOs, which are included as securities held for trading, and "Interest Rate Risk
Management - Derivatives" for a more detailed discussion regarding the
determination of fair values of derivatives used for interest rate management
purposes.
The value of Doral Financial's trading securities and derivatives are generally
very sensitive to interest rate changes and the reported fair values of certain
of these assets such as IOs are based on assumptions regarding the direction of
interest rates and prepayment rates on mortgage loans. As a result,
unanticipated changes in interest rates and prepayment rates for mortgage loans
can result in substantial volatility in the components of the trading account.
As described under "Interest Rate Risk Management," Doral Financial attempts to
mitigate the risk to the value of its trading securities by entering into
hedging transactions involving the purchase of derivatives such as options and
future contracts. These hedging positions are designed to help compensate for
losses in the value of trading securities through gains in the derivative
positions.
Set forth below is a summary of the components of gains and losses from trading
activities:
TABLE D - COMPONENTS OF TRADING ACTIVITIES
Years ended December 31,
(Dollars in thousands) 2001 2000 1999
----------------------------------------------------------------------- ------ ------ ------
Net realized gains and (losses) on sales of trading securities $ 4.6 $ (6.8) $ 9.7
Net unrealized gains and (losses) on trading securities (13.8) 5.5 (0.1)
Net realized and unrealized gains and losses on derivative instruments (10.6) (8.1) 3.3
------ ------ ------
Total $(19.8) $ (9.4) $ 12.9
====== ====== ======
Gain on Sale of Investment Securities. Gain on sale of investment securities
represents the impact on Doral Financial's income of transactions involving the
sale of securities available for sale. This component of earnings increased by
58% from 2000 to 2001, and increased 10% from 1999 to 2000. Sales of securities
available for sale were $2.6 billion in 2001, compared to $552.8 million in 2000
and $437.3 million in 1999.
Commissions, Fees and Other Income. Other non-interest income, commissions and
fees increased by 82% in 2001 compared to 2000, increasing from $9.9 million to
$18.0 million, and by 71% in 2000 compared to 1999, increasing from $5.8 million
to $9.9 million. The increase is primarily related to the volume of commissions
and fees earned by Doral Financial's banking, broker-dealer and insurance
agency subsidiaries.
Set forth below is a summary of Doral Financial's principal sources of fees and
commissions.
TABLE E - FEES AND COMMISSIONS
Year ended December 31,
(Dollars in thousands) 2001 2000 1999
------------------------------------- ------- ------- -------
Deposit and other retail banking fees $ 4,464 $ 2,788 $ 1,357
Securities fees and commissions 4,615 3,800 3,068
Insurance fees and commissions 4,375 144 --
Other Income 4,523 3,129 1,384
------- ------- -------
Total $17,977 $ 9,861 $ 5,809
======= ======= =======
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 31
(DORAL LOGO)
Doral Financial's fees and commissions have increased steadily as Doral
Financial's banking subsidiaries continue to increase their retail branch
network and as Doral Financial continues to diversify its sources of revenues by
generating additional securities fees and generating fees and commissions from
insurance agency activities.
During December 2001, Doral Financial agreed to sell its retail securities
business to UBS/PaineWebber Incorporated of Puerto Rico ("UBS"). This
transaction is expected to close during the first quarter of 2002. Following
completion of the transaction, Doral Securities, Doral Financial's securities
subsidiary, will continue to offer institutional brokerage and investment
banking services. For additional information regarding this transaction, refer
to "Operating Segments -- Broker-dealer Operations."
AMORTIZATION OF IOS AND SERVICING ASSETS
Doral Financial creates IOs in connection with the sale of mortgage loans in
bulk. See Note 2 of Doral Financial's Consolidated Financial Statements for more
information regarding the accounting treatment of IOs. IOs are created on the
sale of mortgage loans with servicing retained and represent the estimated
present value of the excess of the weighted-average coupon on the loans sold
over the sum of: (i) the pass-through interest paid to the investor and (ii) a
normal servicing fee, based on the servicing fee permitted by FNMA and FHLMC,
after adjusting such amount for expected losses and prepayments. The
pass-through interest payable to the investor may be a fixed rate or a floating
rate generally based on a spread over the three-month LIBOR rate. The amount of
the IOs is recognized as an adjustment to the carrying basis of the loans and is
recorded at the time of sale of the related loans. The effect of this treatment
is to recognize the value of the IOs as income at the time of sale, even though
the cash received by Doral Financial with respect to such IOs is received over
the life of the related loans. To compute the value of the IOs, Doral Financial
multiplies the interest spread it is entitled to retain on the loans sold by the
principal balance of the mortgage pool being sold. The resulting product is then
multiplied by a market factor which Doral Financial obtains from an unrelated
financial institution that obtains the factor by reference to internal valuation
models that incorporate assumptions regarding discount rates and mortgage
prepayment rates. The market factor used by Doral Financial to value IOs ranged
from 3.75% to 5.5% during 2001 and 4.5% to 5.5% during 2000. While Doral
Financial has from time to time sold IOs in private sales, there does not
currently exist a liquid market for the purchase and sale of IOs.
The value assigned to the IOs reduces the basis of the related mortgage loan
sold and thereby results in increased "Net Gain on Mortgage Loan Sales and Fees"
at the time of sale. Doral Financial recognized IOs of approximately $141.4
million for 2001, compared to $72.7 million and $46.1 million in 2000 and 1999,
respectively. During 2001, Doral Financial was generally able to recognize
higher values for its IOs because the prevailing interest pass-through rates
paid to investors tended to decline more than the weighted average interest
rates of the loans (generally non-conforming loans) sold, thereby increasing the
interest rate spread payable to Doral Financial over the expected life of the
IOs.
The initial recorded value of IOs is amortized over the expected life of the
asset, and the 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. Throughout the life of the IOs,
Doral Financial continues to monitor changes in interest rates to determine
whether the continued use of the market factor selected to value the IOs is
still appropriate in light of changes in market conditions. It also attempts to
corroborate the value assigned to the IOs through use of valuation models that
incorporate assumptions regarding the direction of interest rates and prepayment
rates. To the extent changes in interest rates or prepayment rates so warrant,
Doral Financial will increase or decrease the recorded value of the IOs and
increase or decrease the level of amortization. Amortization of IOs for each of
the years ended December 31, 2001, 2000 and 1999, was approximately $31.9
million, $13.6 million and $6.9 million, respectively. The increase in the
amortization for 2001 compared to 2000 and 1999 is due to the increase in the
amount of IOs as well as increased amortization resulting from increased
mortgage prepayment rates tied to decreases in interest rates. The carrying
amount of the IOs is reflected in Doral Financial's Consolidated Statements of
Condition as a component of "Securities held for trading." As of December 31,
2001, 2000 and 1999, the carrying amount of IOs and other residual interest
retained in securitization transactions recorded on Doral Financial's
Consolidated Financial Statements was $236.5 million, $158.0 million and $106.4
million, respectively.
Beginning with the second quarter of 1995, whenever Doral Financial sells a
mortgage loan it allocates the cost of the loan between the loan and the related
mortgage servicing right (the "servicing asset" or "mortgage servicing right")
based on their relative fair values. The servicing asset represents the present
value of the servicing fees, net of estimated servicing costs, expected to be
received on the loan over the expected term of the loan. Doral Financial
determines the fair value of its servicing assets by reference to prices paid by
third parties in market transactions for similar mortgage servicing rights.
During 2001 and 2000, the market prices used to value Doral Financial's
servicing assets varied from 1.5% of the principal amount of the loans subject
to the servicing rights to
32 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
2.3% with GNMA, FNMA and FHLMC servicing rights generally having higher prices
than servicing rights for non-conforming loans. In addition, the value of Doral
Financial's FNMA, FHLMC and GNMA mortgage servicing portfolio is evaluated on a
periodic basis by an independent third party.
The value of the servicing asset assigned to a mortgage loan reduces the basis
of the related mortgage loan and thereby results in increased "Net Gain on
Mortgage Loan Sales and Fees" at the time of sale. During the years ended
December 31, 2001, 2000 and 1999, Doral Financial recognized servicing assets of
$38.3 million, $36.5 million and $45.0 million, respectively, related to the
recognition of mortgage servicing rights in connection with the sale of
internally originated loans. Servicing assets purchased in bulk from third
parties are initially recorded on Doral Financial's financial statement at the
amount paid for such assets. The unamortized balance of the servicing asset is
reflected on Doral Financial's Consolidated Statements of Financial Condition.
No servicing assets have been recognized for 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 amounting to approximately
$627.8 million.
Doral Financial's servicing assets are amortized in proportion to, and over the
period of, estimated servicing income. Amortization of servicing assets is
recorded as a reduction of servicing income in Doral Financial's Consolidated
Statements of Income. As in the case of IOs, Doral Financial monitors changes in
interest rates and prepayment rates and adjusts the amount of amortization or
records an impairment loss to reflect changes in prepayment rates. During 2001,
total amortization of servicing assets, including unscheduled amortization and
impairment, amounted to $29.7 million versus $14.3 million for 2000 and $11.0
million for 1999.
Doral Financial's servicing assets are also evaluated for impairment. 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. In
determining impairment, Doral Financial stratifies its servicing assets based on
their predominant risk characteristics, which Doral Financial has determined to
be the type of loans (conventional, conforming and non-conforming) and interest
rates.
The following table shows the changes in Doral Financial's mortgage servicing
assets for each of the years shown:
TABLE F - CAPITALIZATION OF MORTGAGE SERVICING ASSETS
Year ended December 31,
(Dollars in thousands) 2001 2000 1999
------------------------------------- -------- -------- --------
Balance at beginning of period $139,795 $109,721 $ 72,568
Capitalization of rights 44,273 44,342 48,148
Rights sold -- -- (7)
Amortization:
Scheduled (20,884) (14,268) (10,988)
Unscheduled (including impairment) (8,844) -- --
-------- -------- --------
Balance at end of period $154,340 $139,795 $109,721
======== ======== ========
Doral Financial believes that the assumptions it uses to value its IOs and
servicing assets are reasonable. These assumptions are based on historical
experience and the use of internal valuation models. Increases in prepayment
rates or credit losses over anticipated levels, however, could adversely affect
Doral Financial's results of operations 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. Please refer to Note 12 to Doral Financial's Consolidated
Financial Statements for certain hypothetical examples of the possible impact
that increases in prepayment rates could have on the value of Doral Financial's
IOs and servicing assets.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 33
(DORAL LOGO)
NON-INTEREST EXPENSE
Total non-interest expense increased by 22% during 2001, compared to 7% during
2000. A summary of non-interest expense is provided below.
TABLE G - NON-INTEREST EXPENSE
Year ended December 31,
(Dollars in thousands) 2001 2000 1999
------------------------------------------ -------- -------- --------
Compensation and employee benefits $ 47,759 $ 40,514 $ 44,838
Taxes, other than payroll and income taxes 4,423 3,974 2,610
Advertising 9,379 7,911 5,875
Professional services 5,804 4,549 5,473
Communication and information systems 10,248 7,824 6,573
Occupancy and other office expenses 17,170 14,060 10,849
Depreciation and amortization 10,325 7,179 4,534
Other 7,746 6,380 5,816
-------- -------- --------
Total non-interest expense $112,854 $ 92,391 $ 86,568
======== ======== ========
Compensation and employee benefits increased to $47.8 million for 2001, compared
to $40.5 million for 2000 and $44.8 million for 1999. A significant portion of
the increase was related primarily to increased employment due to continuing
retail bank branch expansion and to the higher volume of loan originations and a
larger servicing portfolio. Commission expense relating to securities
transactions also increased as Doral Financial increased its retail securities
sales force during the period. Full-time employees at December 31, 2001 were
1,875, compared to 1,467 and 1,444 as of December 31, 2000 and 1999,
respectively.
Advertising expense increased to $9.4 million in 2001 from $7.9 million in 2000
and $5.9 million in 1999. The increases for 2001 and 2000 were primarily due to
additional costs associated with advertising campaigns for loan and deposit
products.
Professional fees for 2001 were $5.8 million compared to $4.5 million for 2000
and $5.5 million for 1999. The increase for 2001 was primarily due to legal,
accounting, security and consulting fees associated with the continued expansion
of Doral Financial's business.
Communication and information systems expense was $10.2 million in 2001,
compared to $7.8 million in 2000 and $6.6 million in 1999. The increases for
2001 and 2000 reflect increased expenses in telephone, data lines, outsourced
data processing and network fees associated with an expanding retail branch
network and an increased customer base.
Occupancy and other office expenses were $17.2 million in 2001, compared to
$14.1 million in 2000 and $10.8 million in 1999. The increases during 2001 and
2000 were primarily due to higher rent resulting from additional leases and
increased office-related expenses such as printing and stationary and office
equipment leases associated with Doral Financial's ongoing branch network
expansion program and increased customer base.
Depreciation and amortization expense was $10.3 million in 2001, compared to
$7.2 million in 2000 and $4.5 million in 1999. The increase in depreciation was
principally related to the increase in leasehold improvements and the purchase
of office furniture and equipment as well as software and hardware related to
the Company's growth and systems upgrade.
Other expense increased to $7.7 million in 2001, compared to $6.4 million in
2000 and $5.8 million in 1999. The increases for 2001 and 2000 were primarily
related to increases in mortgage loan originations related expenses, mailing,
custodial fees and other expenses.
INCOME TAXES
Income taxes include Puerto Rico income taxes as well as applicable federal and
state taxes. As a Puerto Rico corporation, Doral Financial is generally only
required to pay federal income tax with respect to its income derived from the
active conduct of a trade or business in the United States (excluding Puerto
Rico) and certain investment income derived from U.S. assets. The maximum
statutory corporate income tax rate in Puerto Rico is 39%. For 2001, the
effective income tax rate for Doral Financial was 12.9%, compared to 12.0% for
2000 and 11.3% for 1999. The lower effective tax rates (compared to the maximum
statutory rate) were primarily the result of the tax exemption enjoyed by Doral
Financial on interest income derived from certain FHA and VA mort-
34 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
gage loans secured by properties located in Puerto Rico and on GNMA securities
backed by such mortgage loans. Doral Financial also invests in U.S. Treasury and
agency securities that are exempt from Puerto Rico income taxation and are not
subject to federal income taxation because of the portfolio interest deduction
to which Doral Financial is entitled as a foreign corporation. In addition, its
international banking entities organized in Puerto Rico may invest in various
U.S. securities, the income on which is not subject to Puerto Rico or federal
income taxes. Net income tax savings to Doral Financial attributable to
tax-exempt income amounted to approximately $38.2 million, $18.3 million and
$13.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively. See Note 20 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.
OPERATING SEGMENTS
Doral Financial manages its business with reference to four operating segments:
mortgage banking, banking (including thrift operations), broker-dealer
operations and insurance agency activities, which commenced in December 2000.
Refer to Note 31 of Doral Financial's Notes to the Consolidated Financial
Statements for summarized financial information for these operating segments.
The entire amount of interest expense related to debt incurred at the parent
company level is allocated to the mortgage banking segment.
The net income, net interest income (loss) and non-interest income of each
segment is summarized below.
TABLE H - OPERATING SEGMENTS
Year ended December 31,
(Dollars in thousands) 2001 2000 1999
-------------------------------- -------- -------- --------
NET INCOME
Reportable segments:
Mortgage banking $ 96,744 $ 72,565 $ 52,009
Banking 49,332 26,889 15,737
Broker-dealer 2,073 226 1,307
Insurance 2,287 39 --
Consolidating eliminations (6,585) (15,063) (1,127)
-------- -------- --------
Consolidated net income $143,851 $ 84,656 $ 67,926
======== ======== ========
NET INTEREST INCOME (LOSS)
Reportable segments:
Mortgage banking $ 23,853 $ (7,740) $ 17,536
Banking 60,391 47,133 29,110
Broker-dealer 2,486 2,164 2,366
Insurance 572 -- --
Consolidating eliminations (2,875) 747 872
-------- -------- --------
Consolidated net interest income $ 84,427 $ 42,304 $ 49,884
======== ======== ========
NON-INTEREST INCOME
Reportable segments:
Mortgage banking $145,164 $142,715 $101,866
Banking 36,788 16,230 9,220
Broker-dealer 8,859 7,038 6,838
Insurance 4,057 144 --
Consolidating eliminations (3,736) (15,810) (2,001)
-------- -------- --------
Consolidated non-interest income $191,132 $150,317 $115,923
======== ======== ========
Mortgage Banking. This segment includes a wide range of activities, including
the origination, sale and securitization of mortgage loans, the holding of
mortgage-backed securities and other investment securities for sale or
investment, and the origination of construction loans and mortgage loans secured
by income-producing real estate or unimproved land. The mortgage banking
business is carried out primarily in Puerto Rico, with less significant
activities in Florida and New York. Net interest income was $23.9 million in
2001, and $17.5 million in 1999, whereas the unit
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 35
(DORAL LOGO)
experienced a net interest loss of $7.7 million in 2000. The increase in net
interest income for 2001 was due to increased interest spread and margin
experienced during the year as a result of declining interest rates. Conversely,
the decrease in net interest income for 2000 was due to decreased interest rate
spread and margin experienced during 2000. Interest rate spread and margin for
the mortgage banking segment for 2001 was 1.15% and 1.17%, respectively,
compared to (0.69)% and 0.12% for 2000.
Non-interest income was $145.2 million, $142.7 million and $101.9 million for
2001, 2000 and 1999, respectively. The increases during these years were related
to increases on gains on mortgage loans related to a greater volume of sales
tied to increased mortgage production and higher gains on such sales. Mortgage
originations for this segment were $2.7 billion for 2001, compared to $2.3
billion for 2000 and $2.3 billion for 1999. Loan sales were $2.2 billion for
2001, compared to $2.4 billion for 2000 and $1.4 billion for 1999.
Banking. The banking segment includes Doral Financial's commercial banking
operations in Puerto Rico currently operating through 29 retail bank branches
and its thrift operations in the New York City metropolitan area currently
operating through three retail branches. Doral Financial's banking subsidiaries
offer a variety of loan and deposit products, with emphasis on residential,
construction and commercial real estate mortgage loan products. Doral
Financial's banking subsidiaries have entered into master loan production
agreements with its mortgage banking affiliates whereby the mortgage banking
units help the banking subsidiaries originate loans by advertising to the
general public and providing other origination and settlement services. These
arrangements result in reduced expenses for Doral Financial by avoiding the
costs of maintaining duplicative origination systems.
Net interest income for the banking segment was $60.3 million for 2001, compared
to $47.1 million for 2000 and $17.5 million for 1999. The increase in net
interest income for 2001 and 2000 resulted from improved interest rate spreads
and margins as well as continued increases in the amount of interest-earning
assets. The interest rate spread and margin for the banking segment for 2001
were 2.25% and 2.28% compared to 2.05% and 1.86% for 2000. Total assets of the
banking segment were $3.7 billion for 2001, compared to $2.7 billion for 2000
and $1.9 billion for 1999.
Non-interest income increased to $36.8 million in 2001, compared to $16.2
million in 2000 and $9.2 million in 1999. The increases reflected increased
gains on sales of mortgage loans tied to the increased volume of loan sales and
the recognition of higher gains on such sales. Gains on mortgage loan sales and
fees for this segment were $20.1 million in 2001, compared to $12.2 million in
2000. Banking fees and commissions also increased considerably during the
period, increasing from $1.4 million in 1999 to $2.8 million in 2000 and $4.5
million in 2001.
Broker-dealer Operations. This segment corresponds to the operations of Doral
Financial's broker-dealer subsidiary, Doral Securities, Inc., which is
headquartered in San Juan, Puerto Rico. Doral Securities maintains distinct
retail and institutional operations. The retail division is primarily engaged in
the sale of securities to retail customers while the institutional division
sells securities to institutional customers, provides investment banking
services and operates a repurchase lending operation involving short-term
extensions of credit secured by highly liquid and marketable securities.
Net interest income was $2.5 million in 2001, compared to $2.2 million in 2000
and $2.4 million in 1999. The increase for 2001 was related to increased spreads
on the repurchase lending operations. The interest rate spread and margin for
2001 were 0.44% and 0.53%, respectively, compared to 0.24% and 0.30% for 2000.
