UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 001-31579
Doral Financial
Corporation
(Exact name of registrant as
specified in its charter)
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Puerto Rico
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66-0312162
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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1451 Franklin D. Roosevelt Avenue
San Juan, Puerto Rico
(Address of principal
executive offices)
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00920-2717
(Zip
Code)
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Registrants telephone number, including area code:
(787) 474-6700
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value.
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
Title of Each Class
7.00% Noncumulative Monthly Income Preferred Stock,
Series A
8.35% Noncumulative Monthly Income Preferred Stock,
Series B
7.25% Noncumulative Monthly Income Preferred Stock,
Series C
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the Registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405) is not contained herein, and will not be
contained, to the best of registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by nonaffiliates computed by reference to the
price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of the last
business day of the registrants most recently completed
second fiscal quarter.
$45,980,797, approximately, based on the last sale price of
$2.44 per share on the New York Stock Exchange on June 30,
2010 (the last business day of the registrants most
recently completed second fiscal quarter). 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
registrants classes of common stock, as of the latest
practicable date: 127,293,756 shares as of
March 4, 2011.
Documents
Incorporated by Reference:
Part III incorporates certain information by reference to
the Proxy Statement for the 2011 Annual Meeting of Shareholders
DORAL
FINANCIAL CORPORATION
2010
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
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FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of, and
subject to the protections of, the Private Securities Litigation
Reform Act of 1995. In addition, Doral Financial may make
forward-looking statements in its press releases, other filings
with the Securities and Exchange Commission (SEC) 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 may relate to the
Companys financial condition, results of operations,
plans, objectives, future performance and business, including,
but not limited to, statements with respect to the adequacy of
the allowance for loan and lease losses, market risk and the
impact of interest rate changes, capital markets conditions,
capital adequacy and liquidity, and the effect of legal
proceedings, regulatory matters and new accounting standards on
the Companys financial condition and results of
operations. Forward-looking statements can be identified by the
fact that they do not relate strictly to historical or current
facts, but instead represent Doral Financials current
expectations regarding future events. Such statements may be
generally 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, believe,
expect, predict, forecast,
anticipate, target, goal,
may or words of similar meaning or similar
expressions.
Doral Financial cautions readers not to place undue reliance on
any of these forward-looking statements since they speak only as
of the date made and represent Doral Financials current
expectations of future conditions or results and are not
guarantees of future performance. The Company does not undertake
and specifically disclaims any obligations to update any
forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of those
statements.
Forward-looking statements are, by their nature, subject to
risks and uncertainties and changes in circumstances, many of
which are beyond Doral Financials control. While there is
no assurance that any list of risks and uncertainties or risk
factors is complete, below are certain important factors that
could cause actual results to differ materially from those
contained in any forward-looking statement:
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the continued recessionary conditions in Puerto Rico and any
deterioration in the performance of the United States economy
and capital markets leading to, among other things, (i) a
deterioration in the credit quality of our loans and other
assets, (ii) decreased demand for our products and services
and lower revenue and earnings, (iii) reduction in our
interest margins, and (iv) decreased availability and
increasing pricing of our funding sources, including brokered
certificates of deposits;
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the weakness of the Puerto Rico and United States real estate
markets and of the Puerto Rico and United States consumer and
commercial credit sectors and its impact on the credit quality
of our loans and other assets which have contributed and may
continue to contribute to, among other things, an increase in
our non-performing loans, charge-offs and loan loss provisions;
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a decline in the market value and estimated cash flows of our
mortgage-backed securities and other assets may result in the
recognition of
other-than-temporary
impairment (OTTI) of such assets under generally
accepted accounting principles in the United States of America
(GAAP);
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our ability to derive sufficient income to realize the benefit
of our deferred tax assets;
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uncertainty about the legislative and other measures adopted by
the Puerto Rico government in response to its fiscal situation
and the impact of such measures on several sectors of the Puerto
Rico economy;
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uncertainty about the recently enacted changes to the Puerto
Rico internal revenue code and other related tax provisions and
the impact of such measures on several sectors of the Puerto
Rico economy;
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uncertainty about the effectiveness of the various actions
undertaken to stimulate the United States economy and stabilize
the United States financial markets, and the impact of such
actions on our business, financial condition and results of
operations;
