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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
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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.
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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
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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.
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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