Non-interest income was $8.9 million for 2001, compared to $7.0 million for 2000
and $6.8 million for 1999. The increase during 2001 was primarily related to
increases in trading profits and investment banking fees. Trading profits
increased from $3.2 million to $4.2 million and investment banking and other
fees increased from $2.1 million to $4.0 million. Commissions decreased from
$1.7 million in 2000 to $651,000 in 2001, primarily related to reduced
securities transactions due to the poor performance experienced by the stock
markets during this period.
In December 2001, Doral Financial entered into an agreement with UBS/PaineWebber
Incorporated of Puerto Rico ("UBS") to sell its retail securities division. This
transaction is expected to close during the first quarter of 2002. As part of
the transaction, UBS agreed to provide retail securities services in selected
Doral Financial bank branch locations and to pay Doral Financial a portion of
all commissions earned with respect to sales of securities at these locations.
UBS has also agreed to pay Doral Financial a continuing fee over a four-year
period computed on the amount of retail brokerage assets transferred as part of
the transaction that are maintained with UBS during this period. Doral Financial
believes that the aggregate impact of the reduction of expenses related to
eliminating a retail brokerage staff and the amounts payable by UBS to Doral
Financial will more than compensate for any reduction in brokerage commissions
attributable to the elimination of the retail securities division.
Insurance Agency. This segment commenced operations in Puerto Rico in December
2000. Doral Insurance Agency
36 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
sells hazard, life and disability insurance, as well as other forms of
insurance, primarily to Doral Financial's base of mortgage customers. During
2001, it had net interest income of $572,000 and non-interest income mainly
composed of insurance fees and commissions of $4.1 million.
BALANCE SHEET AND OPERATING DATA ANALYSIS
Loan Production
Loan production includes loans internally originated by Doral Financial as well
as loans purchased from third parties. Purchases of mortgage loans from third
parties were $1.3 billion, $1.1 billion and $529.2 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The following table sets forth
the number and dollar amount of Doral Financial's loan production for the years
indicated:
TABLE I - LOAN PRODUCTION
Year ended December 31,
(Dollars in thousands, except for average initial loan balance) 2001 2000 1999
--------------------------------------------------------------- ---------- ---------- ----------
FHA/VA mortgage loans
Number of loans 5,887 6,893 8,794
Volume of loans $ 516,597 $ 628,290 $ 722,969
Percent of total volume 12% 20% 27%
Conventional conforming mortgage loans
Number of loans 12,272 8,227 10,172
Volume of loans $1,590,536 $ 535,007 $ 769,838
Percent of total volume 38% 17% 28%
Conventional non-conforming mortgage loans(1)(2)
Number of loans 21,568 16,494 11,852
Volume of loans $1,594,118 $1,408,709 $ 818,556
Percent of total volume 38% 44% 30%
Other(3)
Number of loans 1,588 1,374 1,783
Volume of loans $ 508,035 $ 601,740 $ 410,756
Percent of total volume 12% 19% 15%
---------- ---------- ----------
Total loans
Number of loans 41,315 32,988 32,601
========== ========== ==========
Volume of loans $4,209,286 $3,173,746 $2,722,119
========== ========== ==========
Average initial loan balance $ 101,883 $ 96,209 $ 83,498
========== ========== ==========
(1) Includes $55 million, $67 million and $26 million in second mortgages for
the years ended December 31, 2001, 2000 and 1999, respectively.
(2) Includes $141 million, $55 million and $42 million in home equity or
personal loans secured by real estate mortgages up to $40,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
(3) Consists of construction loans on residential projects, mortgage loans
secured by multi-family and commercial properties as well as other
commercial, land, and consumer loans.
A substantial portion of Doral Financial's total mortgage loan originations has
consistently been composed of refinanced loans. For the years ended December 31,
2001, 2000 and 1999, refinanced loans represented approximately 56%, 38% and
61%, respectively, of the total dollar volume of mortgage loans originated by
Doral Financial (excluding loans purchased from third parties). Doral
Financial's future results could be adversely affected by a significant increase
in mortgage interest rates that may reduce refinancing activity. However, based
on historical experience, Doral Financial believes that refinancing activity is
less sensitive to interest rate changes in Puerto Rico than
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 37
(DORAL LOGO)
in the mainland United States because a significant number of refinanced loans
are made for debt consolidation purposes and because interest cost on mortgage
loans is tax deductible for borrowers.
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 with wholesale purchases from other financial institutions.
Purchases from Puerto Rico institutions generally consist of FHA and VA loans,
while purchases from mainland-based entities generally consist of conventional
loans that qualify for the guarantee or sale programs of FNMA or FHLMC. Doral
Financial also originates consumer, commercial, construction and land loans. In
Puerto Rico, Doral Financial 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 years indicated:
TABLE J - LOAN ORIGINATION SOURCES
Year ended December 31,
2001 2000 1999
------------------------------ ----------------------------- -----
Puerto Rico U.S. Total Puerto Rico U.S. Total Total
----------- ---- ----- ----------- ---- ----- -----
Retail 55% -- 55% 47% -- 47% 52%
Wholesale(1) 30% 1% 31% 33% 1% 34% 25%
New Housing Developments 8% 1% 9% 12% -- 12% 8%
Multi-family -- 1% 1% -- 2% 2% 5%
Other(2) 3% 1% 4% 5% -- 5% 10%
(1) Refers to purchases of mortgage loans from other financial institutions.
Puerto Rico wholesale purchases include U.S. mortgage loans purchased by
Doral Financial's Puerto Rico based mortgage units.
(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,
2001 and 2000, Doral Financial purchased servicing rights to approximately
$388.4 million and $184.3 million, respectively, in principal amount of mortgage
loans. Doral Financial intends to continue growing its mortgage servicing
portfolio primarily through internal loan originations and wholesale purchases
of mortgage loans. It will, however, continue to seek to supplement these
purchases with 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 years indicated:
38 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
TABLE K - MORTGAGE LOAN SERVICING
Year ended December 31,
(Dollars in thousands, except for average size of loans prepaid) 2001 2000 1999
---------------------------------------------------------------- ----------- ---------- ----------
COMPOSITION OF SERVICING PORTFOLIO AT YEAR END:
GNMA $ 3,244,289 $3,140,493 $2,685,008
FHLMC/FNMA 2,652,781 2,332,116 2,195,977
Doral Financial grantor trusts 64,927 86,766 109,615
Other conventional mortgage loans(1) 4,044,383 3,245,331 2,642,581
----------- ---------- ----------
Total servicing portfolio $10,006,380 $8,804,706 $7,633,181
=========== ========== ==========
SERVICING PORTFOLIO ACTIVITY:
Beginning servicing portfolio $ 8,804,706 $7,633,181 $6,186,059
Add:
Loans funded and purchased(2) 2,610,308 2,723,399 2,385,162
Bulk servicing acquired 388,401 184,251 238,265
Less:
Servicing transferred and loans purchased serviced by others 138,548 688,536 --
Run-off(3) 1,658,487 1,047,589 1,176,305
----------- ---------- ----------
Ending servicing portfolio $10,006,380 $8,804,706 $7,633,181
=========== ========== ==========
SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:
Number of loans 135,111 128,090 115,691
Weighted average interest rate 7.61% 7.77% 7.60%
Weighted average remaining maturity (months) 253 253 251
Weighted average servicing fee rate 0.3292% 0.3342% 0.3741%
Average servicing portfolio $ 9,436,108 $8,271,683 $7,226,939
Principal prepayments $ 1,333,000 $ 587,000 $ 709,000
Prepayments average portfolio 14% 7% 10%
Average size of loans prepaid $ 70,689 $ 50,192 $ 51,400
Servicing assets $ 154,340 $ 139,795 $ 109,721
DELINQUENT MORTGAGE LOANS AND PENDING FORECLOSURES AT YEAR END:
60-89 days past due 1.31% 1.44% 1.32%
90 days or more past due 2.12% 2.44% 1.86%
----------- ---------- ----------
Total delinquencies excluding foreclosures 3.43% 3.88% 3.18%
=========== ========== ==========
Foreclosures pending 1.41% 1.01% 1.14%
=========== ========== ==========
(1) Includes $1.4 billion, $867 million and $1.1 billion of loans owned by the
Company at December 31, 2001, 2000 and 1999, respectively, which represented
14%, 10% and 15%, respectively, of the total servicing portfolio as of such
dates.
(2) Excludes approximately $1.6 billion, $450 million and $337 million of
commercial, consumer, construction and other loans not included in the
Company's mortgage servicing portfolio for the years ended December 31,
2001, 2000 and 1999, respectively.
(3) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
Most 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, 2001, 2000 and 1999, less than 5%, 7% and 6%,
respectively, of Doral Financial's mortgage servicing portfolio was related to
mortgages secured by real property located outside Puerto Rico.
The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $1.3 billion, $587 million and $709 million for the years ended
December 31, 2001, 2000 and 1999, respectively. This represented approximately
14%, 7% and 10%, respectively, of the average principal amount of mortgage loans
serviced during those periods. Doral Financial strives to reduce the sensitivity
of its servicing income to increases in prepayment rates through a strong retail
origination network that historically has been successful in increasing or
maintaining the size of Doral Financial's servicing portfolio even during
periods of high prepayments.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 39
(DORAL LOGO)
MORTGAGE LOANS HELD FOR SALE
Substantially all of the residential mortgage loans originated by Doral
Financial are classified as held for sale because it intends to sell these loans
in the ordinary course of its mortgage banking and banking business. Mortgage
loans held for sale are carried on Doral Financial's balance sheet at the lower
of net cost or market on an aggregate portfolio basis. Market values are
determined by reference to market prices for comparable mortgage loans. The
amount by which costs exceed market value, if any, is accounted for as a loss
during the period in which the change in valuation occurs. As of December 31,
2001, Doral Financial owned approximately $1.9 billion in mortgage loans held
for sale, of which approximately $1.6 billion consisted of residential mortgage
loans. Given traditional consumer preferences in Puerto Rico, substantially all
of Doral Financial's residential mortgage loans held for sale are fixed-rate
loans. Note 8 to Doral Financial's Consolidated Financial Statements contains
additional information with respect to Doral Financial's portfolio of mortgage
loans held for sale.
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 maximum aggregate amount of unsecured loans that Doral Bank-PR could make to
a single borrower under Puerto Rico banking regulations as of December 31, 2001,
was approximately $29.1 million. Puerto Rico banking regulations permit larger
loans to a single borrower to the extent secured by qualifying collateral. The
maximum aggregate amount of loans that Doral Bank-NY could make to a single
borrower under OTS banking regulations as of December 31, 2001, was $4.5
million. Doral Financial's largest out- standing indebtedness to a single
borrower or group of related borrowers as of December 31, 2001 was $57.9
million.
The following table sets forth certain information regarding Doral Financial's
loans receivable as of the dates indicated:
TABLE L - LOANS RECEIVABLE, NET
As of December 31,
(Dollars in thousands) 2001 2000 1999
----------------------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Construction loans $368,961 55% $238,393 54% $114,853 41%
Residential mortgage loans 63,546 9% 74,862 17% 70,659 26%
Commercial real estate 72,397 11% 38,353 9% 32,383 12%
Consumer secured by real estate 870 0% 2,107 1% 3,317 1%
Consumer - other 39,109 6% 16,652 4% 11,629 4%
Commercial non-real estate 67,891 10% 32,501 7% 16,989 6%
Loans on saving deposits 10,523 2% 10,836 2% 7,793 3%
Land secured 46,602 7% 26,935 6% 19,927 7%
-------- --- -------- --- -------- ---
Loans receivable, gross 669,899 100% 440,639 100% 277,550 100%
-------- --- -------- --- -------- ---
Less:
Undisbursed portion of loans in
process (10,302) (35,134) (40,571)
Unearned interest and deferred
loan fees, net (9,484) (2,476) (3,655)
Allowance for loan losses(1) (6,000) (4,838) (2,140)
-------- -------- --------
(25,786) (42,448) (46,366)
-------- -------- --------
Loans receivable, net $644,113 $398,191 $231,184
======== ======== ========
As of December 31,
(Dollars in thousands) 1998 1997
----------------------------------- -------------------- --------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Construction loans $ 72,081 33% $ 9,927 7%
Residential mortgage loans 80,902 37% 87,037 65%
Commercial real estate 16,443 8% 19,036 14%
Consumer secured by real estate 5,005 2% 7,828 6%
Consumer - other 6,290 3% 2,328 2%
Commercial non-real estate 11,051 5% 3,461 2%
Loans on saving deposits 3,676 2% 3,513 3%
Land secured 21,418 10% 1,488 1%
-------- --- -------- ---
Loans receivable, gross 216,866 100% 134,618 100%
-------- --- -------- ---
Less:
Undisbursed portion of loans in
process (47,575) --
Unearned interest and deferred
loan fees, net (648) (322)
Allowance for loan losses(1) (1,656) (1,241)
-------- --------
(49,879) (1,563)
-------- --------
Loans receivable, net $166,987 $133,055
======== ========
(1) Does not include $6.5 million, $4.5 million, $4.0 million, $3.5 million and
$1.6 million of allowance for loan losses allocated to mortgage loans held
for sale as of December 31, 2001, 2000, 1999, 1998 and 1997, respectively.
The following table sets forth certain information as of December 31, 2001,
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.
40 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
TABLE M - LOANS RECEIVABLE BY CONTRACTUAL MATURITIES
As of December 31, 2001
--------------------------------------------------
1 year 1 to 5 Over 5
(Dollars in thousands) or less years years Total
---------------------------------- -------- -------- -------- --------
Construction loans $ 38,707 $328,379 $ 1,875 $368,961
Residential mortgage loans 29,518 6,594 27,434 63,546
Commercial real estate 26,221 45,073 1,103 72,397
Consumer - secured by real estate 4 866 -- 870
Consumer - other 22,557 16,274 278 39,109
Commercial non-real estate 38,410 14,158 15,323 67,891
Loans on saving deposits 6,314 4,209 -- 10,523
Land secured 17,252 23,812 5,538 46,602
-------- -------- -------- --------
Loans receivable, gross $178,983 $439,365 $ 51,551 $669,899
======== ======== ======== ========
Scheduled contractual amortization of loans receivable does not reflect the
expected life 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 circumstance, 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, 2001, as shown in the preceding table, which have fixed interest
rates or which have floating or adjustable interest rates.
TABLE N - LOANS RECEIVABLE BY FIXED AND FLOATING RATES
Floating or
adjustable-
(Dollars in thousands) Fixed-rate rate Total
---------------------------------- ---------- ----------- --------
Construction loans $ 51,653 $317,308 $368,961
Residential mortgage loans 40,162 23,384 63,546
Commercial real estate 33,929 38,468 72,397
Consumer - secured by real estate 870 -- 870
Consumer - other 35,561 3,548 39,109
Commercial non-real estate 31,962 35,929 67,891
Loans on saving deposits 10,523 -- 10,523
Land secured 2,525 44,077 46,602
-------- -------- --------
Loans receivable, gross $207,185 $462,714 $669,899
======== ======== ========
Doral Financial originates adjustable and fixed interest-rate loans. Unlike its
portfolio of residential mortgage loans held for sale, a substantial portion of
Doral Financial's construction and land loans, mortgage loans secured by
commercial properties and other commercial loans classified as loans receivable
carry adjustable rates. At December 31, 2001, 2000 and 1999, approximately 69%,
67% and 56%, respectively, of Doral Financial's gross loans receivable were
adjustable rate loans. The increase in adjustable rate loans experienced during
2001 and 2000 was mainly the result of higher production in loans for
construction development projects and land loans. The adjustable rate loans have
interest rate adjustment limitations and are generally tied to the prime rate
and often provide for a maximum and minimum rate beyond which the applicable
interest rate will not fluctuate. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral Financial pays
on the different funding sources used to finance these
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 41
loans. Substantially all construction, commercial and land loans held by Doral
Financial 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, Doral Financial is generally at risk for any mortgage
loan default from the time Doral Financial 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," as well as loans secured by multi-family apartment
buildings, are often sold to investors on a full or partial recourse basis. In
such cases, Doral Financial retains all or part of the credit risk associated
with such loans after sale. Doral Financial's contingent obligations with
respect to such recourse provisions are not reflected on Doral Financial's
Consolidated Financial Statements, except for the reserve referred to below. As
of December 31, 2001, the outstanding principal amount in loans that had been
sold subject to recourse, partial recourse or put-back arrangements was
approximately $2.1 billion and the maximum principal amount of loans that Doral
Financial could have been required to repurchase if all loans subject to
recourse defaulted or if the buyers exercised their put-back options was $1.0
billion. As of December 31, 2001, Doral Financial maintained a reserve of $2.2
million ($1.7 million for 2000) for potential losses from such recourse
arrangements, which is included in "Accrued expenses and other liabilities" as a
component of Doral Financial's Consolidated Financial Statements. Historically,
losses on recourse obligations have not been significant. During 2001, Doral
Financial recognized net credit losses of approximately $584,000 on the loans it
was required to repurchase pursuant to recourse provisions. As of December 31,
2001, approximately $81.5 million or 4% of the principal amount of loans sold
with recourse were 60 days or more past due.
Doral Financial is also subject to credit risk with respect to its portfolio of
loans receivable. Loans receivable represent loans that Doral Financial holds
for investment and, therefore, Doral Financial is at risk for the term of the
loan. 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 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 compliance with laws and regulations. Doral Financial's
collateral requirements for loans depend on the financial strength of the
borrower and the type of loan involved. Acceptable collateral principally
includes cash, deposit and investment accounts and real estate, and, to a lesser
extent, liens on accounts receivable, leases receivable, inventory and personal
property. In the case of non-conforming loans sold subject to recourse, Doral
Financial also generally requires lower loan-to-value ratios to protect itself
from possible losses on foreclosure.
Because most of Doral Financial's loans are made to borrowers located in Puerto
Rico and secured by properties located in Puerto Rico, Doral Financial is
subject to greater credit risks tied to adverse economic, political or business
developments and natural hazards, such as hurricanes, that may affect the
island. For example, if Puerto Rico's real estate market were to experience an
overall decline in property values, Doral Financial's rates of loss on
foreclosures 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.
Loans generated by Doral Financial's banking subsidiaries and construction loans
generated by the mortgage banking units are placed on a non-accrual basis after
90 days or more past due, at which point a reserve for all unpaid interest
previously accrued is established. Interest income is recognized when the loan
is no longer 90 days or more delinquent and collectibility is reasonably
assured. For the years ended December 31, 2001, 2000, 1999, 1998 and 1997, Doral
Financial would have recognized $1,995,000, $911,000, $393,000, $335,000, and
$201,000, respectively, in additional interest income had all delinquent loans
owned by Doral Financial's banking and mortgage banking units been accounted for
on an accrual basis. Beginning in 2001, mortgage loans held for sale by Doral
Financial's mortgage banking units are placed on a non-accrual basis after they
have been delinquent for more than one year if concern exists as to ultimate
collectibility based on the loan-to-value ratio. Prior to 2001, Doral Financial
did not place mortgage loans held for sale in its mortgage banking units on a
non-accrual basis following default. Doral Financial believes that its
42 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
non-accrual policy for mortgage loans held for sale in its mortgage banking
units is reasonable because these loans are adequately secured by real estate,
have a low loan-to-value ratio, and the amounts due on the loans are generally
recovered through the sale of the property after foreclosure or negotiated
settlements with borrowers.
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
restructuring as of any of the years presented.