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uncertainty about the outcome of regular annual safety and
soundness and compliance examinations by our primary regulators
which may contribute to, among other things, an increase in
charge-offs, loan loss provisions, and compliance costs;
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changes in interest rates, which may result from changes in the
fiscal and monetary policy of the federal government, and the
potential impact of such changes in interest rates on our net
interest income and the value of our loans and investments;
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the commercial soundness of our various counterparties of
financing and other securities transactions, which could lead to
possible losses when the collateral held by us to secure the
obligations of the counterparty is not sufficient or to possible
delays or losses in recovering any excess collateral belonging
to us held by the counterparty;
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higher credit losses because of federal or state legislation or
regulatory action that either (i) reduces the amount that
our borrowers are required to pay us, or (ii) limits our
ability to foreclose on properties or collateral or makes
foreclosures less economically feasible;
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developments in the regulatory and legal environment for public
companies and financial services companies in the United States
(including Puerto Rico) as a result of, among other things, the
adoption in July 2010 of the Dodd-Frank Wall Street and Consumer
Protection Act and the regulations adopted and to be adopted
thereunder by various federal and state securities and banking
agencies, and the impact of such developments on our businesses,
business practices, capital requirements and costs of operations;
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the exposure of Doral Financial, as originator of residential
mortgage loans, sponsor of residential mortgage loan
securitization transactions, or servicer of such loans or such
transactions, or in other capacities, to government sponsored
enterprises (GSEs), investors, mortgage insurers or
other third parties as a result of representations and
warranties made in connection with the transfer or
securitization of such loans;
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the risk or possible failure or circumvention of controls and
procedures, and the risk that our risk management policies may
be inadequate;
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the risk that the FDIC may further increase deposit insurance
premiums
and/or
require special assessments to replenish its insurance fund,
causing an additional increase in the Companys
non-interest expense;
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changes in our accounting policies or in accounting standards,
and changes in how accounting standards are interpreted or
applied;
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general competitive factors and industry consolidation;
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the strategies adopted by the FDIC and the three acquiring banks
in connection with the resolution of the residential,
construction and commercial real estate loans acquired in
connection with the three Puerto Rico banks that failed in April
2010, which may adversely affect real estate values in Puerto
Rico;
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to the extent we make any acquisitions, including FDIC-assisted
acquisitions of assets and liabilities of failed banks, risks
and difficulties relating to combining the acquired operations
with our existing operations;
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potential adverse outcome in the legal or regulatory actions or
proceedings described in Part I, Item 3 Legal
Proceedings in this Annual Report on
Form 10-K; and
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the other risks and uncertainties detailed in Part I,
Item 1.A Risk Factors in this Annual Report on
Form 10-K.
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2
PART I
GENERAL
Overview
Doral Financial Corporation (Doral Financial or the
Company) was organized in 1972 under the laws of the
Commonwealth of Puerto Rico and operates as a bank holding
company. Doral Financials principal operations are
conducted in Puerto Rico, with growing operations in the United
States, specifically in the New York City metropolitan area and
in northwest Florida. Doral Financials principal executive
offices are located at 1451 F.D. Roosevelt Avenue,
San Juan, Puerto Rico
00920-2717,
and its telephone number is
(787) 474-6700.
Doral Financial manages its business through three operating
segments that are organized by legal entity and aggregated by
line of business: banking (including thrift operations),
mortgage banking and insurance agency. In the past, the Company
operated a fourth operating segment: institutional securities.
For additional information regarding the Companys segments
please refer to Operating Segments under
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and to Note 41 of the accompanying Consolidated
Financial Statements.
Banking. Through its principal banking
subsidiary, Doral Bank, a Puerto Rico commercial bank
(Doral Bank PR), Doral Financial accepts deposits
from the general public and institutions, obtains borrowings,
originates and invests in loans (primarily residential real
estate mortgage loans), invests in mortgage-backed securities as
well as in other investment securities, and offers traditional
banking services. Approximately 88% of Doral Bank PRs loan
portfolio is secured by real estate. Doral Bank PR operates 34
branch offices in Puerto Rico. Mortgage loans are originated
through the Companys mortgage banking entity, Doral
Mortgage, LLC (Doral Mortgage), which is a
subsidiary of Doral Bank PR and is primarily engaged in the
origination of mortgage loans on behalf of Doral Bank PR. Loan
origination activities are conducted through the branch office
network and centralized loan departments. Internal mortgage loan
originations are also supplemented by wholesale loan purchases
from third parties. As of December 31, 2010, Doral Bank PR
had total assets and total deposits of $7.7 billion and
$4.5 billion, respectively, including Doral Mortgage, which
is part of the mortgage banking segment.
This segment also includes the operations conducted through
Doral Bank PRs subsidiaries, Doral Money, Inc.
(Doral Money), which engages in commercial and
construction lending in the New York City metropolitan area, and
CB, LLC, a Puerto Rico limited liability company organized in
connection with the receipt, in lieu of foreclosure, of real
property securing an interim construction loan. During the third
quarter of 2009, Doral Money started a middle market syndicated
lending unit that is engaged in purchasing participations in
senior credit facilities in the U.S. syndicated leverage
loan market.
On July 8, 2010, the Company entered into a collateralized
loan obligation (CLO) arrangement with a third party
in which up to $450.0 million of largely U.S. mainland
based commercial loans are pledged to collateralize AAA rated
debt of $250.0 million paying three month LIBOR plus
1.85 percent issued by Doral CLO I, Ltd. Doral
CLO I, Ltd. is a variable interest entity created to hold
the commercial loans and issue the previously noted debt and
$200.0 million of subordinated notes to the Company whereby
the Company receives any excess proceeds after the payment of
the senior debt interest and other fees and charges specified in
the indenture agreement. The Company also serves as collateral
manager of the assets of Doral CLO I, Ltd. The Company has
concluded that it is the primary beneficiary of the CLO, and
consolidates Doral CLO I, Ltd., as a subsidiary of Doral
Bank PR.
On July 1, 2008, Doral International, Inc., which was a
subsidiary of Doral Bank PR licensed as an international banking
entity under the International Banking Center Regulatory Act of
Puerto Rico (the IBC Act), was merged with and into
Doral Bank PR in a transaction structured as a tax-free
reorganization. On December 16, 2008, Doral Investment
International LLC (Doral Investment) was organized
to become a new subsidiary of Doral Bank PR under the IBC Act,
but is not operational.
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Doral Financial also operates a federal savings bank in New York
and since 2010 in northwest Florida, under the name of Doral
Bank, FSB (Doral Bank US). Doral Bank US gathers
deposits and originates and invests in loans, consisting
primarily of interim loans secured by multifamily apartment
buildings and other commercial properties, and also invests in
investment securities. During 2010, deposits were gathered
primarily through an internet-based platform and during the
second half of 2010, Doral Bank US started to expand its
operations by opening new branches in the New York metropolitan
area and in Florida. As of December 31, 2010, Doral Bank US
had total assets and total deposits of $219.7 million and
$194.5 million, respectively.
Mortgage Banking. Prior to 2007, Doral
Financial and various of its subsidiaries were engaged in
mortgage originations, securitization, servicing and related
activities. As part of its business transformation effort, Doral
Financial transferred its mortgage origination and servicing
platforms, subject to certain exclusions, to Doral Bank PR
(including its wholly-owned subsidiary, Doral Mortgage). The
Companys mortgage origination business is conducted by
Doral Mortgage, and the Companys mortgage servicing
business is operated by Doral Bank PR. Substantially all new
loan origination and investment activities at the holding
company level were terminated.
Insurance Agency. Doral Financial through its
wholly-owned subsidiary, Doral Insurance Agency, Inc.
(Doral Insurance Agency), offers property, casualty,
life and title insurance as an insurance agency, primarily to
its mortgage loan customers.
Institutional Securities. Doral Financial
operated an institutional securities business until 2008 through
Doral Securities, Inc. (Doral Securities), a
wholly-owned subsidiary. Doral Securities operations
during 2008 were limited to acting as a co-investment manager to
a local fixed-income investment company. Doral Securities
provided notice to the investment company in December 2008 of
its intent to assign its rights and obligations under the
investment advisory agreement to Doral Bank PR. The assignment
was completed in January 2009 and Doral Securities did not
conduct any other operations in 2009. During the third quarter
of 2009, this investment advisory agreement was terminated by
the investment company. Effective on December 31, 2009,
Doral Securities was merged with and into its holding company,
Doral Financial Corporation.
Availability
of Information on Website
Doral Financials Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
and all amendments to those reports filed or furnished pursuant
to Sections 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the Exchange Act) are available
free of charge, through its website,
http://www.doralfinancial.com,
as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. In addition,
Doral Financial makes available on its website under the heading
Corporate Governance its: (i) Code of Business
Conduct and Ethics; (ii) Corporate Governance Guidelines;
(iii) Information Disclosure Policy; and (iv) the
charters of the Audit, Compensation, Corporate Governance and
Nominating, and Risk Policy committees, and also intends to
disclose on its website any amendments to its Code of Business
Conduct and Ethics, or waivers of the Code of Business Conduct
and Ethics on behalf of its Chief Executive Officer, Chief
Financial Officer, and Controller. The aforementioned reports
and materials can also be obtained free of charge upon written
request to the Secretary of the Company at 1451 F.D. Roosevelt
Avenue, San Juan, Puerto Rico
00920-2717.