TABLE O - NON-PERFORMING ASSETS
As of December 31,
(Dollars in thousands) 2001 2000 1999 1998 1997
------------------------------------------------------- ------- ------- ------- ------- -------
Mortgage banking business:
Non-accrual loans:
Construction Loans $ 705 $ 1,155 $ -- $ -- $ --
Residential mortgage loans 3,742 -- -- -- --
Loans held-for-sale past due 90 days and still
accruing(1) 55,966 53,288 44,030 49,201 41,793
OREO 7,924 5,936 3,834 2,987 3,025
Other non-performing assets -- -- -- 1,011 1,597
------- ------- ------- ------- -------
Total NPAs of mortgage banking business 68,337 60,379 47,864 53,199 46,415
------- ------- ------- ------- -------
Other lending activities through banking subsidiaries:
Non-accrual loans:
Construction loans 1,184 1,029 -- 183 --
Residential mortgage loans 5,276 4,965 3,731 2,382 1,623
Commercial real estate loans 1,359 1,390 567 770 775
Consumer loans 463 312 205 241 64
Commercial non-real estate loans 710 301 -- 95 --
Land loans 70 -- -- -- --
------- ------- ------- ------- -------
Total non-accrual loans 9,062 7,997 4,503 3,671 2,462
OREO 490 322 76 -- --
------- ------- ------- ------- -------
Total NPAs of banking subsidiaries 9,552 8,319 4,579 3,671 2,462
------- ------- ------- ------- -------
Total NPAs of Doral Financial (consolidated) $77,889 $68,698 $52,443 $56,870 $48,877
======= ======= ======= ======= =======
Total NPAs of banking subsidiaries as a percentage
of their loans receivable, net and OREO 1.58% 2.31% 2.53% 2.88% 1.85%
Total NPAs of Doral Financial as a percentage of
consolidated total assets 1.16% 1.26% 1.16% 1.95% 2.63%
Ratio of allowance for loan losses to total
Non-performing loans at end of period
(consolidated) 17.95% 15.03% 12.64% 9.77% 6.48%
(1) Does not include approximately $12.7 million, $26.5 million, $26.1 million,
$6.5 million and $807,000 of 90 days past due FHA/VA loans for the years
ended December 31, 2001, 2000, 1999, 1998 and 1997, 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.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 43
(DORAL LOGO)
Doral Financial believes that the value of the OREO reflected on its financial
statements represents a reasonable estimate of the properties' fair values, net
of cost of disposition. The fair value of the OREO is normally determined
annually on the basis of periodic appraisals prepared by licensed real estate
appraisers.
The following table summarizes certain information regarding Doral Financial's
allowance for loan losses and losses on OREO, for both Doral Financial's banking
and mortgage banking businesses for the periods indicated.
TABLE P - ALLOWANCE FOR LOAN LOSSES AND OREO
As of December 31,
(Dollars in thousands) 2001 2000 1999 1998 1997
------------------------------------------------------- ------- ------- ------- ------- -------
Allowance for OREO Losses:
Balance at beginning of period $ 1,530 $ 910 $ 1,011 $ 676 $ 356
Provision for losses 969 765 620 1,402 787
Losses charged to the allowance (1,134) (145) (721) (1,067) (467)
------- ------- ------- ------- -------
Balance at end of period $ 1,365 $ 1,530 $ 910 $ 1,011 $ 676
======= ======= ======= ======= =======
Allowance for Loan Losses:(1)
Balance at beginning of period $ 9,387 $ 6,136 $ 5,166 $ 2,866 $ 2,152
Provision for loan losses 4,445 4,078 2,626 883 792
------- ------- ------- ------- -------
Charge-offs:
Mortgage loans held for sale (584) (201) (1,480) -- --
Construction loans -- -- -- -- --
Residential mortgage loans -- (24) -- -- --
Commercial real estate loans -- -- -- -- --
Consumer loans (694) (529) (477) (127) (124)
Commercial non-real estate loans (91) (239) (17) -- --
Other (42) (122) (40) -- --
------- ------- ------- ------- -------
Total Charge-offs (1,411) (1,115) (2,014) (127) (124)
------- ------- ------- ------- -------
Recoveries:
Mortgage loans held for sale -- 14 294 -- --
Construction loans -- -- -- -- --
Residential mortgage loans -- 103 -- -- --
Commercial real estate loans -- -- -- -- --
Consumer loans 161 115 64 76 46
Commercial non-real estate loans 37 50 -- -- --
Other -- 6 -- -- --
------- ------- ------- ------- -------
Total recoveries 198 288 358 76 46
------- ------- ------- ------- -------
Net charge-offs (1,213) (827) (1,656) (51) (78)
------- ------- ------- ------- -------
Other (147) -- -- 1,468 --
------- ------- ------- ------- -------
Balance at end of period $12,472 $ 9,387 $ 6,136 $ 5,166 $ 2,866
======= ======= ======= ======= =======
Allowance for loan losses as a percentage of total
loans outstanding at the end of period 0.48% 0.54% 0.49% 0.49% 0.53%
Net charge-offs as a percentage of average total loans 0.06% 0.05% 0.15% 0.01% 0.02%
(1) Relates to mortgage loans held for sale and loans receivable held for
investment.
44 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
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 Q - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
As of December 31,
(Dollars in thousands) 2001 2000 1999 1998 1997
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
Mortgage loans held for sale $ 6,472 51.9% $4,549 48.5% $3,996 65.1% $3,510 67.9% $1,625 56.7%
Loans receivable, net
Construction 3,305 26.5% 2,617 27.9% 885 14.4% 117 2.3% 51 1.8%
Residential mortgage loans 569 4.6% 822 8.8% 545 8.9% 1,225 23.8% 990 34.5%
Commercial real estate 648 5.2% 421 4.4% 250 4.1% 81 1.6% 101 3.5%
Consumer - secured by mortgage 8 0.1% 23 0.2% 25 0.4% 25 0.5% 42 1.5%
Consumer - other 350 2.8% 183 1.9% 90 1.5% 31 0.6% 12 0.4%
Commercial non-real estate 608 4.9% 357 3.8% 131 2.1% 54 1.0% 18 0.6%
Loans on saving deposits 94 0.8% 119 1.3% 60 1.0% 18 0.3% 19 0.7%
Land secured 418 3.2% 296 3.2% 154 2.5% 105 2.0% 8 0.3%
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $12,472 100.0% $9,387 100.0% $6,136 100.0% $5,166 100.0% $2,866 100.0%
======= ===== ====== ===== ====== ===== ====== ===== ====== =====
The allowance for loan losses was $12.5 million at December 31, 2001, compared
to $9.4 million at December 31, 2000 and $6.1 million as of December 31, 1999.
The increase in the allowance for 2001 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 that carry greater credit risk.
The percentage of the allowance for loan losses to non- performing loans will
not remain constant due to the nature of Doral Financial's portfolio of loans
that 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
ongoing 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. Residential mortgage loans and
consumer loans are generally evaluated as a group of homogeneous loans while
past due construction and commercial loans are evaluated for impairment
individually, generally based on the fair values of the collateral. 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
expectations used by Doral Financial in determining the allowance for loan
losses.
INVESTMENT AND TRADING ACTIVITIES
As part of its mortgage securitization activities, Doral Financial is involved
in the purchase and sale of mortgage-backed securities held for trading. At
December 31, 2001, Doral Financial held securities for trading with a fair
market value of $993.3 million, approximately $692.4 million of which consisted
of Puerto Rico tax-exempt GNMA securities. 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 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
activities. The fair values of Doral Financial's tax-exempt GNMA securities are
based on quotations obtained from local broker-dealers after adjusting such
amounts for such factors as liquidity and the prices of U.S. GNMAs. Refer to
"Non-Interest Income - Trading Activities" for additional information on how
Doral Financial determines the fair values of its trading securities.
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, 2001, Doral Financial held $928.2 million of
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 45
(DORAL LOGO)
investment securities that were classified as available for sale and reported at
fair value based on quoted market prices, with unrealized gains or losses
included in stockholders' equity and reported as "Accumulated other
comprehensive income (loss), net of taxes," in Doral Financial's Consolidated
Financial Statements. At December 31, 2001, Doral Financial had unrealized
losses in other comprehensive income of $12.3 million, compared to unrealized
gains of $2.9 million at December 31, 2000. As of December 31, 2001, Doral
Financial held approximately $866.3 million in securities that are classified as
held to maturity.
The following table summarizes Doral Financial's securities holdings as of
December 31, 2001.
TABLE R - INVESTMENT SECURITIES
HELD FOR AVAILABLE HELD TO
(Dollars in thousands) TRADING FOR SALE MATURITY
-------- --------- --------
Mortgage-backed securities $740,797 $481,834 $124,218
Interest-only strips 236,468 -- --
U.S. Treasury and agency securities 320 446,345 723,442
Puerto Rico government obligations 4,728 -- 10,305
Derivatives and swap agreements 1,534 -- --
Other 9,481 -- 8,370
-------- -------- --------
Total $993,328 $928,179 $866,335
======== ======== ========
For additional information regarding the composition of Doral Financial's
investment securities, please refer to Notes 5, 6 and 7 of Doral Financial's
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Doral Financial has an ongoing need for capital to finance its lending,
servicing and investing activities. Doral Financial's cash requirements arise
from loan originations and purchases, repayments of debt upon maturity,
purchases and holdings of securities, payments of operating and interest
expenses and servicing advances and loan repurchases pursuant to warranty or
recourse provisions.
Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA, as well as contractual arrangements with other investors,
require Doral Financial to advance funds to make scheduled payments of
principal, interest, taxes and insurance, if such payments have not been
received from the borrowers. While Doral Financial generally recovers funds
advanced pursuant to these arrangements within 30 days, it must absorb the cost
of the funds it advances during the time the advance is outstanding. During each
of the years ended December 31, 2001 and 2000, the monthly average amount of
funds advanced by Doral Financial under such servicing agreements was
approximately $9.6 million. To the extent the mortgage loans underlying Doral
Financial's servicing portfolio experience increased delinquencies, Doral
Financial would be required to dedicate additional cash resources to comply with
its obligation to advance funds as well as incur additional administrative costs
related to increases in collection efforts.
When Doral Financial sells mortgage loans to third parties it generally makes
customary representations and warranties regarding the characteristics of the
loans sold. To the extent Doral Financial breaches any of these warranties,
investors are generally entitled to obligate Doral Financial to repurchase the
loan subject of the breach.
In addition to its servicing and warranty obligations, Doral Financial's loan
sale activities include the sale of non-conforming mortgage loans subject to
recourse arrangements that generally obligate Doral Financial to repurchase the
loans if the loans are 90 days or more past due or otherwise in default. To the
extent the delinquency ratios of the loans sold subject to recourse or put-back
arrangements is greater than anticipated and Doral Financial is required to
repurchase more loans than anticipated, Doral Financial's liquidity requirements
would be increased. See "Credit Risks Related to Loan Activities" for additional
information on these arrangements.
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. Doral Financial also obtains liquidity in the capital markets
through the sale of its debt and equity securities. Doral Financial's banking
subsidiaries also rely on deposits, borrowings
46 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
from the FHLB-NY as well as term notes backed by letters of credit of the
FHLB-NY.
The table below shows Doral Financial's sources of borrowings and the related
average interest rate as of December 31, 2001 and 2000. Refer to Notes 14 and 15
to Doral Financial's Consolidated Financial Statements for additional
information regarding Doral Financial's repurchase agreements and warehouse
lines of credit.
TABLE S - SOURCES OF BORROWINGS:
As of December 31
(Dollars in thousands) 2001 2000
--------------------- -----------------------
AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
----------- ------- ----------- -------
Repurchase Agreements $2,573,772 4.00% $2,275,855 6.32%
Loans Payable 161,101 3.67% 372,620 7.46%
Deposits 1,669,909 3.65% 1,303,525 5.50%
Notes Payable 459,543 7.98% 444,746 8.01%
Advances from FHLB 687,500 4.80% 389,000 5.95%
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 Doral Financial to obtain more favorable rates once mortgage loans are in
the process of securitization but prior to the actual issuance of the
mortgage-backed securities, as well as to finance such mortgage-backed
securities upon their issuance. Doral Financial has several warehousing, gesta-
tion and repurchase agreements lines of credit totaling $6.8 billion as of
December 31, 2001, of which $2.7 billion was outstanding under these facilities
at year end. Of the aggregate amount of funding available under Doral
Financial's warehouse and repurchase lines of credit, approximately $2.1 billion
represent committed lines under which the lender is committed to advance funds
subject to compliance by Doral Financial with various conditions. The remaining
funding was available under uncommitted lines pursuant to which advances are
made at the discretion of the lender.
Doral Financial's committed lines of credit generally require Doral Financial to
comply with various financial covenants and ratios. Failure to comply with any
of these covenants permits the lender to require immediate repayment of all
amounts previously advanced and to stop making any further advances to Doral
Financial. As of December 31, 2001, Doral Financial was in compliance with all
such financial covenants and ratios. Doral Financial has two credit facilities
with an aggregate credit availability of $1.0 billion, of which approximately
$203 million was outstanding as of December 31, 2001, that permit the lender to
require Doral Financial to repay all outstanding advances and refuse to make
further credit advances if Doral Financial's senior unsecured debt is rated Ba2
or lower by Moody's Investors Service ("Moody's") or BB or lower by Standard &
Poor's Rating Services, a division of The McGraw-Hill Companies ("S&P"). Doral
Financial's senior unsecured debt obligations are currently rated Baa2 by
Moody's and BBB- by S&P.
Doral Financial's investment grade credit ratings on its debt securities have
allowed it to obtain liquidity in the capital markets through public and private
offerings of its debt securities. To the extent Doral Financial's credit rat-
ings on its debt securities were to fall below investment grade, Doral
Financial's ability to obtain liquidity through the capital markets would be
materially adversely affected. A decrease in Doral Financial's credit ratings
could also make it more difficult for it to sell non-conforming loans subject to
recourse provisions since the purchasers of loans subject to recourse provisions
rely in part on the credit of Doral Financial when purchasing such loans. A
decrease in recourse sales could adversely affect the liquidity of Doral
Financial because the secondary market for non-conforming loans is not as liquid
as the secondary market for loans that qualify for the sale or guarantee pro-
grams of FHA, VA, FNMA and FHLMC. A decrease in Doral Financial's credit ratings
could also adversely affect its liquidity because lending institutions may be
less inclined to renew or enter into new lending arrangements with Doral
Financial. A ratings downgrade would also adversely affect liquidity because
counterparties to repurchase agreements used for funding loan origination
activities or to derivative contracts used for interest rate risk
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 47
(DORAL LOGO)
management purposes could increase the applicable margin requirements under
such agreements.
Under Doral Financial's repurchase lines of credit and derivative contracts,
Doral Financial is required to deposit cash or qualifying securities to meet
margin requirements. To the extent that the value of securities previously
pledged as collateral decline because of changes in interest rates, Doral
Financial will be required to deposit additional cash or securities to meet its
margin requirements, thereby adversely affecting its liquidity.
A considerable amount of Doral Financial's liquidity is derived from the sale of
mortgage loans in the secondary mortgage market. The U.S. (including Puerto
Rico) secondary mortgage market is the most liquid in the world in large part
because of the sale or guarantee programs maintained by FHA, VA, HUD, FNMA and
FHLMC. To the extent these programs were curtailed or the standard for insuring
or selling loans under such programs were materially increased or for any reason
Doral Financial failed to qualify for such programs, Doral Financial's ability
to sell mortgage loans and consequently its liquidity would be materially
adversely affected.
Doral Financial maintains a considerable investment in mortgage-servicing assets
and IOs generated as part of its mortgage sale activities. While the servicing
assets and IOs are recorded at the time of sale of the related mortgage loans,
the cash related to such retained interest is received over the life of the
asset and, therefore, does not provide immediate liquidity that is available to
Doral Financial to fund its operations or to pay dividends.
Doral Financial's banking subsidiaries 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, 2001, Doral Financial's banking subsidiaries held approximately
$1.7 billion in deposits at a weighted-average interest rate of 3.65%. For
additional information regarding deposit accounts and FHLB-NY advances see Notes
16 and 18 to Doral Financial's Consolidated Financial Statements.
The following table presents the average balance and the average rate paid on
each deposit type for the years indicated.
Table T - Average Deposit Balance
Year ended December 31,
(Dollars in thousands) 2001 2000 1999
---------------------- ---------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- ---------- ------- -------- -------
Certificates of deposit $ 904,910 4.87% $ 835,762 6.31% $481,265 5.84%
Regular passbook savings 101,038 4.33% 63,560 4.73% 51,605 4.57%
NOW Accounts 299,486 2.80% 191,381 4.62% 106,502 4.65%
Non-interest bearing 177,862 -- 132,671 -- 132,429 --
---------- ------- ---------- ------- -------- -------
Total deposits $1,483,296 4.75% $1,223,374 5.07% $771,801 4.64%
========== ======= ========== ======= ======== =======
The following table sets forth the maturities of certificates of deposit having
principal amounts of $100,000 or more at December 31, 2001.
TABLE U - DEPOSIT MATURITIES
(Dollars in thousands) AMOUNT
--------
Certificates of deposit maturing
Three months or less $132,742
Over three through six months 108,578
Over six through twelve months 124,588
Over twelve months 273,432
--------
Total $639,340
========
48 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
As of December 31, 2001 and 2000, Doral Financial's banking subsidiaries had
approximately $418.1 million and $324.4 million, respectively, in brokered
deposits obtained through broker-dealers. Doral Financial uses such deposits as
a source of long-term funds. Brokered deposits are generally considered a less
stable source of funding than core deposits obtained through retail bank
branches. Investors that invest in brokered deposits are generally very
sensitive to interest rates and will generally move funds from one institution
to another based on minor differences in rates offered on deposits.
Doral Financial's banking subsidiaries, as members of the 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, 2001, Doral Financial's banking
subsidiaries had $687.5 million in outstanding advances from the FHLB-NY at a
weighted average interest rate cost of 4.80%. See Note 18 to Doral Financial's
Consolidated Financial Statements for additional information regarding such
advances. In the past, Doral Bank has also raised funds by selling its term
notes secured by FHLB-NY letters of credit to private investors.
Doral Financial expects that it will continue to have adequate liquidity,
financing arrangements and capital resources to finance its operations. Doral
Financial will continue to explore alternative and supplementary methods of
financing its operations, including both debt and equity financing. There can be
no assurance, however, that Doral Financial will be successful in consummating
any such transactions.
REGULATORY CAPITAL RATIOS
As of December 31, 2001, Doral Financial and its banking subsidiaries were in
compliance with all the regulatory capital requirements that were applicable to
them as a financial holding company, state non-member bank and federal savings
bank (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%).
In addition to the above requirements, Doral Financial has agreed with the FDIC
to maintain Doral Bank-New York's ratio of Tier 1 capital to average assets at
not less than 8% during its first three years of operations which ends on
October 31, 2002. Set forth below are Doral Financial's and its banking
subsidiaries' regulatory capital ratios as of December 31, 2001, based on
existing Federal Reserve, FDIC and OTS guidelines.
TABLE V - REGULATORY CAPITAL RATIOS
DORAL FINANCIAL
BANKING SUBSIDIARIES
--------- -------------------------------------
DORAL WELL
DORAL DORAL BANK CAPITALIZED
FINANCIAL BANK PR NY(1) MINIMUM
--------- ------- ----- -----------
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) 18.1% 12.7% 28.9% 6.0%
Total capital (Total capital to risk-weighted assets) 18.4% 13.0% 29.2% 10.0%
Leverage ratio(2) 11.6% 7.6% 12.9% 5.0%
(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.
(2) Tier 1 capital to average assets in the case of Doral Financial and
Doral Bank-PR and Tier 1 capital to adjusted total assets in the case
of Doral Bank-NY.
As of December 31, 2001, Doral Financial's banking subsidiaries 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.
Failure to meet minimum regulatory capital requirements could result in the
initiation of certain mandatory and additional discretionary actions by banking
regulators against Doral Financial and its banking subsidiaries that, if
undertaken, could have a material adverse effect on Doral Financial.
On November 29, 2001, the federal banking and thrift regulatory agencies adopted
a final rule that changes the regulatory capital treatment of recourse
obligations, residual interests and direct credit substitutes. The new rules are
effective on January 1, 2002, for transactions settled on or after January 1,
2002. For transactions entered into before
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 49
(DORAL LOGO)
January 1, 2002, Doral Financial is not required to implement the rule until
December 31, 2002. The new rule attempts to more consistently treat recourse
obligations for the regulatory agencies' risk-based capital requirements. The
rule also imposes a new dollar-for-dollar capital requirement on residual
interests retained in sale or securitization transactions and a 25% limit on the
amount of Tier 1 capital that may consist of credit-enhancing, interest-only
strips, a subset of residual interests.
The rule clarifies that, subject to certain exceptions, the entire amount of
assets sold with recourse, not just the contractual amount of the recourse
obligation, is converted into an on-balance sheet credit equivalent amount. The
credit equivalent amount, less any recourse liability reflected on the balance
sheet, is then risk weighted for purposes of applying the applicable capital
requirement. The risk weighting for most residential mortgage loans is currently
50%. As of December 31, 2001, Doral Financial's outstanding balance of loans
sold with recourse was $2.1 billion.
While Doral Financial is still examining the new capital requirements regarding
residuals and credit-enhancing, interest-only strips, it currently understands
that its IOs created in connection with the sale of non-conforming loans will
generally be treated as credit-enhancing, interest-only strips and thus will be
subject to a dollar-for-dollar capital requirement for risk-based capital
purposes and to the 25% concentration limit for Tier 1 capital purposes.