The public may read and copy any materials Doral Financial files
with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. In
addition, the public may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC, including Doral
Financial, at its website
(http://www.sec.gov).
4
Holding
Company Structure
Doral Financial conducts its activities primarily through its
wholly-owned subsidiaries, Doral Bank PR, Doral Bank US, Doral
Insurance Agency, and Doral Properties, Inc. (Doral
Properties). Doral Bank PR operates four wholly-owned
subsidiaries: Doral Mortgage, Doral Money, Doral Investment and
CB, LLC.
On July 19, 2007, Doral Holdings Delaware, LLC (Doral
Holdings), a newly formed bank holding company in which
Irving Place Capital (formerly known as Bear Stearns Merchant
Banking) and other investors, including funds managed by
Marathon Asset Management, Perry Capital, the DE Shaw Group and
Tennenbaum Capital, purchased 48,412,698 shares of Doral
Financial common stock for an aggregate purchase price of
$610.0 million. As a result of this transaction, Doral
Holdings initially owned approximately 90% of the then
outstanding common stock of Doral Financial.
On April 19, 2010, the Company announced that it had
entered into a definitive Stock Purchase Agreement with various
purchasers of the Companys common stock, including certain
direct and indirect investors in Doral Holdings, which was the
Companys parent company, to raise up to
$600.0 million of new equity capital for the Company
through a private placement. Shares were sold in two tranches:
(i) a $180.0 million non-contingent tranche consisting
of approximately 180,000 shares of the Companys
Mandatorily Convertible Non-Cumulative Non-Voting Preferred
Stock (the Mandatorily Convertible Preferred Stock),
$1.00 par value and $1,000 liquidation preference per share
and (ii) a $420.0 million contingent tranche
consisting of approximately 13.0 million shares of the
Companys common stock and approximately
359,000 shares of Mandatorily Convertible Preferred Stock.
In addition, as part of the non-contingent tranche, the Company
issued into escrow 105,002 shares of the Mandatorily
Convertible Preferred Stock with a liquidation value of
$105.0 million, to be released to purchasers if the Company
did not complete an FDIC assisted transaction.
The Company used the net proceeds from the placement of the
shares in the Non-Contingent Tranche to provide additional
capital to the Company to facilitate the Company (through its
wholly owned subsidiary, Doral Bank PR) qualifying as a bidder
for the acquisition of certain assets and assumption of certain
liabilities of one or more Puerto Rico banks from the FDIC, as
receiver.
The Company was approved to bid on the assets and liabilities of
all three Puerto Rico banks that failed in April 2010. On
April 30, 2010, the Company announced it had been out-bid
and would not be acquiring any of the assets or liabilities of
any of the three Puerto Rico failed banks resolved in separate
FDIC assisted purchase and assumption transactions. As a result,
pursuant to the Stock Purchase Agreement and the related
5
escrow agreement, approximately 105,002 shares of the
Mandatorily Convertible Preferred Stock and the
$420.0 million of contingent funds were released from
escrow to the purchasers and the contingent tranche of
securities was not issued.
In connection with the Stock Purchase Agreement, the Company
also entered into a Cooperation Agreement with Doral Holdings,
Doral Holdings L.P. and Doral GP Ltd. pursuant to which Doral
Holdings made certain commitments including the commitment to
vote in favor of converting the Mandatorily Convertible Non
Cumulative Preferred Stock to common stock and registering the
shares issued pursuant to this capital raise and other
previously issued unregistered shares of common stock and to
dissolve Doral Holdings pursuant to certain terms and conditions.
Accordingly, during the third quarter of 2010, the Company
converted 285,002 shares of Mandatorily Convertible
Non-Voting Preferred Stock into 60,000,386 shares of common
stock. In addition, during the third quarter of 2010, Doral
Holdings, previously the controlling shareholder of Doral
Financial, distributed its shares in Doral Financial to its
investors and dissolved. The Company is no longer a controlled
company as a result of this conversion and the dissolution of
Doral Holdings. Refer to Note 34 of the Consolidated
Financial Statements for additional information on the stock
exchanges.
Banking
Activities
Doral Financial is engaged in retail banking activities in
Puerto Rico through its principal banking subsidiary. Doral Bank
PR operates 34 branches in Puerto Rico and offers a variety of
consumer loan products as well as deposit products and other
retail banking services. Doral Bank PRs strategy is to
combine excellent service with an improved sales process to
capture new clients and cross-sell additional products and
provide solutions to existing clients. As of December 31,
2010, Doral Bank PR and its subsidiaries had a loan portfolio,
classified as loans receivable, of approximately
$5.1 billion, of which approximately $4.5 billion
consisted of loans secured by residential real estate, including
real estate development projects, and a loan portfolio
classified as loans held for sale, of approximately
$199.4 million.
Doral Bank PRs lending activities have traditionally
focused on the origination of residential mortgage loans. All
residential mortgage origination activities are conducted by
Doral Bank PR through its wholly-owned subsidiary Doral Mortgage.
Doral Financial is also engaged in the banking business in the
New York City metropolitan area through its federal savings bank
subsidiary, Doral Bank US. During 2010, Doral Bank US commenced
an expansion process opening new branches in New York and in the
northwest area of Florida. Doral Bank US, through its
internet-based platform and new branches, offers a variety of
deposit products. Doral Bank US invests primarily in interim
loans secured by multifamily apartment buildings and other
commercial properties located in the New York City metropolitan
area, as well as in taxi medallion loans.
Doral Money is also engaged in the mortgage banking business in
the New York City metropolitan area and since the third quarter
of 2009 organized a middle market syndicated lending unit that
is engaged in purchasing participations in senior credit
facilities in the U.S. syndicated leverage loan market.
Starting in 2011, a new healthcare finance product will provide
asset-based, working capital lines of credit to providers of
goods and services in the healthcare industry nationwide,
including hospitals, home healthcare agencies and long-term care
facilities with financing needs from $1.0 million to
$20.0 million.
Doral Bank PR and Doral Bank US 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
Financials banking subsidiaries please refer to
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources in this
report.
6
Consumer
Lending
Consumer lending operations include residential mortgage
lending, consumer loans and leasing activities. Doral Bank PR
and its subsidiaries consumer loan portfolio totaled
$3.5 billion, or 67.4%, of its loans receivable portfolio.
Residential
Mortgage Lending
Doral Bank PR 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 Bank PR originates a wide variety of mortgage loan
products, some of which are held for investment and others which
are held for sale, that are designed to meet consumer needs and
competitive conditions. The principal residential mortgage
products are
30-year and
15-year
fixed rate first mortgage loans secured by single-family
residential properties consisting of
one-to-four
family units. None of Doral Bank PRs residential mortgage
loans have adjustable interest rate features. Doral Financial
generally classifies mortgage loans between those that are
guaranteed or insured by 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 under standard FNMA or FHLMC programs are
referred to as conforming loans, while those that do not meet
the requirements are referred to as non-conforming loans.
For additional information on Doral Financials mortgage
loan originations, refer to Table E Loan Production
included in Part II, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, in this report.
Other
Consumer
Doral Bank PR provides consumer credit, personal secured loans,
lease financing receivables and loans on savings deposits. At
December 31, 2010, consumer loans totaled
$59.2 million, or 1.2%, of its loans receivable portfolio.
Doral Bank PRs consumer loan portfolio is subject to
certain risks, including: (i) amount of credit offered to
consumers in the market; (ii) interest rate increases;
(iii) consumer bankruptcy laws which allow consumers to
discharge certain debts; and (iv) continued recessionary
conditions
and/or
additional deterioration of the Puerto Rico and United States
economies. Doral Bank PR attempts to reduce its exposure to such
risks by: (i) individually reviewing each loan request and
renewal; (ii) utilizing a centralized approval system for
loans in excess of $25,000; (iii) strictly adhering to
written credit policies; and (iv) conducting an independent
credit review.
Commercial
Lending
Commercial lending operations include commercial real estate,
commercial and industrial and construction and land. Doral Bank
PR and its subsidiaries commercial loan (including
construction and land) portfolio totaled $1.7 billion, or
32.6%, of its loans receivable portfolio. Most of the growth in
the commercial lending portfolio has been in the
U.S. operations as economic conditions have started to
improve on the mainland.
Commercial
Real Estate and Commercial and Industrial
Due to worsening economic conditions in Puerto Rico,
Dorals new commercial lending activity in Puerto Rico has
been limited since early 2008. However, commercial lending
activities in the U.S. have grown significantly beginning
late in 2009. At December 31, 2010, commercial loans
totaled $1.3 billion, or 24.4%, of Doral Bank PR and its
subsidiaries loans receivable portfolio, which included
$653.6 million in commercial loans secured by real estate.