Substantially all of Doral Financial's recourse obligations and IOs are recorded
at the parent company level and, accordingly, the new rule will only directly
impact the regulatory requirements applicable to Doral Financial as a financial
holding company. While the full implementation of the new rule effective on
December 31, 2002 is expected to reduce Doral Financial's regulatory capital
ratios at the holding company level, Doral Financial anticipates that it will
continue to comply with all applicable capital requirements following the
implementation of the rule. Set forth below, are Doral Financial's pro forma
capital ratios for risk-based capital purposes as of December 31, 2001 assuming
the new rule had been in effect on such date and that all of Doral Financial's
IOs will be treated as credit-enhancing, interest-only strips for purposes of
the rule.
TABLE W - PRO FORMA CAPITAL RATIOS
DORAL FINANCIAL
---------------
Tier 1 Capital Ratio 13.24%
Total Capital Ratio 13.57%
Leverage Ratio 11.00%
Doral Securities is subject to regulatory capital requirements imposed by the
SEC. At December 31, 2001, Doral Securities was in compliance with its
applicable capital requirement.
ASSETS AND LIABILITIES
At December 31, 2001, Doral Financial's total assets were $6.7 billion, compared
to $5.5 billion at December 31, 2000. The increase in assets was due primarily
to an increase in the loan portfolios of $838.8 million, an increase of $149.1
million in Doral Financial's money market investments offset in part by a net
decrease of $38.2 million in investment securities and other instruments. Total
liabilities were $5.9 billion at December 31, 2001, compared to $5.0 billion at
December 31, 2000. The increase in liabilities was largely the result of an
increase in securities sold under agreements to repurchase, deposit accounts and
FHLB advances that were used to fund Doral Financial's increase in assets. At
December 31, 2001, Doral Financial's deposit accounts totaled $1.7 billion,
compared to $1.3 billion at December 31, 2000. As of December 31, 2001, Doral
Financial's banking subsidiaries had $3.7 billion in assets, compared to $2.7
billion at December 31, 2000.
50 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The tables below summarize Doral Financial's contractual obligations and other
commercial commitments as of December 31, 2001.
TABLE X - CONTRACTUAL OBLIGATIONS
(Dollars in thousands) PAYMENT DUE BY PERIOD
-------------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
---------- ---------- --------- --------- ----------
Repurchase and warehousing lines of credit $2,734,873 $1,783,049 $ -- $ 255,000 $ 696,824
Deposits 1,669,909 1,358,573 252,572 58,076 688
Other Borrowed Funds 1,147,043 170,975 274,371 261,470 440,227
Non-cancellable Leases 43,892 4,707 6,848 5,467 26,870
---------- ---------- --------- --------- ----------
Total Contractual Cash Obligations $5,595,717 $3,317,304 $ 533,791 $ 580,013 $1,164,609
========== ========== ========= ========= ==========
TABLE Y - OTHER COMMERCIAL COMMITMENTS
(Dollars in thousands) AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------------------------------------------
TOTAL
OTHER COMMERCIAL AMOUNTS LESS THAN AFTER 5
COMMITMENTS COMMITTED 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
---------- ---------- --------- --------- ----------
Standby Repurchase (Recourse) Obligations $1,022,449 $ 143,522 $278,164 $ 23,329 $ 577,434
Put-back options 18,396 18,396 -- -- --
---------- ---------- -------- -------- ----------
Total Commercial Commitments $1,040,845 $ 161,918 $278,164 $ 23,329 $ 577,434
========== ========== ======== ======== ==========
INTEREST RATE RISK MANAGEMENT
General. Interest rate fluctuations are the primary market risk affecting Doral
Financial. Changes in interest rates can affect the volume of mortgage loan
originations, the net interest income earned by Doral Financial on its port-
folio of loans and mortgage-backed securities, the amount of gain on sale of
loans, and the value of Doral Financial's mortgage-servicing assets 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 resi-
dential properties and to qualify for mortgage loans. Increases in rates could
also 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, 2001, 2000 and 1999, refinance
loans represented approximately 56%, 38% and 61%, 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 a significant portion of Doral Financial's refinance loans are
for debt consolidation purposes and, therefore, not as sensitive to increases in
interest rates, a significant future increase in mortgage interest rates in
Puerto Rico 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. This risk is sometimes
referred to as "lag risk." Doral Financial generally does not hedge the lag risk
associated with conventional loans in the pipeline or in the process of
origination because Doral Financial generally does not 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 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 that lock in the interest rate until the closing date, it
attempts to enter into forward commitments to sell such
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 51
(DORAL LOGO)
loans at the time it fixes the rates for the loans. As of December 31, 2001,
Doral Financial had $481.4 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 commit-
ments 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. Futures 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 prior to sale, 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 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 Puerto Rico 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. Traditionally, Doral Financial has not actively 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 declines. The
structure of Doral Financial's balance sheet serves to hedge in part the
sensitivity of its servicing income and IOs to decreases in interest rates
because the market value of Doral Financial's large portfolio of fixed-rate
residential mortgage loans and mortgage-backed securities tends to increase in
value when interest rates decline. Doral Financial also seeks to reduce the
sensitivity of its servicing income and the value of its servicing asset by
maintaining 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 2001.
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-earn-
ing 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, quarterly, etc.).
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, FHLB-NY advances and long-term certificates of deposit,
including brokered certificates of deposit. Doral Financial also seeks to
negotiate interest rate floors on the floating rate loans it originates.
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 in exchange for receiving a variable rate of interest
on the same notional amount for a predetermined period of time. No actual assets
are exchanged in a swap of this type and interest payments are generally net-
ted. As of December 31, 2001, Doral Financial, through Doral Bank-PR, had in
place two interest rate swap agreements with an aggregate notional amount of
$100 million. Doral Financial also purchases options on futures
52 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
contracts for Eurodollar instruments in an attempt to manage the risk to its net
interest income components. For a detail of the Doral Financial's derivative
instruments used to manage interest rate risk, see Note 30 to Doral Financial's
Consolidated Financial Statements.
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, increases when interest rates fall. At December 31, 2001, Doral
Financial held $993.3 million of mortgage-backed and other invest- ment
securities (most of which carried fixed interest rates) that were classified as
held for trading and reported at fair value, with unrealized gains and losses
included in earnings. In addition, at December 31, 2001, Doral Financial held
$928.2 million of investment securities (all of which carried fixed interest
rates) that 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 will consider, among other things, the volatility of prices of
its securities and the direction of interest rates. 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, 2001. Condensed information as
of December 31, 2000, is also shown. Interest rate swap agreements are presented
on the basis of the notional amounts used to calculate the contractual amounts
to be exchanged under the swap agreements.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 53
(DORAL LOGO)
TABLE Z - INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands)
AS OF DECEMBER 31, 2001 1 YEAR 1 TO 3 3 TO 5 OVER 5 NON-INTEREST
OR LESS YEARS YEARS YEARS RATE BEARING TOTAL
---------- -------- -------- ---------- ------------ ----------
ASSETS
Cash and Money Market Instruments $ 594,385 $ -- $ -- $ -- $ -- $ 594,385
Total Loans 210,568 379,676 138,545 1,862,818 -- 2,591,607
Securities Held for Trading 198,502 827 165 793,834 -- 993,328
Securities Available for Sale -- -- 1,724 926,455 -- 928,179
Securities Held to Maturity -- 7,109 3,055 856,171 -- 866,335
FHLB Stock -- -- -- 56,095 -- 56,095
Other Assets -- -- -- -- 664,354 664,354
---------- -------- -------- ---------- ---------- ----------
Total Assets $1,003,455 $387,612 $143,489 $4,495,373 $ 664,354 $6,694,283
========== ======== ======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans Payable $ 161,101 $ -- $ -- $ -- $ -- $ 161,101
Repurchase Agreements 1,621,948 -- 255,000 696,824 -- 2,573,772
Deposits 1,134,691 252,572 58,077 688 223,881 1,669,909
Other Borrowed Funds 170,975 274,371 261,470 440,227 -- 1,147,043
Other Liabilities -- -- -- -- 380,338 380,338
Stockholders' Equity -- -- -- -- 762,120 762,120
---------- -------- -------- ---------- ---------- ----------
Total Liabilities and Stockholders'
Equity $3,088,715 $526,943 $574,547 $1,137,739 $1,366,339 $6,694,283
========== ======== ======== ========== ========== ==========
Notional amount of -
Interest Rate Swaps $ 50,000 $ (50,000) $ -- $ --
Interest Rate Sensitivity Gap (2,035,260) (189,331) (431,058) 3,357,634
Cumulative Interest Rate
Sensitivity Gap (2,035,260) (2,224,591) (2,655,649) 701,985
Cumulative Gap
to Interest-Earning Assets (33.75)% (36.89)% (44.04)% 11.64%
CONDENSED INTEREST RATE SENSITIVITY
ANALYSIS AS OF DECEMBER 31, 2000
Notional amounts of -
Interest Rate Swaps $ 100,000 $ (100,000) $ -- $ --
Interests Rate Sensitivity Gap (1,854,019) (243,848) (409,771) 2,914,463
Cumulative Interest Rate
Sensitivity Gap (1,854,019) (2,097,867) (2,507,638) 406,825
Cumulative Gap
to Interest-Earning Assets (36.62)% (41.43)% (49.53)% 8.03%
54 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
Gap analysis measures the volume of assets and liabilities at a point in time
and their repricing during future periods. The Company prepared its gap analysis
on a contractual maturity basis. 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 Doral Financial. A positive gap generally denotes
asset sensitivity and it also denotes 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, 2001, Doral Financial
had a one-year negative gap of approximately $2.0 billion compared to a negative
gap of $1.9 billion as of December 31, 2000. While static gap analysis is a
useful measure for determining short-term risk to future net interest income, it
has certain shortcomings. For example, since the static gap analysis is
presented on the basis of contractual maturities, it does not take into account
that a large portion of Doral Financial's loans held for sale and trading
securities will be sold before their contractual maturities. Static gap analysis
does not measure the sensitivity of the market value of assets and liabilities
to changes in interest rates.
For a hypothetical example of the possible impact of changes in interest rate
assumptions on the values of Doral Financial's mortgage servicing assets and IOs
refer to Note 12 to Doral Financial's Consolidated Financial Statements.
Derivatives. As described above, Doral Financial uses derivatives to manage its
interest rate risk. Derivatives include interest rate swaps, futures, forward
sale contracts 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.
The fair values of Doral Financial's derivatives are reflected on Doral
Financial's Consolidated Financial Statements. Fair values for derivatives such
as interest rate futures contracts or options are determined by reference to
market prices. Any changes in fair values of these derivatives occurring during
a reporting period must be recorded as gains or losses on Doral Financial's
income statement and may, therefore, increase the volatility of Doral
Financial's future earnings. Fair values for derivatives purchased in the
over-the-counter market are determined by prices provided by external sources or
valuation models.
The table below summarizes the fair values of Doral Financial's derivatives as
well the source of the fair values.
TABLE AA - FAIR VALUE RECONCILIATION
(Dollars in thousands)
Fair value of contracts outstanding at the beginning of the period $ 3,032
Contracts realized or otherwise settled during the period (9,122)
Fair value of new contracts when entered into during the period 8,276
Changes in fair values attributable to changes in valuation techniques and assumptions --
Other changes in fair values (652)
-------
Fair value of contracts outstanding at the end of the period $ 1,534
=======
TABLE BB - SOURCE OF FAIR VALUE
(Dollars in thousands) PAYMENT DUE BY PERIOD
----------------------------------------------------------------------
MATURITY MATURITY
SOURCE OF FAIR VALUE LESS THAN MATURITY MATURITY IN EXCESS TOTAL FAIR
1 YEAR 1-3 YEARS 3-5 YEARS OF 5 YEARS VALUE
--------- --------- --------- ---------- ----------
Prices actively quoted $ 4,444 $ 295 $ -- $ -- $ 4,739
Prices provided by other external sources (1,648) (1,557) -- -- (3,205)
Prices based on models and other valuation methods -- -- -- -- --
-------- -------- -------- --------- ----------
$ 2,796 $(1,262) $ -- $ -- $ 1,534
======== ======== ======== ========= ==========
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 55
(DORAL LOGO)
The use of derivatives involves market and credit risk. The market risk of
derivatives arises principally from the potential for changes in the value of
derivative contracts based on changes in interest rates. Doral Financial
generally manages its risks by taking risk-offsetting positions.
The credit risk of derivatives arises from the potential of a counterparty to
default on its contractual obligations. Credit risk related to derivatives
depends 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 generally increase with inflation. However,
the increase in real estate values in Puerto Rico in recent years has been a
positive factor for Doral Financial's mortgage banking business. The average
size of loans originated tends to increase as home values appreciate, which
serves to increase loan origination fees and servicing income faster than the
cost of providing such services. Additionally, appreciation in real estate
property values reduces the loan-to-value ratio of existing loans. Interest
rates normally increase during periods of high inflation and decrease during
periods of low inflation. See "Interest Rate Risk Management" for a discussion
of the effects of changes of interest rates on Doral Financial's operations.
RECLASSIFICATION
Certain amounts reflected in the Company's Consolidated Financial Statements for
the years ended December 31, 2000 and 1999, have been reclassified to conform to
the presentation for 2001.
CHANGES IN ACCOUNTING STANDARDS ADOPTED IN THE 2001 FINANCIAL STATEMENTS
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,"was issued in September 2000 and replaces SFAS
No. 125 of the same title. This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral, and
requires certain disclosures, but carries over most of SFAS No. 125's provisions
without reconsideration. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001 and is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Doral Financial's adoption of this
statement did not materially affect its results of operations or financial
condition for the year ended December 31, 2001.
Derivatives and Hedging Activities. Doral Financial adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, on
January 1, 2001. This statement establishes accounting and reporting standards
for derivative instruments, including derivative instruments that are embedded
in other contracts, and for hedging activities.
Although Doral Financial enters into derivative transactions for hedging
purposes, it generally does not designate derivatives as hedges for accounting
purposes and, effective January 1, 2001, records all derivatives at fair values
with changes in fair values recorded as gains or losses on its Consolidated
Statement of Income as a component of Trading Activities. Prior to the adoption
of SFAS No. 133, Doral Financial followed a similar policy except in the case of
interest rate swap agreements held in its banking subsidiaries. At December 31,
2001, none of Doral Financial's derivatives were designated as hedges.
As part of the implementation of SFAS No. 133, Doral Financial reclassified $110
million of its held to maturity securities as available for sale and $130
million as trading securities. As a result of this reclassification, Doral
Financial recognized an after-tax gain of $1.6 million in other comprehensive
income and an after-tax gain of $5.9 million in the income statement as
cumulative effect of a change in accounting principles. Under the provisions of
SFAS No. 133, such a reclassification does not compromise Doral Financial's
intent to hold current or future debt securities until their maturity.
In connection with the adoption of the SFAS No. 133, Doral Financial also
recognized in earnings the fair value of $100 million of interest rate swaps
previously excluded from the financial statements, valued at an after tax loss
of $196,000. All other derivative instruments were previously recorded at fair
value and remained classified as securities held for trading.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
Business Combinations. In June 2001, the FASB issued
56 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
SFAS No. 141, "Business Combinations" which addresses financial accounting and
reporting for business combinations. SFAS No. 141 requires the use of the pur-
chase method of accounting for all business combinations initiated after June
30, 2001 and requires the recognition of intangible assets apart from goodwill
if they meet certain criteria. SFAS No. 141 also adds certain disclosure
requirements. Doral Financial was not a party to any business combination during
2001.
Goodwill and Intangible Assets: In June 2001, the FASB issued SFAS No. 142,
"Goodwill and other Intangible Assets," which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. It addresses how
intangible assets that are acquired individually, or with a group of other
assets (but not those acquired in a business combination) should be accounted
for in financial statements upon their acquisition. SFAS No. 142 also addresses
how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements.
Under SFAS No. 142, goodwill and intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but without the constraint of an arbitrary
ceiling. SFAS No. 142 provides specific guidance for testing goodwill for
impairment.
The provisions of SFAS No. 142 are effective for fiscal years beginning after
December 15, 2001. As of December 31, 2001, Doral Financial carried goodwill of
approximately $9.1 million that is presented within "Other Assets" in its
Statement of Financial Condition. Doral Financial's goodwill amortization for
2001 was approximately $621,000. The Company adopted SFAS No. 142 on January 1,
2002 and discontinued the amortization of goodwill because its fair value
exceeds the carrying amount.
Accounting for Asset Retirement Obligations. In June 2001, the FASB issued SFAS
No. 143 "Accounting for Asset Retirement Obligations." This statement addresses
financial accounting and reporting for obligations associated with the
retirement of long-lived assets and the associated asset retirement costs. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Doral Financial's management believe that the
adoption of this statement will not have a material effect on the Consolidated
Financial Statements of Doral Financial.
Accounting for the Impairment or Disposal of Long-Lived Assets. In August 2001,
the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement supersedes SFAS No. 121 and portions of APB
30 and develops one accounting model for long-lived assets that are to be
disposed of by sale. SFAS No. 144 is effective for financial statements issued
for years beginning after December 15, 2001, but earlier application is
encouraged. Doral Financial's management does not believe that the adoption of
this statement will have a material effect on the Consolidated Financial
Statements of Doral Financial.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 57
58 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
[PricewaterhouseCoopers LLP LOGO]
PricewaterhouseCoopers LLP
PO Box 363566
San Juan PR 00936-3566
Telephone (787) 754-9090
Facsimile (787) 766 1094
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 respects, the
financial position of Doral Financial Corporation and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America, 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 our opinion.
As discussed in Note 2 to the accompanying consolidated financial statements, in
2001 the Company adopted the Statement of Financial Accounting Standards No.
133, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as amended, which effect was accounted for as a cumulative effect
of a change in accounting principle.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Juan, Puerto Rico
February 15, 2002
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2004
Stamp 1767166 of the P.R. Society of
Certified Public Accountants has been
affixed to the fib copy of this report
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 59
(DORAL LOGO)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - DECEMBER 31,
(Dollars in thousands, except share information) 2001 2000
----------- -----------
ASSETS
Cash and due from banks $ 45,970 $ 28,999
----------- -----------
Money market investments:
Securities purchased under agreements to resell 54,866 59,025
Time deposits with other banks 240,146 214,480
Other short term investments, at cost 253,403 125,815
----------- -----------
Total money market investments 548,415 399,320
----------- -----------
Pledged investment securities:
Trading securities, at fair value 756,499 926,091
Securities available for sale, at fair value 702,136 168,210
Securities held to maturity, at amortized cost 762,247 1,427,361
----------- -----------
Total pledged investment securities 2,220,882 2,521,662
----------- -----------
Investment securities and other instruments not pledged:
Trading securities, at fair value 236,829 175,847
Securities available for sale, at fair value 226,043 14,164
Securities held to maturity, at amortized cost 104,088 130,952
Federal Home Loan Bank of NY (FHLB) stock, at cost 56,095 39,505
----------- -----------
Total investment securities and other instruments not pledged 623,055 360,468
----------- -----------
Total investment securities and other instruments 2,843,937 2,882,130
----------- -----------
Loans:
Mortgage loans held for sale, at lower of cost or market, net 1,947,494 1,354,605
Loans receivable, net of allowance for loan losses of $6,000 (2000 - $4,838) 644,113 398,191
----------- -----------
Total loans 2,591,607 1,752,796
----------- -----------
Receivables and mortgage servicing advances 43,725 56,951
Broker-dealer's operations receivable 274,422 43,111
Accrued interest receivable 47,039 49,733
Servicing assets, net 154,340 139,795
Premises and equipment, net 99,935 67,469
Real estate held for sale, net 8,414 6,258
Other assets 36,479 36,824
----------- -----------
Total assets $ 6,694,283 $ 5,463,386
=========== ===========
LIABILITIES
Securities sold under agreements to repurchase $ 2,573,772 $ 2,275,855
Loans payable 161,101 372,620
Deposits 1,669,909 1,303,525
Notes payable 459,543 444,746
Advances from FHLB 687,500 389,000
Broker-dealer's operations payable 245,573 43,512
Accrued expenses and other liabilities 134,765 128,418
----------- -----------
Total liabilities 5,932,163 4,957,676
----------- -----------
Commitments and contingencies (Note 23)
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value, 10,000,000 shares authorized at aggregate
liquidation preference value 124,750 124,750
Common stock, $1 par value, 200,000,000 shares authorized; 47,866,334 and 42,449,134
shares issued in 2001 and 2000, respectively; 47,810,334 and 42,393,134 shares
outstanding in 2001 and 2000, respectively 47,866 42,449
Paid-in capital 217,594 64,319
Legal surplus 8,423 5,982
Retained earnings 375,855 265,396
Accumulated other comprehensive (loss) income, net of income tax (benefit) of ($509) - (2000 - $581) (12,312) 2,870
Treasury stock at par value, 56,000 shares held (56) (56)
----------- -----------
Total stockholders' equity 762,120 505,710
----------- -----------
Total liabilities and stockholders' equity $ 6,694,283 $ 5,463,386
=========== ===========
The accompanying notes are an integral part of these financial statements.
60 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(In thousands, except per share information) 2001 2000 1999
--------- --------- --------
Interest income:
Loans $ 162,532 $ 124,184 $ 78,258
Mortgage-backed securities 96,839 78,075 58,756
Investment securities 70,940 101,852 60,235
Other interest earning assets 25,784 21,434 14,430
--------- --------- --------
Total interest income 356,095 325,545 211,679
--------- --------- --------
Interest expense:
Loans payable 14,270 34,159 24,292
Securities sold under agreements to repurchase 121,050 136,346 72,726
Deposits 70,399 62,002 35,784
Other borrowed funds 65,949 50,734 28,993
--------- --------- --------
Total interest expense 271,668 283,241 161,795
--------- --------- --------
Net interest income 84,427 42,304 49,884
Provision for loan losses 4,445 4,078 2,626
--------- --------- --------
Net interest income after provision for loan losses 79,982 38,226 47,258
--------- --------- --------
Non-interest income:
Net gain on mortgage loan sales and fees 187,221 134,339 80,184
Trading activities (19,770) (9,393) 12,914
Gain on sale of investment securities 5,315 3,360 3,068
Servicing income, net of amortization of $29,728, $14,268,
and $10,988, in 2001, 2000, and 1999, respectively 389 12,150 13,948
Commissions, fees and other income 17,977 9,861 5,809
--------- --------- --------
Total non-interest income 191,132 150,317 115,923
--------- --------- --------
Non-interest expenses:
Compensation and employee benefits 47,759 40,514 44,838
Taxes, other than payroll and income taxes 4,423 3,974 2,610
Advertising 9,379 7,911 5,875
Professional services 5,804 4,549 5,473
Communication and information systems 10,248 7,824 6,573
Occupancy and other office expenses 17,170 14,060 10,849
Depreciation and amortization 10,325 7,179 4,534
Other 7,746 6,380 5,816
--------- --------- --------
Total non-interest expenses 112,854 92,391 86,568
--------- --------- --------
Income before income taxes and cumulative effect
of change in accounting principle 158,260 96,152 76,613
Income taxes 20,338 11,496 8,687
--------- --------- --------
Income before cumulative effect of change in accounting principle 137,922 84,656 67,926
Cumulative effect of change in accounting principle, net of tax 5,929 -- --
--------- --------- --------
Net income $ 143,851 $ 84,656 $ 67,926
========= ========= ========
Net income per common share:
Basic:
Income before cumulative effect of change in accounting principle $ 2.87 $ 1.86 $ 1.55
Cumulative effect of change in accounting principle 0.13 -- --
--------- --------- --------
Net income $ 3.00 $ 1.86 $ 1.55
========= ========= ========
Diluted:
Income before cumulative effect of change in accounting principle $ 2.82 $ 1.85 $ 1.50
Cumulative effect of change in accounting principle 0.13 -- --
--------- --------- --------
Net income $ 2.95 $ 1.85 $ 1.50
========= ========= ========
Dividends per common share $ 0.475 $ 0.38 $ 0.30
========= ========= ========
The accompanying notes are an integral part of these financial statements.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 61
(DORAL LOGO)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
(In thousands) 2001 2000 1999
--------- --------- --------
PREFERRED STOCK:
Balance at beginning of year $ 124,750 $ 83,210 $ 8,460
Shares converted (8% convertible) -- (8,460) --
Shares issued (7% noncumulative monthly income) -- -- 74,750
Shares issued (8.35% noncumulative monthly income) -- 50,000 --
--------- --------- --------
Balance at end of year 124,750 124,750 83,210
--------- --------- --------
COMMON STOCK:
Balance at beginning of year 42,449 40,485 40,485
Common stock converted -- 1,934 --
Common stock issued 5,061 -- --
Common stock issued under Stock Option Plan 356 30 --
--------- --------- --------
Balance at end of year 47,866 42,449 40,485
--------- --------- --------
PAID-IN CAPITAL:
Balance at beginning of year 64,319 59,115 61,800
Shares converted -- 6,526 --
Issuance cost of preferred stock -- (1,756) (2,685)
Common stock issued 148,386 -- --
Shares issued under Stock Option Plan 4,889 434 --
--------- --------- --------
Balance at end of year 217,594 64,319 59,115
--------- --------- --------
LEGAL SURPLUS:
Balance at beginning of year 5,982 3,596 2,499
Transfer from retained earnings 2,441 2,386 1,097
--------- --------- --------
Balance at end of year 8,423 5,982 3,596
--------- --------- --------
RETAINED EARNINGS:
Balance at beginning of year 265,396 205,875 156,315
Net income 143,851 84,656 67,926
Cash dividends declared on common stock (21,543) (15,943) (12,129)
Cash dividends declared on preferred stock (9,408) (6,806) (5,140)
Transfer to legal surplus (2,441) (2,386) (1,097)
--------- --------- --------
Balance at end of year 375,855 265,396 205,875
--------- --------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES:
Balance at beginning of year 2,870 (7,243) 56
Net change in the fair value of investment securities
available for sale, net of deferred taxes (15,182) 10,113 (7,299)
--------- --------- --------
Balance at end of year (12,312) 2,870 (7,243)
--------- --------- --------
TREASURY STOCK AT PAR: (56) (56) (56)
--------- --------- --------
Total stockholders' equity $ 762,120 $ 505,710 $384,982
========= ========= ========
The accompanying notes are an integral part of these financial statements.
62 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
(In thousands) 2001 2000 1999
--------- --------- --------
NET INCOME $ 143,851 $ 84,656 $ 67,926
--------- --------- --------
Other comprehensive (loss) income, net of tax:
Unrealized net (losses) gains on securities arising during the period
(net of taxes of $2,686 - 2001, $(3,972) - 2000, and $4,958 - 1999) (8,212) 10,626 (7,756)
Amortization of unrealized loss on securities reclassified to held to maturity
(net of taxes of $(614) - 2001 and $(105) - 2000) 1,842 316 --
Reclassification adjustment for (gains) losses included in net income
(net of taxes of $(982) - 2001, $2,531 - 2000 and $(292) - 1999) (10,412) (829) 457
--------- --------- --------
Other comprehensive (loss) income before cumulative effect of change in
accounting principle (16,782) 10,113 (7,299)
Cumulative effect of change in accounting principle, net of taxes 1,600 -- --
--------- --------- --------
Other comprehensive (loss) income (15,182) 10,113 (7,299)
--------- --------- --------
Comprehensive income, net of taxes $ 128,669 $ 94,769 $ 60,627
========= ========= ========
The accompanying notes are an integral part of these financial statements.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 63
(DORAL LOGO)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands) 2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 143,851 $ 84,656 $ 67,926
----------- ----------- -----------
Adjustments to reconcile net income to net cash used in operating activities:
Cumulative effect of change in accounting principle (5,929) -- --
Depreciation and amortization 10,325 7,179 4,534
Amortization of interest-only strips 31,859 13,588 6,897
Amortization of servicing assets 29,728 14,268 10,988
Deferred tax provision 1,686 4,882 2,917
Provision for loan losses 4,445 4,078 2,626
Provision for losses on real estate held for sale 969 765 620
Origination and purchases of mortgage loans held for sale (3,663,659) (2,795,573) (2,574,959)
Principal repayments and sales of mortgage loans held for sale 2,021,071 1,599,912 1,131,161
Purchases of securities held for trading (3,799,035) (1,673,421) (1,559,411)
Principal repayments and sales of trading securities 4,892,583 2,375,956 2,651,802
Increase in interest-only strips, net (113,055) (66,947) (48,988)
Increase in servicing assets (44,273) (44,342) (48,141)
Decrease (increase) in receivables and mortgage servicing advances 13,226 (930) (23,453)
(Increase) decrease in broker-dealer's operations receivable (231,311) 115,687 (14,312)
Decrease (increase) in accrued interest receivable 2,694 (7,712) (18,451)
(Decrease) increase in payable related to short sales (4,063) 49,363 --
(Decrease) increase in interest payable (7,449) 8,137 18,875
Increase (decrease) in broker-dealer's operations payable 202,061 (110,698) 12,208
Increase (decrease) in accrued expenses and other liabilities 11,506 609 (23,235)
Increase in other assets (276) (10,312) (7,863)
----------- ----------- -----------
Total adjustments (646,897) (515,511) (476,185)
----------- ----------- -----------
Net cash used in operating activities (503,046) (430,855) (408,259)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held to maturity (666,923) (282,540) (819,499)
Principal repayments and maturities of securities held to maturity 1,119,005 144,834 73,703
Origination of loans receivable (552,329) (384,124) (150,551)
Principal repayments of loans receivable 304,616 213,847 85,400
Purchases of securities available for sale (2,941,805) (612,144) (699,455)
Proceeds from sales of securities available for sale 2,562,233 552,826 437,314
Principal repayments of securities available for sale 1,615 6,951 19,946
Purchase of FHLB stock (16,590) (17,860) (14,731)
Purchase of premises and equipment (42,170) (36,932) (22,266)
Purchase of net assets of subsidiary -- -- (4,928)
Proceeds from sales of real estate held for sale 3,577 2,838 1,848
----------- ----------- -----------
Net cash used in investing activities (228,771) (412,304) (1,093,219)
----------- ----------- -----------
(CONTINUED)
The accompanying notes are an integral part of these financial statements.
64 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands) 2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits $ 366,384 $ 293,101 $ 477,311
Increase in securities sold under agreements to repurchase 297,917 347,899 730,628
Decrease in loans payable (207,456) (30,203) (73,244)
Issuance of common stock, net 158,692 464 --
Issuance of preferred stock, net -- 48,244 72,065
Proceeds from FHLB advances 298,500 255,000 102,000
Increase (decrease) in notes payable 14,797 (16,307) 261,320
Dividends declared and paid (30,951) (22,749) (17,269)
----------- ----------- -----------
Net cash provided by financing activities 897,883 875,449 1,552,811
----------- ----------- -----------
Net increase in cash and cash equivalents 166,066 32,290 51,333
Cash and cash equivalents at beginning of year 428,319 396,029 344,696
----------- ----------- -----------
Cash and cash equivalents at the end of year $ 594,385 $ 428,319 $ 396,029
=========== =========== ===========
Cash and cash equivalents include:
Cash and due from banks $ 45,970 $ 28,999 $ 25,793
Money market investments 548,415 399,320 370,236
----------- ----------- -----------
$ 594,385 $ 428,319 $ 396,029
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Loan securitizations $ 1,049,970 $ 844,182 $ 1,306,609
=========== =========== ===========
Reclassification of securities held to maturity to trading category $ 130,000 $ -- $ --
=========== =========== ===========
Reclassification of securities available for sale to held to maturity category $ -- $ -- $ 592,200
=========== =========== ===========
Reclassification of securities held to maturity to available for sale category $ 110,000 $ -- $ --
=========== =========== ===========
Conversion of preferred stock $ -- $ 8,460 $ --
=========== =========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash used to pay interest $ 293,073 $ 275,104 $ 142,920
=========== =========== ===========
Cash used to pay income taxes $ 10,263 $ 6,069 $ 2,470
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 65
(DORAL LOGO)
Notes to Consolidated Financial Statements Years Ended December 31, 2001, 2000
and 1999
1. REPORTING ENTITY
Doral Financial Corporation ("DFC" or the "Company") is a financial holding
company (see Note 3) engaged in mortgage banking, banking, insurance agency 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 Insurance Agency, Inc., Doral Securities, Inc., Doral Money,
Inc., Doral International, Inc. and Doral Properties, Inc. ("Doral Properties").
The Company operates primarily in Puerto Rico, but it also has mortgage banking
offices in Florida and New York, and three branches of a Federally chartered
savings bank in New York.
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 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
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") mortgaged-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, origi-
nates loans for investment and provides banking services through a Puerto Rico
commercial bank and a federal savings bank in New York, and provides insurance,
and securities brokerage and investment banking services through Doral Insurance
Agency, Inc. and Doral Securities, Inc., respectively.
On December 13, 2001, the Company entered into an agreement with UBS/PaineWebber
Incorporated of Puerto Rico whereby the Company will sell the retail secu-
rities brokerage operations of Doral Securities to UBS/PaineWebber. The
transaction is expected to close during the first quarter of 2002. Doral
Securities will continue offering institutional and investment banking services.
This transaction also establishes an alliance whereby UBS/PaineWebber will lease
certain premises of the Company that would serve as sales offices for certain
securities products of UBS/PaineWebber. This transaction did not have a material
effect on the Consolidated Financial Statements of the Company as of December
31, 2001 and for the year then ended.
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.
MONEY MARKET INVESTMENTS
Money market investments consist of fixed income securities with original
maturities of less than one year. These investments are carried at cost which
approximates fair value due to their short-term nature. In the case of securi-
ties purchased under agreements to resell, it is the Company's policy to require
and take possession of collateral whose fair value exceeds the balance of the
related receivable. The securities underlying the agreements are not recorded in
the asset accounts of the Company, since the counterparties retain effective
control of such securities.
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 generally based on quoted market prices. 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. Realized and
unrealized changes in market value are recorded in the securities trading
activities 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.
66 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
In connection with securitization transactions and the sales of loans, the
Company recognizes as interest-only strips ("IOs") the rights to cash flows
remaining after the payment of the servicing fees and the contractual payments
to the buyers of the loans. The contractual payments to the buyers are generally
based on a spread over LIBOR. The contractual payments are either fixed over the
life of the loans or variable with quarterly resetting. These IOs are carried at
fair value, which is generally determined based on dealers' quotes or market
prices for sales of similar assets. The Company also evaluates the fair value of
IOs based on the present value of the estimated future excess cash flows using
management's best estimate of current prepayment speed assumptions and a
discount rate commensurate with the risk involved.
SECURITIES HELD TO MATURITY
Securities which the Company has the ability and intent to hold until their
maturity are classified as held to maturity 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, in other comprehensive income. 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. Cost of
securities sold is determined on the specific identification method.
When securities are transferred from available for sale to held to maturity, any
unrealized gain or loss at the time of transfer remains in accumulated other
comprehensive income and is amortized over the remaining term of the securities.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of net cost or fair value
computed on an aggregate portfolio basis. The amount by which cost exceeds fair
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 or securitized. The securitization of mortgage loans held
for sale is recorded as a sale of mortgage loans and the purchase of a mort-
gage-backed security, and are classified as trading, available for sale or held
to maturity.
LOANS RECEIVABLE
Loans receivable are held principally for investment purposes. These consist
mainly 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 over the term of
the loan. Loan origination fees and costs incurred in the origination of loans
held for investment are deferred and amortized using the interest method
throughout the term of the loan as a yield adjustment.
Recognition of interest on loans receivable is discontinued at the banking
subsidiaries when loans are more than 90 days in arrears. 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.
Recognition of interest on residential mortgage loans held by the Company's
mortgage banking units is discontinued when other factors indicate that the
collection of interest and principal is doubtful. 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 or when conditions indicate that the Company
will collect the principal and interest.
ALLOWANCE FOR LOAN LOSSES
An allowance for losses is provided for probable 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.
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.
Commercial loans over $1,000,000 are evaluated individually for impairment.
Loans that are measured 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.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 67
[DORAL LOGO]
BROKER-DEALER TRANSACTIONS
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.
INSURANCE AGENCY COMMISSIONS
Commissions of the Company's insurance agency operation are recorded when
earned. The Company's insurance agency earns commissions on the sale of
insurance policies issued by unaffiliated insurance companies.
SERVICING ASSETS AND SERVICING ACTIVITIES
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. The servicing rights entitle the Company to
annual servicing fees based on the outstanding principal balance of the mortgage
loans and the contractual servicing rate. The annual servicing fees generally
fluctuate between 25 and 50 basis points, net of guarantee fees. The servicing
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. The fair value of the servicing
rights is generally determined based on market prices for sales of similar
assets. Purchased servicing assets are initially recorded at their fair value,
which equals the amount paid.
The servicing assets are amortized in proportion to, and over the period of,
estimated net servicing income. Amortization is adjusted prospectively to
reflect changes in prepayment experience. Servicing assets are evaluated for
impairment. In determining impairment, servicing assets are stratified based on
their predominant risks characteristics, which have been determined to be the
types of loans (conventional, conforming and non-conforming) and interest rates.
Impairment is recognized whenever the prepayment pattern of a particular strata
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.
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, 2001, accounts receivable
include advances to investors of approximately $5,939,000 (2000 - $10,534,000).
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 cost or fair value
less estimated costs to sell.
PREMISES AND EQUIPMENT
Premises 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.
Useful lives range from three 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. If
identified, an impairment loss is recognized through a charge to earnings based
on the fair value of the property.
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.
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 for a specified period or
up to a certain percentage of the amount of loans sold. Pursuant to put
arrangements, the Company grants the buyer an option, for a specified period,
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 allocates a portion of the proceeds of the sale to such obligation. Put
options are recorded at fair value at the time of sale as a liability on the
Company's consolidated statements of financial condition, and subsequently
carried at fair value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
As part of its financing activities the Company enters into
68 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
sales of securities under agreements to repurchase the same or substantially
similar securities. The Company retains control over such securities,
accordingly, the 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. The counterparties to the contracts generally have the right to
repledge the securities received as collateral. Those securities are presented
in the consolidated statements of financial condition as pledged investment
securities.
AMORTIZATION OF DEBT ISSUANCE COSTS
Costs related to the issuance of debt are amortized to interest expense under a
method that approximates the interest method, and are included in the other
assets caption.
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 Company's
general policy to mark such instruments to market with gains or losses included
in the results of operations as part of the trading activities.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of 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.
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
maturities 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 common
shares outstanding during the period.
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 and
considers the dilutive effect of stock options using the treasury stock method.
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 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
The Company uses the intrinsic value method to account for its stock option
plan. 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. The
measurement date is generally the date when both the number of options to be
received and their exercise price is first known. Note 26 provides certain
required disclosures related to the effect of using the fair value method.
COMPREHENSIVE INCOME
Comprehensive income includes net income and other transactions, except those
with stockholders, which are recorded directly in equity. In the Company's case,
in addition to net income, other comprehensive income results exclusively 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
The Company reports financial and descriptive information about its reportable
segments (see Note 31). 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. DFC's management determined that the segregation that
best fulfills the segment definition described above is by line of business.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 69
(DORAL LOGO)
RECLASSIFICATIONS
Certain amounts reflected in the 2000 and 1999 Consolidated Financial Statements
have been reclassified to conform to the presentation for 2001. The
reclassifications made include the presentation of the servicing income net of
the amortization of servicing assets. See Note 11 for a disclosure of the
components of net servicing income presented in the consolidated statements of
income.
RECENT ACCOUNTING PRONOUNCEMENTS
Derivatives and Hedging Activities. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, on January 1, 2001. This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments that are embedded in other contracts, and for
hedging activities.
Although the Company enters into derivative transactions for hedging purposes,
it generally does not designate derivatives as hedges for accounting purposes.
At December 31, 2001, none of the Company's derivatives were designated as
hedges, and, accordingly, they are carried at fair value with changes therein
reported in earnings for the period.
Under the provisions of SFAS No. 133, the Company reclassified $110 million of
its held to maturity securities as available for sale and $130 million as
trading securities. As a result of this reclassification, the Company
recognized a gain of $1.6 million (net of tax) in other comprehensive income and
a gain of $5.9 million (net of tax) in the income statement as cumulative effect
of a change in accounting principle.
In connection with the adoption of the SFAS No. 133, the Company also recognized
in the Consolidated Financial Statements the fair value of $100 million of
interest rate swaps previously excluded, valued at a loss of $196,000. All other
derivative instruments were previously recorded at fair value and remained
classified as securities held for trading.