Commercial loans include lines of credit and term facilities to
finance
7
business operations and to provide working capital for specific
purposes, such as to finance the purchase of assets, equipment
or inventory. Since a borrowers cash flow from operations
is generally the primary source of repayment, Doral Bank
PRs analysis of the credit risk focuses heavily on the
borrowers debt repayment capacity.
Lines of credit are extended to businesses based on an analysis
of the financial strength and integrity of the borrowers and are
generally secured by real estate, accounts receivable or
inventory, and have a maturity of one year or less. Such lines
of credit bear a floating interest rate that is indexed to a
base rate, such as, the prime rate, the London Interbank Offered
Rate (LIBOR) or another established index.
Commercial term loans are typically made to finance the
acquisition of fixed assets, provide permanent working capital
or to finance the purchase of businesses. Commercial term loans
generally have terms from one to five years. They may be
collateralized by the asset being acquired or other available
assets and bear a floating interest rate, indexed to the prime
rate, LIBOR or another established index, or are fixed for the
term of the loan.
As mentioned above, Doral Moneys syndicated lending unit
commenced operations during the third quarter of 2009.
Syndicated corporate loans are credit facilities sourced
primarily from financial institutions that are acting as lenders
and arrangers in these syndications. The U.S. based middle
market syndicated lending strategy is to acquire
$5.0 million to $15.0 million participation interests
in loans made to U.S. mainland companies that are first
underwritten by money center or regional banks, and
re-underwritten by the Companys U.S. based syndicated
lending unit. Borrowers are either domiciled in the U.S. or
the vast majority of their revenues are generated in the
U.S. All borrowers have external public ratings or a rating
letter from Standard & Poors
and/or
Moodys.
The syndicated lending unit portfolio has been growing within
commercial lending. As of December 31, 2010 syndicated
loans totaled $507.1 million, or 9.9%, of the consolidated
Doral Bank PR loans receivable portfolio. For the year ended
December 31, 2010, U.S. syndicated loans accounted for
34.3% of total loans originated during 2010.
Doral Financials portfolio of commercial loans is subject
to certain risks, including: (i) continued recessionary
conditions
and/or
additional deterioration of the Puerto Rico and United States
economies; (ii) interest rate increases; (iii) the
deterioration of a borrowers or guarantors financial
capabilities; and (iv) environmental risks, including
natural disasters. Doral Financial attempts to reduce the
exposure to such risks by: (i) reviewing each loan request
and renewal individually; (ii) utilizing a centralized
approval system for all unsecured and secured loans in excess of
$100,000; (iii) strictly adhering to written loan policies;
and (iv) conducting an independent credit review. In
addition, loans based on short-term asset values are monitored
on a monthly or quarterly basis.
Construction
Lending
Due to market conditions in Puerto Rico, the Company has ceased
financing new construction of single family residential and
commercial real estate projects, including land development, in
Puerto Rico. Doral will continue to evaluate and appraise market
conditions to determine if and when it will resume such
financing. Doral Bank had traditionally been a leading player in
Puerto Rico in providing interim construction loans to finance
residential development projects, primarily in the affordable
and mid-range housing markets. In 2006, the Company reassessed
its risk exposure to the sector and made a strategic decision to
restrict construction lending to established clients with proven
track records. In late 2007, as a result of the continued
downturn in the Puerto Rico housing market, the Company decided
that it would no longer underwrite new development projects and
focus its efforts on collections, including assisting developers
in marketing their properties to potential home buyers. As of
December 31, 2010, Doral Bank PR and its subsidiaries had
approximately $421.1 million in construction and land
loans. Construction loans extended by the Company to developers
are typically adjustable rate loans, indexed to the prime rate,
with terms generally ranging from 12 to 36 months.
Doral Bank US and Doral Money extend interim, construction loans
and bridge loans secured by multifamily apartment buildings and
other commercial properties in the New York City metropolitan
area and
8
in northwest Florida. As of December 31, 2010, Doral Bank
US and Doral Money had a portfolio of $18.5 million and
$90.3 million in interim construction and bridge loans,
respectively.
Doral Financials construction loan portfolio is subject to
certain risks, including: (i) continued recessionary
conditions
and/or
additional deterioration of the Puerto Rico economy and the
United States economy; (ii) continued deterioration of the
United States and Puerto Rico housing markets;
(iii) interest rate increases; (iv) deterioration of a
borrowers or guarantors financial capabilities; and
(v) environmental risks, including natural disasters. Doral
Financial attempts to reduce the exposure to such risks by:
(i) individually reviewing each loan request and renewal;
(ii) utilizing a centralized approval system for secured
loans in excess of $100,000; (iii) strictly adhering to
written loan policies; and (iv) conducting an independent
credit review.
Mortgage
Origination Channels
Doral Bank PRs strategy is to defend its mortgage
servicing portfolio primarily by internal originations through
its retail branch network. Doral Mortgage units are co-located
in 33 of the 34 retail bank branches of Doral Bank PR. Doral
Bank PR supplements retail originations with wholesale purchases
of loans from third parties. The principal origination channels
of Doral Financials loan origination units are summarized
below.
Retail Channel. Doral Bank PR originates loans
through its network of loan officers located in each of its 33
retail branches throughout Puerto Rico. Customers are sought
through advertising campaigns in local newspapers and
television, as well as direct mail and telemarketing campaigns.
Doral Bank PR emphasizes quality customer service and offers
extended operating hours to accommodate the needs of customers.
Doral Bank PR works closely with residential housing developers
and specializes in originating mortgage loans to provide
permanent financing for the purchase of homes in new housing
projects.
Wholesale Correspondent Channel. Doral Bank PR
maintains a centralized unit that purchases closed residential
mortgage loans from other financial institutions consisting
primarily of conventional mortgage loans. Doral Bank PR
underwrites each loan prior to purchase. For the years ended
December 31, 2010, 2009, and 2008 total loan purchases
amounted to approximately $82.0 million,
$126.0 million and $181.5 million, respectively.
For more information on Doral Financials loan origination
channels, refer to Table F Loan Origination Sources
in Part II, Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations, in this report.
Mortgage
Loan Underwriting
Doral Bank PRs underwriting standards are designed to
comply with the relevant guidelines set forth by the Department
of Housing and Urban Development (HUD), GNMA, RHS,
VA, FNMA, FHLMC, Federal and Puerto Rico banking regulatory
authorities, private mortgage investment conduits and private
mortgage insurers, as applicable.
Doral Bank PRs underwriting policies focus primarily on
the borrowers ability to pay and secondarily on collateral
value. The maximum
loan-to-value
(LTV) ratio on conventional first mortgages
generally does not exceed 80%. Doral Bank PR also offers certain
first mortgage products with higher LTV ratios, which may
require private mortgage insurance. In conjunction with a first
mortgage, Doral Bank PR may also provide a borrower with
additional financing through a closed end second mortgage loan,
whose combined LTV ratio exceeds 80%. Doral Bank PR does not
originate adjustable rate mortgages (ARM) or
negatively amortizing loans. However, the Company has entered
into certain loss mitigation arrangements that provide for a
temporary reduction in interest rates. The Company uses external
credit scores as a useful measure for assessing the credit
quality of a borrower. These scores are supplied by credit
information providers, based on statistical models that
summarize an individuals credit record.
FICO®
scores, developed by Fair Isaac Corporation, are the most
commonly used credit scores.
Doral Bank PR sells the majority of its conforming mortgage loan
originations and retains the majority of its non-conforming loan
originations in portfolio. The Companys underwriting
process is established to
9
achieve a uniform rules-based standard while targeting high
quality non-conforming loan originations which is consistent
with the Companys goal of retaining a greater portion of
its mortgage loan production.
Mortgage
Loan Servicing
When Doral Financial sells originated or purchased mortgage
loans, it generally retains the right to service such loans and
to receive the associated servicing fees. Doral Financials
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.
The Company believes that loan servicing for third parties is
important to its asset/liability management tools because it
provides an asset whose value in general tends to move in the
opposite direction to the value of its loan and investment
portfolio. The asset also provides additional fee income to help
offset the cost of its mortgage operations.
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 the termination of the servicing rights
and the loss of future servicing fees. In general, Doral Bank
PRs servicing agreements are terminable by the investors
for cause. However, certain servicing arrangements, such as
those with FNMA and FHLMC, contain termination provisions that
may be triggered by changes in the servicers financial
condition that materially and adversely affect its ability to
provide satisfactory servicing of the loans. As of
December 31, 2010, approximately 28%, 6% and 29% of Doral
Financials mortgage loans serviced for others related to
mortgage servicing for FNMA, FHLMC and GNMA, respectively. As of
December 31, 2010, Doral Bank PR serviced approximately
$8.2 billion in mortgage loans on behalf of third parties.
Termination of Doral Bank PRs servicing rights by any of
these agencies could have a material adverse effect on Doral
Financials results of operations and financial condition.