Business Combinations. In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 141, "Business Combinations." This pronouncement
addresses financial accounting and reporting for business combinations. SFAS
No. 141 requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001 and requires the recognition of
intangible assets apart from goodwill if they meet certain criteria.
Goodwill and Intangible Assets. In June 2001, the FASB issued SFAS No. 142,
"Goodwill and other Intangible Assets." This pronouncement addresses financial
accounting and reporting for acquired goodwill and other intangible assets. SFAS
No. 142 addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition and how
those assets should be accounted for after they have been initially recognized
in the financial statements. Under SFAS No. 142, goodwill and intangible assets
that have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. Intangible assets that have finite
useful lives will continue to be amortized over their useful lives, but without
the constraint of an arbitrary ceiling.
As of December 31, 2001, the Company had a goodwill of $9.1 million that is
presented within other assets in the consolidated statements of financial
condition. The Company's goodwill amortization for 2001 was $621,000. The
Company will adopt the SFAS No. 142 on January 1, 2002 and will discontinue the
amortization of the goodwill because its fair value exceeds its book value.
Accounting for Asset Retirement Obligations. In June 2001, the FASB issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Management believes that the adoption of
this statement will not have a material effect on the Consolidated Financial
Statements of the Company.
Accounting for the Impairment or Disposal of Long-Lived Assets. In August 2001,
the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement supersedes SFAS No. 121 and portions of APB
30 and develops an accounting model for long-lived assets that are to be
disposed of by sale. SFAS No. 144 is effective for financial statements issued
for years beginning after December 15, 2001, but earlier application is
encouraged. Management believes that the adoption of this statement will not
have a material effect on the Consolidated Financial Statements of the Company.
70 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
3. REGULATORY REQUIREMENTS
HOLDING COMPANY REQUIREMENTS
On March 11, 2000, the Company became a financial holding company subject to the
provisions of the Gramm-Leach-Bliley Act (the "Act"). Under the Act, bank
holding companies, such as DFC, all of whose subsidiary depository
institutions are "well-capitalized" and "well-managed," as defined in the Bank
Holding Company Act of 1956 (the "BHCA"), and which obtain satisfactory
Community Reinvestment Act ratings, may elect to be treated as financial
holding companies ("FHCs"). FHCs are permitted to engage in a broader spectrum
of activities than those currently permitted to bank holding companies. FHCs
can engage in any activities that are "financial" in nature, including insurance
underwriting and brokerage, and underwriting and dealing in securities without a
revenue limit or a limit on underwriting and dealing in equity securities
applicable to foreign securities affiliates (which include Puerto Rico
securities affiliates for these purposes). Subject to certain limitations, under
new merchant banking rules, FHCs will also be allowed to make investments in
companies that engage in activities that are not financial in nature without
regard to the existing 5% limit for domestic investments and 20% limit for
overseas investments (including Puerto Rico).
Under the Act, if the Company later fails to meet the requirements for being a
FHC and is unable to correct such deficiencies within certain prescribed time
periods, the Federal Reserve Board could require the Company 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.
BANKING CHARTERS
Doral Bank-PR is a commercial bank chartered under the laws of the Commonwealth
of Puerto Rico. Its deposits are insured by the FDIC through the Savings
Association Insurance Fund ("SAIF").
Doral Bank-NY is a federally chartered savings bank regulated by the Office of
Thrift Supervision. Its deposit accounts are also insured by the FDIC through
SAIF.
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 and its banking subsidiaries must meet
specific capital guidelines that involve quantitative measures of its assets,
liabilities, and certain off balance sheet items as calculated under regu-
latory accounting practices. The Company's and its banking subsidiaries' 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 and its banking subsidiaries 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, 2001, that the Company and all of its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the FDIC, dated as of
September 17, 2001, 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 substantially 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 which ends on October 31, 2002. As of December 31,
2001, Doral Bank-NY was in compliance with the capital requirements for a well
capitalized institution and the Tier 1 capital 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 $9,112,000 (2000 - $9,757,000),
$404,000 (2000 - $138,000), and $764,000 representing non-allowable assets,
such as goodwill and other intangible assets, were deducted from the capital of
DFC, Doral Bank-PR and Doral Bank-NY, respectively. There were no non-allowable
assets in Doral Bank-NY as of December 31, 2000.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 71
(DORAL LOGO)
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- --------------------- ------------------- -----------------------
AMOUNT RATIO (%) AMOUNT RATIO (%) AMOUNT RATIO (%)
-------- --------- -------- ------- -------- ---------
AS OF DECEMBER 31, 2001:
Total capital (to risk-weighted assets):
DFC Consolidated $777,792 18.4 $338,375 >8.0 N/A N/A
_
Doral Bank-PR $242,068 13.0 $138,240 >8.0 $172,800 >10.0
_ _
Doral Bank-NY $ 30,418 29.2 $ 8,347 >8.0 $ 10,434 >10.0
_ _
Tier I capital (to risk-weighted assets):
DFC Consolidated $765,320 18.1 $169,188 >4.0 N/A N/A
_
Doral Bank-PR $235,940 12.7 $ 69,120 >4.0 $103,680 >6.0
_ _
Doral Bank-NY $ 30,169 28.9 $ 4,174 >4.0 $ 6,260 >6.0
_ _
Leverage Ratio (1):
DFC Consolidated $765,320 11.6 $263,855 >4.0 N/A N/A
_
Doral Bank-PR $235,940 7.6 $121,251 >4.0 $151,564 >5.0
_ _
Doral Bank-NY $ 30,169 12.9 $ 9,327 >4.0 $ 11,659 >5.0
_ _
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- --------------------- ------------------- -----------------------
AMOUNT RATIO (%) AMOUNT RATIO (%) AMOUNT RATIO (%)
-------- -------- -------- -------- -------- ---------
AS OF DECEMBER 31, 2000:
Total capital (to risk-weighted assets):
DFC Consolidated $502,526 18.3 $219,424 >8.0 N/A N/A
_
Doral Bank-PR $157,713 14.7 $ 85,552 >8.0 106,940 >10.0
_ _
Doral Bank-NY $ 25,220 45.4 $ 4,440 >8.0 5,550 >10.0
_ _
Tier I capital (to risk-weighted assets):
DFC Consolidated $493,139 18.0 $109,712 >4.0 N/A N/A
_
Doral Bank-PR $152,664 14.3 $ 42,776 >4.0 64,164 >6.0
_ _
Doral Bank-NY $ 25,091 45.2 $ 2,220 >4.0 3,330 >6.0
_ _
Leverage Ratio (1):
DFC Consolidated $493,139 9.2 $215,458 >4.0 N/A N/A
_
Doral Bank-PR $152,664 7.5 $ 81,454 >4.0 101,817 >5.0
_ _
Doral Bank-NY $ 25,091 17.5 $ 5,750 >4.0 7,187 >5.0
_ _
(1) Tier 1 capital to average assets in the case of Doral Financial and Doral
Bank-PR, and Tier 1 capital to adjusted total assets in the case of Doral
Bank-NY.
HOUSING AND URBAN DEVELOPMENT REQUIREMENTS
The Company's mortgage operation is a U S. Department of Housing and Urban
Development approved, non-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 omissions insurance coverage, based on
the balance of its servicing portfolio. The Company is in compliance with these
regulatory requirements.
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 also 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
capital requirements.
72 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
4. MONEY MARKET INVESTMENTS
At December 31, 2001, the Company has $266.8 million on time deposits and
other short-term money markets pledged as collateral of securities sold under
agreement to repurchase.
At December 31, 2001, 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:
(In thousands) Collateral
Carrying Estimated
Type of Collateral Pledged Value Market Value
-------------------------- -------- ------------
Mortgage-backed securities $ 7,775 $ 8,687
U.S. Government securities 45,113 49,078
Other securities 1,978 1,978
------- -------
$54,866 $59,743
======= =======
These securities were held on behalf of the Company by the dealers that arranged
the transactions. At December 31, 2001, the Company has repledged approximately
$6.7 million of the underlying securities.
5. SECURITIES HELD FOR TRADING
Securities held for trading consisted of:
December 31,
(In thousands) 2001 2000
-------------- ---------- ----------
Mortgage-backed securities:
GNMA exempt $ 692,409 $ 856,781
GNMA taxable 11,440 18,953
CMO certificates 12,743 14,951
FHLMC and FNMA 24,205 47,712
Interest-only strips 236,468 157,986
P.R. Government and Agencies 4,728 1,397
Derivatives and swap
agreements 1,534 3,032
Other 9,801 1,126
---------- ----------
$ 993,328 $1,101,938
========== ==========
Net unrealized gain on trading securities included in earnings for the year
ended December 31, 2001, amounted to approximately $3,163,000. For the years
ended December 31, 2000 and 1999, earnings included net unrealized holding
gains/(losses) on trading securities of $6,981,000 and ($13,309,000),
respectively.
6. SECURITIES AVAILABLE FOR SALE
The amortized cost, unrealized gains and losses, approximate market value,
weighted average yield and contractual maturities of securities available for
sale as of December 31, 2001 and 2000 (1999 - only market value and weighted
average yield are presented) were as follows:
(Dollars in thousands) 2001
------------------------------------- ----------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market Average
Cost Gains Losses Value Yield
--------- ---------- ---------- -------- --------
MORTGAGE-BACKED SECURITIES
GNMA
Due from one to five years $ 1,712 $ 12 $ -- $ 1,724 4.50%
Due over ten years 60,069 136 1,064 59,141 6.38%
FHLMC and FNMA
Due over ten years 424,990 712 4,733 420,969 6.31%
DEBT SECURITIES
FHLB Notes
Due over ten years 45,000 675 -- 45,675 6.75%
FHLMC ZERO COUPON
Due over ten years 62,061 39 -- 62,100 7.65%
US TREASURY
Due from five to ten years 49,520 -- 145 49,375 5.00%
Due over ten years 294,040 85 4,930 289,195 5.37%
-------- ------ ------- -------- ----
$937,392 $1,659 $10,872 $928,179 6.06%
======== ====== ======= ======== ====
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 73
(DORAL LOGO)
(Dollars in thousands) 2000 1999
----------------------------------- --------------------------------------------------------------- ----------------------
Weighted Weighted
Amortized Unrealized Unrealized Market Average Market Average
Cost Gains Losses Value Yield Value Yield
--------- ---------- ---------- -------- -------- -------- --------
MORTGAGE-BACKED SECURITIES
GNMA
Due within a year $ 10,394 $ 103 $86 $ 10,411 7.29% $ -- $ --
FHLMC AND FNMA
Due within a year 66,195 1,181 -- 67,376 7.55% -- --
DEBT SECURITIES
FHLB NOTES
Due over ten years 22,981 1,081 -- 24,062 6.32% -- --
US TREASURY
Due within a year 10,565 610 -- 11,175 6.25% -- --
Due from five to ten years -- -- -- -- -- 66,325 5.50%
Due over ten years 63,826 5,524 -- 69,350 6.25% -- --
-------- ------ --- -------- ---- ------- ----
$173,961 $8,499 $86 $182,374 6.80% $66,325 5.50%
======== ====== === ======== ==== ======= ====
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 2001 were
approximately $2,562,000,000 (2000 - $552,826,000 and 1999 - $437,314,000). For
2001, gross gains of $12,083,000 (2000 - $8,672,000 and 1999 - $3,648,000) were
realized on those sales. For 2001, gross losses of $6,768,000 (2000 - $5,312,000
and 1999 - $580,000) were realized on those sales.
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.
74 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
7. SECURITIES HELD TO MATURITY
The amortized cost, unrealized gains and losses, approximate market value,
weighted average yield and contractual maturities of held to maturity securities
as of December 31, 2001 and 2000 (1999 - only amortized cost and weighted
average yield) were as follows:
(Dollars in thousands) 2001
------------------------------------------ ---------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market Average
Cost Gains Losses Value Yield
--------- ---------- ---------- -------- --------
MORTGAGE-BACKED SECURITIES
GNMA
Due from five to ten years $ 2,878 $ 52 $ -- $ 2,930 6.75%
Due over ten years 15,429 368 -- 15,797 6.99%
CMO CERTIFICATES
Due from one to five years 3,139 -- 15 3,124 6.08%
Due from five to ten years 1,836 -- 9 1,827 6.50%
Due over ten years 100,936 420 1,598 99,758 5.89%
DEBT SECURITIES
FHLB NOTES
Due from five to ten years 5,000 100 -- 5,100 7.89%
Due over ten years 336,492 10,202 -- 346,694 6.46%
FHLB ZERO COUPON
Due over ten years 320,862 -- 10,816 310,046 7.16%
P.R. HOUSING BANK
Due from five to ten years 5,000 -- -- 5,000 6.00%
Due over ten years 3,305 17 -- 3,322 6.20%
U.S. TREASURY
Due over ten years 61,088 1,084 1,764 60,408 5.36%
P.R. ECONOMIC DEVELOPMENT BANK NOTES
Due from one to five years 2,000 10 -- 2,010 6.60%
OTHER
Due from one to five years 5,025 -- -- 5,025 4.09%
Due from five to ten years 1,345 10 -- 1,355 6.68%
Due over ten years 2,000 15 -- 2,015 7.00%
-------- ------- ------- -------- ----
$866,335 $12,278 $14,202 $864,411 6.58%
======== ======= ======= ======== ====
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 75
(DORAL LOGO)
(Dollars in thousands) 2000 1999
----------------------------------- ------------------------------------------------------------ -----------------------
Weighted Weighted
Amortized Unrealized Unrealized Market Average Amortized Average
Cost Gains Losses Value Yield Cost Yield
----------- ---------- ---------- ---------- -------- ---------- ---------
MORTGAGE-BACKED SECURITIES
GNMA
Due from five to ten years $ 2,510 $ 66 $ -- $ 2,576 6.60% $ 2,295 6.50%
Due over ten years 21,239 754 -- 21,993 6.99% 24,294 6.99%
CMO CERTIFICATES
Due from one to five years 3,205 -- 15 3,190 6.12% 5,227 6.06%
Due from five to ten years 5,288 -- 26 5,262 6.23% 5,944 6.71%
Due over ten years 123,299 582 979 122,902 5.95% 127,764 5.89%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Due from one to five years 4,906 169 -- 5,075 6.22% 4,994 6.22%
Due from five to ten years 9,996 141 -- 10,137 6.41% 9,885 6.42%
FHLB NOTES
Due within a year 34,380 -- 63 34,317 6.94% -- --
Due from one to five years 26,999 49 38 27,010 7.27% 26,539 7.31%
Due from five to ten years 70,595 350 138 70,807 7.69% 72,592 7.30%
Due over ten years 591,553 5,219 5,559 591,213 6.78% 598,031 6.84%
FHLB ZERO COUPON
Due from five to ten years 196,922 -- 8,222 188,700 7.50% 182,944 7.50%
Due over ten years 158,591 20,748 45 179,294 7.85% 146,823 7.86%
P.R. HOUSING BANK NOTES
Due over ten years 3,390 -- -- 3,390 6.20% 5,000 6.20%
U.S. TREASURY
Due within a year 5,035 1,102 1,097 5,040 5.68% 1,597 5.03%
Due from five to ten years 70,031 3,819 -- 73,850 6.00% 70,061 6.00%
Due over ten years 225,029 4,024 2,314 226,739 5.51% 225,070 5.48%
P.R. ECONOMIC DEVELOPMENT
BANK NOTES
Due from one to five years 2,000 -- -- 2,000 6.60% -- --
Due from five to ten years 1,345 -- -- 1,345 6.68% -- --
Due over ten years 2,000 -- -- 2,000 7.00% -- --
---------- ------- ------- ---------- ---- ---------- ----
$1,558,313 $37,023 $18,496 $1,576,840 6.74% $1,509,060 6.71%
========== ======= ======= ========== ==== ========== ====
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.
76 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
8. MORTGAGE LOANS HELD FOR SALE
At December 31, mortgage loans held for sale consisted of the following:
(In thousands) 2001 2000
-------------- ---------- ----------
Conventional single family residential loans $1,530,601 $ 937,386
FHA/VA loans 98,207 131,169
Mortgage loans on residential multifamily 178,372 165,133
Construction and commercial real estate loans 140,169 118,257
Consumer loans secured by mortgages 145 2,660
---------- ----------
$1,947,494 $1,354,605
========== ==========
At December 31, the aggregate amortized cost and approximate market value of
these loans were as follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
-------------- ----------- ---------- ---------- -----------
2001 $1,947,494 $26,415 $9,794 $1,964,115
========== ======= ====== ==========
2000 $1,354,605 $15,513 $2,049 $1,368,069
========== ======= ====== ==========
9. LOANS RECEIVABLE
Loans receivable are related to the Company's banking and construction loan
operations and consisted of:
December 31,
----------------------------
(In thousands) 2001 2000
-------------- ---------- ----------
Construction loans $ 368,961 $ 238,393
Residential mortgage loans 63,546 74,862
Commercial real estate 72,397 38,353
Consumer-secured by real estate 870 2,107
Consumer-other 39,109 16,652
Commercial non-real estate 67,891 32,501
Loans on savings deposits 10,523 10,836
Land secured 46,602 26,935
--------- ---------
Loans receivable, gross 669,899 440,639
--------- ---------
Less:
Undisbursed portion of loans
in process (10,302) (35,134)
Unearned interest and
deferred loan fees, net (9,484) (2,476)
Allowance for loan losses (6,000) (4,838)
--------- ---------
(25,786) (42,448)
--------- ---------
Loans receivable, net $ 644,113 $ 398,191
========= =========
As of December 31, 2001, the Company had loans receivable and mortgage loans
held for sale amounting to approximately $13,509,000 (2000 - $9,152,000) 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 $1,995,000 (2000 - $911,000).
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, 2001, fixed rate loans and adjustable rate loans were
approximately $207,185,000 and $452,412,000, respectively.
The Company evaluates loans receivable for impairment. Impaired loans as of
December 31, 2001 and 2000 amounted to $2,049,000 and $1,084,000, respec-
tively. The Company determined that, given the fair value of the loans'
collateral, no impairment allowance was necessary at December 31, 2001 and 2000.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 77
(DORAL LOGO)
10. ALLOWANCES FOR LOSSES
Changes in the allowances for losses were as follows:
Year ended December 31,
----------------------------------------
(In thousands) 2001 2000 1999
-------------- -------- ------- -------
Allowance for real estate held for sale:
Balance at beginning of period $ 1,530 $ 910 $ 1,011
Provision for losses 969 765 620
Losses charged to the allowance (1,134) (145) (721)
-------- ------- -------
Balance at the end of period $ 1,365 $ 1,530 $ 910
======== ======= =======
Allowance for loan losses:
Balance at beginning of period $ 9,387 $ 6,136 $ 5,166
Provision for loan losses 4,445 4,078 2,626
Recoveries 198 288 358
Other adjustments (147) -- --
Losses charged to the allowance (1,411) (1,115) (2,014)
-------- ------- -------
Balance at the end of period $ 12,472 $ 9,387 $ 6,136
======== ======= =======
The Company allocates the allowance for loan losses between loans held for sale
and loans receivable. At December 31, 2001, approximately $6,472,000 and
$6,000,000 (2000 - $4,549,000 and $4,838,000), respectively of the total
allowance for loan losses was allocated to loans held for sale and loans
receivable, respectively.
11. SERVICING ACTIVITIES
The components of net servicing income are shown below:
Year ended December 31,
-----------------------------------------
(In thousands) 2001 2000 1999
-------------- -------- -------- --------
Servicing fees $ 23,507 $ 21,248 $ 20,227
Late charges 5,875 4,949 4,510
Other 735 221 199
-------- -------- --------
Servicing income, gross 30,117 26,418 24,936
Amortization of servicing assets (29,728) (14,268) (10,988)
-------- -------- --------
Servicing income, net $ 389 $ 12,150 $ 13,948
======== ======== ========
The changes in servicing assets are shown below:
Year ended December 31,
------------------------------------------
(In thousands) 2001 2000 1999
--------- --------- ---------
Balance at beginning of period $ 139,795 $ 109,721 $ 72,568
Capitalization of rights 44,273 44,342 48,148
Rights sold -- -- (7)
Amortization:
Scheduled (20,884) (14,268) (10,988)
Unscheduled (including impairment) (8,844) -- --
--------- --------- ---------
Balance at the end of period $ 154,340 $ 139,795 $ 109,721
========= ========= =========
78 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
The Company's servicing portfolio amounted to approximately $10.0 billion, $8.8
billion and $7.6 billion at December 31, 2001, 2000 and 1999, respectively,
including $1.4 billion, $867 million and $1.1 billion, respectively, of the
Company's loans.
During the years ended December 31, 2001, 2000 and 1999, the Company purchased
servicing rights to approximately $388.4 million, $184.3 million and $238.3
million respectively, in principal amount of mortgage loans. As of December 31,
2001, $627.8 million of the Company's servicing portfolio was internally
originated prior to April 1, 1995, for which servicing assets have not been
capitalized in the Company's financial statements.
12. SALES OF MORTGAGE LOANS
As disclosed in Note 2, the Company routinely originates, securitizes and sells
mortgage loans into the secondary market. As a result of this process, the
Company typically retains the servicing rights and may retain interest only
strips. The Company's retained interests are subject to prepayment and interest
rate risks.
In 2001, 2000, and 1999, the Company recognized pre-tax gains of $187.2 million,
$134.3 million, and $80.2 million, respectively, on the securitization and sales
of residential mortgage loans.
Values used in measuring the retained interests at the date of the sales of the
loans resulting from transactions completed during the year were as follows:
- Servicing Assets from Loan Sales - The Company measures the servicing
assets at the date of the sales based on current market rates in
similar transactions ranging from 1.50% to 2.30% per annum, depending
on the type of loan, including the recognition of retained beneficial
interest in the servicing assets and interest-only strips.
- Interest-Only Strips - The Company measures the interest-only strips at
the date of the transaction based on market values computed from the
difference in interest rate spreads multiplied by the principal amount
of loans sold by a market factor. These market factors ranged from 3.75
to 5.50 during 2001 (2000 - 4.50 to 5.50).
At December 31, 2001, fair values of the Company's retained interests were based
on prices by dealers and supported by the Company's historical sales to third
parties and internal valuation models. The key economic assumptions used by the
Company in its internal valuation models and the sensitivity of the current fair
value of residual cash flows to immediate 10 percent and 20 percent adverse
changes in those assumptions for mortgage loans at December 31, 2001 are as
follows:
Servicing Assets
(Dollars in thousands) From Loans Sold Interest-Only Strips
---------------------- ---------------- --------------------
Carrying amount/fair value of retained interests: $154,340 $236,468
Weighted-average life (in years): 7.00 7.40
PREPAYMENT SPEED ASSUMPTION (ANNUAL RATE) 14.65% 13.50%
Impact on fair value of 10% adverse change $ 6,774 $ 6,398
Impact on fair value of 20% adverse change $ 12,973 $ 12,130
RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL) 11.00% 12.00%
Impact on fair value of 10% adverse change $ 5,146 $ 8,219
Impact on fair value of 20% adverse change $ 9,923 $ 15,672
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 79
(DORAL LOGO)
The following table presents quantitative information about delinquencies, net
credit losses, and components of loans sold with recourse and/or put back
options:
Principal
Amount of Principal Amount of Loans Net Credit
(In thousands) Loans 60 days or More Past Due(1) Losses(2)
-------------- ---------- --------------------------- ----------
TYPE OF LOAN
Residential Mortgage Loans sold with recourse
agreements and/or put back options $2,082,577 $81,477 $584
---------- ------- ----
Notes: (1) Loans 60 days or more past due are based on end of period total
loans.
(2) Net credit losses are charge-offs and are based on total loans
outstanding.
Recourse sales generally involve the sale of non-conforming loans to local
financial institutions and to FNMA and FHLMC. As of December 31, 2001 and 2000,
the Company's contractual recourse obligations relating to its mortgage
servicing portfolio were approximately $1.0 billion and $770.8 million,
respectively. Recourse obligations at December 31, 2001 includes $402 million
expiring at various dates commencing in the first quarter of 2002 and ending in
December 2003. As of December 31, 2001, the Company has an allowance for
recourse provisions of $2.2 million (2000 - $1.7 million). Historical losses on
recourse obligations have not been significant.
From time to time the Company may sell loans with put options. At December 31,
the changes in the amounts of loans sold under these arrangements were as
follows:
(In thousands) 2001 2000
-------------- -------- --------
Beginning balance $ 43,524 $ 53,577
Puts expired (14,814) --
Principal repayment of underlying loans and mortgage-backed securities (10,314) (10,053)
-------- --------
Ending balance $ 18,396 $ 43,524
======== ========
These put arrangements expire between March and August of 2002. If a put option
is exercised, the Company would have to buy back these loans. At December 31,
2001 and 2000, the market value of the instruments under put options exceeded
the put option exercise price.
13. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
-------------------------
(In thousands) 2001 2000
-------------- -------- --------
Office furniture and equipment $ 34,684 $ 23,251
Leasehold improvements 25,982 13,935
Automobiles 281 268
Office building 7,976 6,387
-------- --------
68,923 43,841
Less - Accumulated depreciation
and amortization (23,540) (15,572)
-------- --------
45,383 28,269
Land 8,865 8,720
Construction in progress 45,687 30,480
-------- --------
$ 99,935 $ 67,469
======== ========
For information regarding the capitalization of costs incurred in the
construction of the Company's new headquarters, please refer to Note 32.
14. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The following summarizes significant data about securities sold under agreements
to repurchase for the years ended December 31, 2001 and 2000.
(Dollars in thousands) 2001 2000
---------------------- ---------- ----------
Carrying amount as of
December 31, $2,573,772 $2,275,855
========== ==========
Average monthly aggregate
balance outstanding $2,449,394 $2,229,536
========== ==========
Maximum balance outstanding
at any month-end $2,762,755 $2,417,870
========== ==========
Weighted average interest rate
during the year 4.94% 6.12%
========== ==========
Weighted average interest rate
at year end 4.00% 6.32%
========== ==========
80 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
The carrying and market values of securities available for sale and securities
held to maturity pledged as collateral at December 31, shown by maturity of the
repurchase agreement, were as follows:
(Dollars in thousands) 2001 2000
---------------------- -------------------------------------------- --------------------------------------------
Carrying Market Repurchase Repo Carrying Market Repurchase Repo
Value Value Liability Rate Value Value Liability Rate
---------- ---------- ---------- ---- ---------- ---------- ---------- ----
MORTGAGE-BACKED SECURITIES
GNMA
Term up to 30 days $ 25,602 $ 25,469 $ 24,708 1.94% $ -- $ -- $ -- --
Term of 30 to 90 days -- -- -- -- 10,394 10,411 10,012 6.70%
Term over 90 days 12,284 12,262 11,150 5.05% -- -- -- --
FHLMC AND FNMA
Term up to 30 days 330,873 328,784 323,401 1.89% -- -- -- --
Term over 90 days -- -- -- -- 52,467 53,212 51,355 6.60%
CMO CERTIFICATES
Term up to 30 days 65,728 64,531 42,004 2.27% 28,906 28,764 25,472 6.87%
Term of 30 to 90 days 28,315 28,099 27,525 2.64% 21,327 21,801 18,367 7.11%
Term over 90 days 15,428 15,331 14,834 2.65% 50,713 50,206 50,200 6.77%
DEBT SECURITIES
FEDERAL FARM CREDIT NOTES
Term over 90 days -- -- -- -- 11,102 11,330 9,504 5.77%
FHLB NOTES
Term up to 30 days 19,493 20,300 18,072 5.67% 12,900 12,513 12,485 6.64%
Term of 30 to 90 days 47,537 49,563 44,900 5.83% 578,777 579,982 530,737 5.79%
Term over 90 days 294,992 302,113 287,905 5.53% -- -- -- --
FHLB AND FHLMC
ZERO COUPONS
Term over 90 days 382,922 372,146 361,475 5.46% 282,657 296,500 240,649 5.94%
U.S. TREASURY SECURITIES
Term up to 30 days 134,398 132,147 133,580 4.66% 177,613 185,713 178,767 6.11%
Term of 30 to 90 days 50,000 49,078 48,621 5.90% 138,088 139,050 127,082 5.77%
Term over 90 days 83,945 80,760 81,374 5.17% -- -- -- --
---------- ---------- ---------- ---- ---------- ---------- ---------- ----
$1,491,517 $1,480,583 $1,419,549 4.33% $1,364,944 $1,389,482 $1,254,630 5.99%
========== ========== ========== ==== ========== ========== ========== ====
15. LOANS PAYABLE
At December 31, 2001 and 2000, the Company had several mortgage warehousing
lines of credit and gestation or presale facilities totaling approximately $1.5
billion and $1.9 billion, respectively. Advances under these facilities are
secured by mortgage loans.
Loans payable consisted of the following:
December 31,
----------------------
(In thousands) 2001 2000
-------------- -------- --------
Loans payable resulting from the use of warehousing lines of credit and
gestation or presale facilities due in 2002, at various variable rates
averaging 3.01% and 7.65% at December 31, 2001 and 2000, respectively, and
other financing arrangements. $115,801 $323,257
Securities sold short at 5.38% and 6.25% due in January 2002 and January 2001, respectively. 45,300 49,363
-------- --------
$161,101 $372,620
======== ========
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 81
(DORAL LOGO)
Maximum borrowings outstanding at any month-end during 2001 and 2000 were $304
million and $510 million, respectively. The approximate average outstanding
borrowings during the periods were $250 million and $447 million, respectively.
The weighted average interest rate of such borrowings, computed on a monthly
basis, was 5.70% in 2001 and 7.64% in 2000.
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, 2001, the Company was in compliance with these
requirements.
16. DEPOSIT ACCOUNTS
At December 31, deposits and their weighted average interest rates are
summarized as follows:
2001 2000
---------------------- ----------------------
(Dollars in thousands) Amount % Amount %
---------------------- ---------- ---- ---------- ----
Certificates of deposit $ 946,935 4.78 $ 880,035 6.57
Regular savings 149,252 4.30 78,745 4.75
NOW accounts 349,838 2.64 215,412 4.74
Non interest-bearing deposits 223,884 -- 129,333 --
---------- ---- ---------- ----
$1,669,909 3.65 $1,303,525 5.50
========== ==== ========== ====
At December 31, 2001 and 2000, certificates of deposit over $100,000 amounted to
approximately $639,340,000 and $534,986,000, respectively.
At December 31, 2001, the banking subsidiaries had deposits from officers,
directors, employees and principal stockholders of the Company amounting to
approximately $3,072,000 (2000 - $6,343,000).
The Company, as a servicer of loans, is required to maintain certain balances on
behalf of the borrowers called escrow funds. At December 31, 2001, escrow funds
amounted to approximately $95,084,000 (2000 - $73,670,000), of which $90,802,000
was deposited with Doral Bank-PR (2000 - $69,837,000). The remaining escrow
funds were deposited with other banks and therefore excluded from the Company's
assets and liabilities.
A summary of certificates of deposit by maturity as of December 31, 2001
follows:
(In thousands)
----------------------------------------
2002 $635,600
2003 174,172
2004 78,400
2005 23,100
2006 34,976
2007 and thereafter 687
--------
$946,935
========
At December 31, 2001, the banking subsidiaries had brokered certificates of
deposit maturing as follows:
(In thousands)
----------------------------------------
2002 $166,472
2003 151,107
2004 56,836
2005 17,576
2006 26,000
2007 and thereafter 145
--------
$418,136
========
82 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
17. NOTES PAYABLE
Notes payable consisted of the following:
December 31,
--------------------
(In thousands) 2001 2000
-------------- -------- --------
8.50% medium term notes due in July 2004, paying interest semiannually on January 8 and July 8 $200,000 $200,000
$100 million notes, net of discount, bearing interest at 7.65%, due on March 26, 2016, paying
interest monthly 97,939 --
7.84% Senior notes due on October 10, 2006, paying interest semiannually on April 10 and October 10 75,000 75,000
Senior term notes at fixed rates ranging from 8.35% to 8.55% with maturities ranging from August 2004
to August 2007, paying interest semiannually on February 28 and August 31 29,000 29,000
Bonds 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, paying interest monthly 44,765 44,765
Term-notes due in 2001, collateralized by stand-by letters of credit issued by the FHLB, paying interest
semiannually -- 35,000
Notes payable collateralized by mortgage servicing rights held by the Company at variable interest
rates ranging from 8.20% to 8.35%, due on June 22, 2001, paying interest monthly -- 38,000
Notes payable at variable interest rates (8.30% at December 31, 2000), due on December 31, 2001,
paying interest monthly -- 10,000
Notes payable to bank, collateralized by CMO certificates at variable interest rates (5.33% and 8.55%
at December 31, 2001 and 2000, respectively), due on June 30, 2002, paying interest monthly 7,951 8,886
9% Demand note collateralized by CMO certificates, paying interest monthly -- 1,000
Zero Coupon Senior Notes (effective rate of 6.50%) due on April 30, 2007 1,793 --
Notes payable at fixed rates ranging from 7.00% to 8.50%, with maturities ranging from February
2002 to August 2004, paying interest monthly 3,095 3,095
-------- --------
$459,543 $444,746
======== ========
At December 31, 2001, the scheduled aggregate annual maturities of notes payable
were approximately as follows:
(In thousands)
Year ending December 31,
------------------------
2002 $ 9,975
2003 1,601
2004 205,770
2005 8,710
2006 82,760
2007 and thereafter 150,727
--------
$459,543
========
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 83
(DORAL LOGO)
18. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the FHLB consisted of the following:
December 31,
------------------------
(In thousands) 2001 2000
-------- --------
1.850% due on January 2, 2002 $ 50,000 $ --
7.440% due on May 31, 2002 6,000 6,000
6.445% due on July 17, 2002 5,000 5,000
2.450% due on December 23, 2002 100,000 --
5.959% due on January 29, 2003 5,000 5,000
3.340% due on October 23, 2003 50,000 --
4.795% due on February 3, 2004 12,000 12,000
6.190% due on August 22, 2005 50,000 50,000
6.310% due on August 31, 2005 80,000 80,000
6.090% due on September 11, 2005 30,000 30,000
5.850% due on November 2, 2005 10,000 10,000
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 25,000
6.220% due on June 21, 2010 30,000 30,000
5.740% due on September 28, 2010 30,000 30,000
5.840% due on October 12, 2010 39,000 39,000
5.360% due on December 1, 2010 50,000 50,000
5.050% due on January 2, 2011 50,000 --
4.930% due on January 3, 2011 13,500 --
4.685% due on January 10, 2011 35,000 --
-------- --------
$687,500 $389,000
======== ========
At December 31, 2001, the Company had pledged qualified collateral, in the form
of first mortgage notes, investments and mortgage-backed securities with a
market value of $906,747,000 to secure the above advances from the FHLB.
19. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
December 31,
------------------------
(In thousands) 2001 2000
-------------- -------- --------
Amounts retained on mortgage
loans, generally paid within 5
days $ 13,423 $ 4,588
Customer mortgages and closing
expenses payable 9,869 2,968
Deferred compensation plan 1,845 1,495
Incentive compensation payable 3,445 3,171
Accrued interest payable 33,408 40,857
Accrued expenses and other
payables 57,580 59,229
Deferred tax liability 15,195 16,110
-------- --------
$134,765 $128,418
======== ========
20. INCOME TAXES
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 that are insured or guaranteed pursuant to the provisions of the National
Housing Act of June 27, 1934, as amended (referred to as "FHA loans"), or
pursuant to the provisions of the Servicemen's Readjustment Act of 1944, as
amended (referred to as "VA loans"), and that were executed after June 30, 1983,
and prior to August 1, 1997. After that date, only those 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 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
84 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
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 subsidiaries are
subject to Puerto Rico income tax on income derived from all sources. The
Company's Puerto Rico subsidiaries are 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, subject to certain conditions and limitations, is creditable
as a foreign tax credit against the Puerto Rico income tax liability.
Except for the operations of Doral Bank-NY and Doral Money, substantially all of
the Company's operations are conducted through Puerto Rico subsidiaries in
Puerto Rico; therefore, the amount of U.S. income taxes is not significant.
Doral Bank-NY and Doral Money are U.S. corporations and are subject to U.S.
income tax on their income derived from all sources.
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.
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:
(Dollars in thousands) YEAR ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------
2001 2000 1999
-------- ------- -------
Income before income taxes $158,260 $96,152 $76,613
-------- ------- -------
% OF % OF % OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-------- ------- -------- -------- -------- -------
Tax at statutory rates $ 61,721 39.0 $ 37,499 39.0 $ 29,879 39.0
Tax effect of exempt interest income,
net of disallowance (38,175) (24.1) (18,289) (19.0) (13,764) (18.0)
Tax effect of capital gains (7,845) (5.0) (8,433) (8.8) (1,072) (1.4)
Other, net 4,637 3.0 719 0.8 (6,356) (8.3)
-------- ---- -------- ---- -------- ----
Provision for income taxes $ 20,338 12.9 $ 11,496 12.0 $ 8,687 11.3
======== ==== ======== ==== ======== ====
The components of income tax expense for the years ended December 31, are
summarized below:
(In thousands) 2001 2000 1999
--------------------------- ------- ------- ------
Current income tax expense $18,652 $ 6,614 $5,770
Deferred income tax expense 1,686 4,882 2,917
------- ------- ------
Total income tax expense $20,338 $11,496 $8,687
======= ======= ======
At December 31, the components of the net deferred tax liability were:
(In thousands) 2001 2000
---------------------------------------- -------- --------
Deferred tax liabilities resulting from:
Deferred income for tax purposes $(43,942) $(31,551)
Deferred income for book purposes 3,678 1,634
-------- --------
(40,264) (29,917)
-------- --------
Deferred tax assets resulting from:
Unrealized losses on securities 27,745 12,796
Deferred expenses (642) 787
Others (2,034) 224
-------- --------
25,069 13,807
-------- --------
Net deferred tax liability $(15,195) $(16,110)
======== ========
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 85
(DORAL LOGO)
21. RELATED PARTY TRANSACTIONS
At December 31, 2001, the Company had $6,549,000 of loans outstanding to
officers, directors and principal stockholders of which $6,188,000 are secured
by mortgage loans. Furthermore, the Company had construction loans receivable
and commitments to extend credit to related parties of $25,834,000 and
$36,130,000, respectively.
The Company paid a computer service bureau, in which it holds a 33% interest,
$1,581,000, $1,404,000 and $1,319,000 for services rendered during the years
ended December 31, 2001, 2000 and 1999, respectively. At December 31, 2001 and
2000, the value of the Company's equity interest in this service bureau was not
significant.
22. 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.
These financial instruments may include commitments to extend credit and sell
mortgage-backed securities and loans. 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, 2001, commitments to extend
credit amounted to approximately $456,138,000 and commitments to sell mortgage-
backed securities and loans amounted to approximately $481,402,000. 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.
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
approximately 84% of the Company's lending activity is with customers located in
Puerto Rico and most of its loans are secured by properties located in Puerto
Rico.
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
Company under custody agreements. Collateral for securities sold under
agreements to repurchase is kept by the counterparty.
23. COMMITMENTS AND CONTINGENCIES
The Company has several noncancelable operating leases for office facilities
expiring from 2002 through 2007 and thereafter. Total minimum rental commitments
for leases in effect at December 31, 2001, are as follows:
(In thousands)
Year Amount
---------------------- -------
2002 $ 4,707
2003 3,573
2004 3,275
2005 2,912
2006 2,555
2007 and thereafter 26,870
-------
$43,892
=======
Total rental expense for the years ended December 31, 2001, 2000 and 1999,
amounted to approximately $7,200,000, $6,200,000, and $4,500,000, respectively.
The Company is subject to legal proceedings and claims that have arisen in the
ordinary course of business and have not been adjudicated. Management believes
that these actions, when finally concluded, will not have a material adverse
effect upon the financial position, results of operations or cash flows 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
86 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
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 $5.4 million), without the insurance company's approval because
the residual certificates are pledged as collateral to the insurance company.
24. RETIREMENT AND COMPENSATION PLANS
Prior to March 1, 2001 the Company maintained a non-contributory target benefit
pension plan (the "Old Plan") for its Puerto Rico based employees. Under the Old
Plan, the Company's annual contribution was the amount estimated necessary to
fund the targeted benefit. The target benefits were based on years of service
and employees' compensation, as defined in the Plan. Effective March 1, 2001,
the Old Plan was converted into a profit-sharing plan with a cash or deferred
arrangement and renamed the Doral Financial Corporation Retirement Savings and
Incentive Plan (the "New Plan"). The New Plan is available to all employees of
Doral Financial who have attained age 18. Participants in the New Plan will have
the option of making pre-tax or after-tax contributions. The Company will make a
matching contribution with its common stock equal to $0.50 for every dollar of
pre-tax contribution made by participants to the New Plan up to 5% of the
participant's basic compensation, as defined. The Company will also be able to
make fully discretionary profit-sharing contributions to the New Plan. All other
savings plans maintained by the Company's Puerto Rico affiliates will be merged
into the New Plan. Effective March 1 2001 the company amended and restated its
401K plan for U.S. based employees to conform it with the benefits available
under the new plan. The Company's expense related to the retirement plans during
the years ended December 31, 2001, 2000 and 1999, amounted to approximately
$956,000, $1,860,000, and $1,090,000, 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, 2001, 2000, and 1999,
amounted to approximately $453,000, $350,000 and $200,000, 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, 2001, 2000, and 1999, amounted to approximately $3,684,000,
$3,436,000 and $6,844,000, respectively.
25. CAPITAL STOCK AND PAID-IN CAPITAL
On August 1, 2001, the Company issued 5,060,000 shares of common stock at a
price of $32.00 per share. The net proceeds to the Company amounted to $153.4
million.
On August 31, 2000, the Company issued 2,000,000 shares of its 8.35%
Non-Cumulative Monthly Income Preferred Stock, Series B (the "8.35% Preferred
Stock") at a price of $25 per share, its liquidation preference. As of December
31, 2001, there were 2,000,000 shares issued and outstanding. The 8.35%
Preferred Stock may be redeemed at the option of the Company beginning on
September 30, 2005, at varying redemption prices that start at $25.50 per share.
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, its liquidation preference. As of December
31, 2001, there were 1,495,000 shares issued and outstanding. 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.
The 8.35% Preferred Stock and the 7% Preferred Stock (the "Preferred Stocks")
are not convertible into shares of common stock or any other equity securities
and have equal rank as to the payment of dividends and rights on liquidation.
The holders of the Preferred Stocks are entitled to receive non-cumulative cash
dividends on their liquidation preference when declared by the Board of
Directors at the annual rate established for each series, payable monthly. The
terms of the Preferred Stocks prohibit the Company from declaring or paying any
dividends on the common stock (1) unless all accrued and unpaid dividends on
the Preferred Stocks for the preceding 12 dividend periods have been paid and
the full dividend on the Preferred Stocks for the current monthly dividend peri-
od is contemporaneously declared and paid or set aside for payment or (2) if the
Company has defaulted in the payment of the redemption price of any shares of
the Preferred Stocks called for redemption. The terms of the Preferred Stocks
provide that if the Company is unable to pay in full dividends on a series of
Preferred Stock, all dividends will be distributed pro rata among the
outstanding series of Preferred Stock.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 87
(DORAL LOGO)
On March 31, 2000, all of the 8,460 shares of the Company's 8% Convertible
Preferred Stock (liquidation preference $1,000 per share) were converted into
1,933,714 shares of common stock at a conversion price of $4.375.
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 its 7.84% 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 dividend ratios,
and certain other financial ratios.
As discussed in Note 3, present banking 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 financial holding
companies should generally pay dividends only out of current operating earnings.
26. 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, as amended in 2001, allows for the granting of up to 3,000,000 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 2000 and 1999 the Company granted stock options 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 activity of stock options during 2001, 2000 and 1999 is set forth below:
2001 2000 1999
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Beginning of year 1,482,900 $12.29 1,346,300 $12.48 444,200 $15.22
Options granted -- -- 195,000 11.90 930,000 11.25
Options exercised (356,200) 14.68 (30,500) 15.22 -- --
Options forfeited (600) 15.22 (27,900) 15.22 (27,900) 15.22
--------- ------ --------- ------ --------- ------
End of year 1,126,100 $11.54 1,482,900 $12.29 1,346,300 $12.48
========= ====== ========= ====== ========= ======
88 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
The following table summarizes the weighted average exercise price and the
weighted average remaining contractual life of the options outstanding at
December 31, 2001.
WEIGHTED AVERAGE
WEIGHTED AVERAGE OUTSTANDING REMAINING CONTRACT
EXERCISE PRICE OPTIONS LIFE (YEARS)
---------------- ----------- ------------------
$15.22 57,850 6.25
====== ======= ====
$11.25 933,000 8.00
====== ======= ====
$11.94 135,250 8.25
====== ======= ====
As described in Note 2, the Company uses the intrinsic value-based method to
account for stock options. Had the Company implemented the fair value method
described in SFAS No. 123, it would have recognized compensation expense over
the options' expected life, 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:
(In thousands, except per share information) 2001 2000 1999
-------------------------------------------- -------- ------- -------
Compensation and Benefits:
Reported $ 47,759 $40,514 $44,838
Pro forma $ 49,975 $43,450 $45,578
Net Income:
Reported $143,851 $84,656 $67,926
Pro forma $141,635 $81,720 $67,200
Basic Earnings Per Share:
Reported $ 3.00 $ 1.86 $ 1.55
Pro forma $ 2.95 $ 1.79 $ 1.54
Diluted Earnings Per Share:
Reported $ 2.95 $ 1.85 $ 1.50
Pro forma $ 2.91 $ 1.78 $ 1.48
The fair value of the options granted was estimated using the Black-Scholes
option pricing model with the following assumptions:
2000 1999
------ ------
Stock Price and Exercise Price $11.90 $11.25
Stock Option Estimated Fair Value $ 3.70 $ 3.50
Expected Stock Option Term (years) 4 4
Expected Volatility 40% 37%
Expected Dividend Yield 3.20% 2.67%
Risk-Free Interest Rate 6.28% 6.35%
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 89
(DORAL LOGO)
27. SUPPLEMENTAL INCOME STATEMENT INFORMATION
Employee costs and other expenses are shown in the Consolidated Statements of
Income net of direct loan origination costs.
Set forth below is a reconciliation of the application of SFAS No. 91 to
employee costs and other expenses:
YEAR ENDED DECEMBER 31,
---------------------------------------
(In thousands) 2001 2000 1999
------- ------- -------
Employee costs, gross $76,016 $63,960 $68,566
Deferred costs pursuant to SFAS No. 91 28,257 23,446 23,728
------- ------- -------
Employee cost, net $47,759 $40,514 $44,838
======= ======= =======
Other expenses, gross $15,254 $13,595 $11,728
Deferred costs pursuant to SFAS No. 91 7,508 7,215 5,912
------- ------- -------
Other expenses, net $ 7,746 $ 6,380 $ 5,816
======= ======= =======
28. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
INCOME SHARES PER SHARE
(In thousands, except share data) (NUMERATOR) (DENOMINATOR) AMOUNT
----------------------------------------------------------------- ----------- ------------- ---------
AS OF DECEMBER 31, 2001:
Income before cumulative effect of change in accounting principle $137,922
Less: Non-convertible preferred stock dividend (9,408)
--------
Basic EPS
Income available to common shareholders 128,514 44,794,192 $2.87
-------- ---------- =====
Effect of dilutive securities
Incremental Shares - Options 708,747
----------
Diluted EPS
Income available to common shareholders $128,514 45,502,939 $2.82
======== ========== =====
AS OF DECEMBER 31, 2000:
Net Income $84,656
Less: Convertible preferred stock dividend (169)
Less: Non-convertible preferred stock dividend (6,637)
--------
Basic EPS
Income available to common shareholders 77,850 41,887,708 $1.86
-------- ---------- =====
Effect of dilutive securities
Incremental Shares - Options 205,801
----------
Diluted EPS
Income available to common shareholders $ 77,850 42,093,509 $1.85
======== ========== =====
90 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
INCOME SHARES PER SHARE
(In thousands, except share data) (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------------------------------- ----------- ------------- ---------
AS OF DECEMBER 31, 1999:
Net Income $67,926
Less: Convertible preferred stock dividend (677)
Less: Non-convertible preferred stock dividend (4,463)
-------
Basic EPS
Income available to common shareholders 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
======= ========== =====
In 2001 and 1999, all stock options outstanding during the year have been
included in the computation of outstanding shares. In 2000, 357,900 stock
options were not included in the computation because they were antidilutive.
29. 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, 2001 and 2000. The fair value of finan-
cial instruments is 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
costs.
2001 2000
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE
------------------------------------------------- ---------- ---------- ---------- -----------
Financial assets:
Cash and due from banks $ 45,970 $ 45,970 $ 28,999 $ 28,999
Money market investments 548,415 548,415 399,320 399,320
Securities held for trading 993,328 993,328 1,101,938 1,101,938
Securities available for sale 928,179 928,179 182,374 182,374
Securities held to maturity 866,335 864,411 1,558,313 1,576,840
Mortgage loans held for sale 1,947,494 1,964,115 1,354,605 1,368,069
Loans receivable 644,113 645,216 398,191 400,199
Servicing assets 154,340 171,858 139,795 159,535
Financial liabilities:
Securities sold under agreements to repurchase $2,573,772 $2,575,070 $2,275,855 $ 2,272,177
Loans payable 161,101 161,101 372,620 372,620
Deposits 1,669,909 1,682,945 1,303,525 1,306,361
Notes payable 459,543 462,440 444,746 458,169
Advances from FHLB 687,500 685,921 389,000 387,592
Off balance sheet financial instruments-
Interest rate swap agreements (1) $ -- $ -- $ -- $ (196)
(1) As disclosed in Note 2, with the adoption of SFAS No. 133 on January 1,
2001, the Company recognized the fair value of the swaps in the financial
statements.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 91
(DORAL LOGO)
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 esti-
mated future cash flows and assumed discount rates reflecting varying degrees of
risk.
Derivatives: The fair value of derivative financial instruments 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.
Loans receivable: valued on the basis of estimated future principal and interest
cash flows, discounted at rates commensurate with the loan characteristics. 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. In certain circumstances, quot-
ed 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 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. The
fair value of servicing assets as of December 31, 2001 and 2000 includes the
portion of the Company's mortgage servicing portfolio consisting of loans
internally originated by Doral Financial prior to the adoption of SFAS No. 122
on April 1, 1995 amounting to approximately $627.8 million and $1.4 billion,
respectively, for which a servicing asset has not been recognized in the
financial statements.
Deposits: 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.
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 rates 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 assets 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 and interest rate
swaps.
The following table summarizes the activity in derivative transactions, other
than interest rate swaps, for the year:
92 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
(In thousands) NOTIONAL AMOUNT FAIR VALUE
------------------------------ --------------------------- --------------------------------------------- --------
AT DECEMBER 31 AT DECEMBER 31 AVERAGE NET
FOR THE PERIOD GAINS
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES (LOSSES)
----------- ----------- ------- ----------- ------- ----------- --------
2001
Options on Futures $ 1,750,000 $ 1,030,000 $10,518 $ 8,085 $ 6,009 $ 4,676 $ 8,032
Options on Eurodollars 30,470,000 27,366,000 19,405 19,382 6,654 5,599 2,672
Forward Contracts -- -- -- -- -- -- 4,095
Options on Bonds and
Mortgage-Backed Securities 935,000 100,000 5,746 1,898 3,416 3,257 (3,757)
Futures on U.S. Treasury bonds
and notes 69,000 -- 253 24 62 1,426 (18,195)
Futures on Eurodollars -- 334,000 -- 1,795 -- 1,844 (260)
----------- ----------- ------- ------- ------- -------- ---------
$33,224,000 $28,830,000 $35,922 $31,184 $16,141 $ 16,802 $ (7,413)
=========== =========== ======= ======= ======= ======== =========
2000
Options on Futures $ 3,119,500 $ 1,899,700 $ 4,808 $ 4,300 $ 3,555 $ 2,588 $ (5,043)
Options on Eurodollars 10,100,000 225,000 1,397 305 2,038 1,292 1,591
Forward Contracts -- -- -- -- -- -- 309
Options on Bonds and
Mortgage-Backed Securities 535,000 450,000 4,740 1,526 1,835 2,442 3,237
Futures on U.S. Treasury bonds 9,700 425,000 277 2,059 56 498 (8,148)
and notes
----------- ----------- ------- ------- ------- -------- ---------
$13,764,200 $ 2,999,700 $11,222 $ 8,190 $ 7,484 $ 6,820 $ (8,054)
=========== =========== ======= ======= ======= ======== =========
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 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, derivatives 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 counterparty 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. 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. Non-performance by the counterparty will expose Doral
Bank-PR to interest rate risk. At December 31, 2001, Doral Bank-PR had two
interest rate swaps agreements with notional amounts of $50 million each,
designated to protect Doral Bank-PR from the repricing of its short-term
liabilities. These agreements end on November 5, 2002, and January 16, 2003,
respectively. The interest rate to be received on the swap agreements is 100% of
the three-months LIBOR rate (2.46% and 2.21% at December 31, 2001, and 6.75% and
6.80% at December 31, 2000) and the fixed interest rate to be paid is 6.13% and
5.50%, respectively. At December 31, 2001, the agreements had a negative fair
value of $3.2 million that has been recorded in the Consolidated Statements of
Financial Condition.
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 93
(DORAL LOGO)
31. SEGMENT INFORMATION
The Company has four reportable segments identified by line of business:
mortgage banking, banking (including thrift operations), broker-dealer
operations and insurance sales activities which commenced during December, 2000.
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 (loss), non-interest
income, net income and identifiable assets for the Company's reportable
segments.
(In thousands) 2001 2000 1999
---------- ---------- ----------
NET INTEREST INCOME (LOSS)
Reportable segments:
Mortgage banking $ 23,853 $ (7,740) $ 17,536
Banking 60,391 47,133 29,110
Broker-dealer 2,486 2,164 2,366
Insurance 572 -- --
Consolidating eliminations (2,875) 747 872
---------- ---------- ----------
Consolidated net interest income $ 84,427 $ 42,304 $ 49,884
========== ========== ==========
NON-INTEREST INCOME
Reportable segments:
Mortgage banking $ 145,164 $ 142,715 $ 101,866
Banking 36,788 16,230 9,220
Broker-dealer 8,859 7,038 6,838
Insurance 4,057 144 --
Consolidating eliminations (3,736) (15,810) (2,001)
---------- ---------- ----------
Consolidated non-interest income $ 191,132 $ 150,317 $ 115,923
========== ========== ==========
NET INCOME
Reportable segments:
Mortgage banking $ 96,744 $ 72,565 $ 52,009
Banking 49,332 26,889 15,737
Broker-dealer 2,073 226 1,307
Insurance 2,287 39 --
Consolidating eliminations (6,585) (15,063) (1,127)
---------- ---------- ----------
Consolidated net income $ 143,851 $ 84,656 $ 67,926
========== ========== ==========
IDENTIFIABLE ASSETS
Reportable segments:
Mortgage banking $2,775,039 $2,708,152 $2,464,389
Banking 3,715,588 2,719,551 1,935,572
Broker-dealer 584,933 713,617 825,099
Insurance 28,875 158 --
Consolidating eliminations (410,152) (678,092) (687,717)
---------- ---------- ----------
Consolidated total identifiable assets $6,694,283 $5,463,386 $4,537,343
========== ========== ==========
94 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
32. 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 in the first quarter of 2002. The following
condensed financial information presents the financial position of Doral
Properties, Inc., as of December 31, 2001 and 2000, and the statements of
changes in stockholder's equity and cash flows for the year ended December 31,
2001 and 2000. All costs being 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, 2001, premises under construction includes approximately $4.9
million of capitalized interest costs. The financial statements of Doral
Properties, Inc., as of December 31, 2001 and 2000 were as follows:
DORAL PROPERTIES, INC.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
(In thousands) 2001 2000
------- -------
ASSETS:
Cash $ 669 $ 409
Investment contract 4,280 19,215
Unamortized debt issue cost 2,046 2,046
Other assets 4 15
Premises under construction 42,701 26,240
------- -------
Total assets $49,700 $47,925
======= =======
LIABILITIES:
Construction retainage payable $ 1,769 $ 1,675
Accounts payable, principally to affiliates 1,696 15
Bonds payable 44,765 44,765
------- -------
Total liabilities 48,230 46,455
------- -------
STOCKHOLDER'S EQUITY:
Common stock and paid-in capital 1,470 1,470
------- -------
Total liabilities and stockholder's equity $49,700 $47,925
======= =======
DORAL PROPERTIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
DECEMBER 31,
---------------------
(In thousands) 2001 2000
----------------------------------------- ------ ------
Common stock and paid-in capital:
Balance at beginning of year $1,470 $ 500
Capital contribution -- 970
------ ------
Total stockholder's equity at end of year $1,470 $1,470
====== ======
DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT 95
(DORAL LOGO)
DORAL PROPERTIES, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31,
--------------------------
(In thousands) 2001 2000
-------- --------
Cash flows from operating activities:
Net income $ -- $ --
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in other assets 11 121
Increase in debt issue cost -- (3)
Increase in accounts payable, principally to affiliates 1,775 439
-------- --------
Net cash provided by operating activities 1,786 557
-------- --------
Cash flows from investing activities:
Additions to premises under construction (16,461) (12,428)
Decrease in investment contract 14,935 11,283
-------- --------
Net cash used in investing activities (1,526) (1,145)
-------- --------
Cash flows from financing activities:
Capital contribution -- 970
-------- --------
Net increase in cash 260 382
Cash and cash equivalents at the beginning of year 409 27
-------- --------
Cash and cash equivalents at the end of year $ 669 $ 409
======== ========
96 DORAL FINANCIAL CORPORATION 2001 ANNUAL REPORT
CORPORATE DIRECTORY
COMPANY HEADQUARTERS
Doral Financial Plaza
1451 FD Roosevelt Avenue
San Juan, Puerto Rico 00920-2717
INVESTOR INQUIRIES
General inquiries from
stockholders and the investment
community may be directed to:
Richard F. Bonini
Senior Executive Vice President,
Investor Relations
Telephone: (212) 329-3729
Doral Financial Corporation
387 Park Avenue South
New York, New York 10016
or,
Mario Samuel Levis
Executive Vice President and
Treasurer
Telephone: (787) 749-7108
Doral Financial Corporation
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Visit us online at
www.doralfinancial.com
TRANSFER AGENT AND
REGISTRAR
Telephone: 1-800-851-9677
(201) 329-8660
Mellon Investor Services, LLC
85 Challenger Road
Ridgefield Park, NJ 07660
www.melloninvestor.com
INDEPENDENT PUBLIC
ACCOUNTANTS
PricewaterhouseCoopers LLP
BBVA Tower
P.O. Box 363566
San Juan, Puerto Rico 00936-3566
SPECIAL COUNSEL
Pietrantoni Mendez & Alvarez LLP
Banco Popular Center,
Suite 1901
209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
STOCK LISTING
Common: NASDAQ
(National Association of
Securities Dealers)
National Market System
Stock Symbol: DORL
7.00% Preferred: NASDAQ
National Market System
Stock Symbol: DORLP
8.35% Preferred: NASDAQ
National Market System
Stock Symbol: DORLO
Annual Report
Creative Director & Editorial
Lucienne Gigante
Design
Estela Morales Amaral
Photography
Jim Allen
Hector O. Torres
Angel Luis Garcia
Travel and Sports((R),)Inc. (travelandsports.com)
Printing
Bowne
Writing
Robert P. Schoene (787) 789-8964
Production, Editing and Coordination
Publishing Resources, Inc. (787) 791-5382
EXHIBIT 21
LIST OF DORAL FINANCIAL CORPORATION
SUBSIDIARIES
Jurisdiction of
Name of Subsidiary Incorporation
------------------ ---------------
Doral Mortgage Corporation Puerto Rico
Doral Securities, Inc. Puerto Rico
Doral Bank Puerto Rico
Centro Hipotecario de Puerto Rico, Inc. Puerto Rico
Doral Money, Inc. Delaware
SANA Investment Mortgage Bankers, Inc. Puerto Rico
Doral Bank, FSB USA
Doral International, Inc. Puerto Rico
Doral Insurance Agency, Inc. Puerto Rico
Doral Properties, Inc. Puerto Rico
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 15, 2002 relating to the financial statements, which
appears on page 59 of the 2001 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, 2001.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
March 22, 2002
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. 333-72740) of Doral Financial Corporation of our
report dated February 15, 2002 relating to the financial statements, which
appears on page 59 of the 2001 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, 2001.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
San Juan, Puerto Rico
March 22, 2002