In certain instances, the Company also services loans with no
contractual servicing fee. The servicing asset or liability
associated with this type of servicing arrangement is evaluated
solely based on ancillary income, float, late fees, prepayment
penalties and costs.
Doral Bank PRs mortgage loan servicing portfolio is
subject to reduction by reason of normal amortization,
prepayments and foreclosure of outstanding mortgage loans.
Additionally, Doral Bank PR may sell mortgage loan servicing
rights from time to time to other institutions if market
conditions are favorable. For additional information regarding
the composition of Doral Financials servicing portfolio as
of each of the Companys last three fiscal year-ends, refer
to Table G Loans Serviced for Third Parties in
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
in this report.
The degree of credit 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. Prior to 2006, Doral Financial often sold
non-conforming loans on a partial recourse basis. These recourse
obligations were retained by Doral Financial when Doral Bank PR
assumed the servicing rights from Doral Financial. For
additional information regarding recourse obligations, see
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Off-Balance Sheet Activities in this
report.
Sale of
Loans and Securitization Activities
Doral Financial sells or securitizes a portion of the
residential mortgage loans that it originates and purchases to
generate income. These loans are underwritten to investor
standards, including the stardards of FNMA, FHLMC, and GNMA. 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, RHS or VA loans into pools of
$1.0 million or more for sale primarily to broker-dealers
and other institutional investors. During the years ended
December 31, 2010, 2009 and 2008, Doral Financial
10
issued approximately $311.8 million, $377.3 million
and $333.8 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 $1.0 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, 2010, 2009 and
2008, Doral Financial securitized approximately
$92.8 million, $53.6 million and $40.4 million,
respectively, of loans into FNMA and FHLMC mortgage-backed
securities. In addition, for the years ended December 31,
2010, 2009 and 2008, Doral Financial sold approximately
$30.7 million, $35.0 million and $54.5 million,
respectively, of loans through the FNMA and FHLMC cash window
programs. Also, during the fourth quarter of 2010, Doral Bank
sold $39.9 million of loans to a private investor.
When the loans backing a GNMA security are initially securitized
they are treated as sales and the Company continues to service
the underlying loans. The Company is required to bring
individual delinquent GNMA loans that it previously accounted
for as sold back onto its books as loan assets when, under the
GNMA Mortgage-Backed Securities Guide, the loan meets
GNMAs specified delinquency criteria and is eligible for
repurchase. The rebooking of GNMA loans is required (together
with a liability for the same amount) regardless of whether the
bank, as seller-servicer, intends to exercise the repurchase
(buy-back option) since the Company is deemed to have regained
effective control over these loans.
At December 31, 2010, 2009 and 2008, the loans held for
sale portfolio includes $153.4 million, $128.6 million
and $165.6 million, respectively, related to defaulted
loans backing GNMA securities for which the Company has an
unconditional option (but not an obligation) to repurchase the
defaulted loans. Payment on these loans is guaranteed by FHA.
Prior to the fourth quarter of 2005, Doral Financials
non-conforming loan sales were generally made on a limited
recourse basis. As of December 31, 2010, 2009 and 2008,
Doral Financials maximum contractual exposure relating to
its portfolio of loans sold with recourse was approximately
$0.7 billion, $0.8 billion and $1.0 billion,
respectively, which included recourse obligations to FNMA and
FHLMC as of such dates of approximately $0.6 billion,
$0.7 billion and $1.0 billion, respectively. As of
December 31, 2010, 2009 and 2008, Doral Financial had a
recourse liability of $10.3 million, $9.4 million and
$8.8 million, respectively, to reflect estimated losses
from such recourse arrangements.
Doral Financial estimates its liability from its recourse
obligations based on historical losses from foreclosure and
disposition of mortgage loans adjusted for expectations of
changes in portfolio behavior and market environment. The
Company believes that it has an adequate valuation for its
recourse obligation as of December 31, 2010 and 2009, but
actual future recourse obligations may differ from expected
results.
In the past the Company sold non-conforming loans to financial
institutions in the U.S. mainland on a non-recourse basis,
except recourse for certain early defaults. Since 2007 the
Company is retaining all of its non-conforming loan production
in its loan receivable portfolio. While the Company currently
anticipates that it will continue to retain its non-conforming
loan production in portfolio, in the future, the Company may
seek to continue to diversify secondary market outlets for its
non-conforming loan products both in the U.S. mainland and
Puerto Rico.
In the ordinary course of business, Doral Financial makes
certain representations and warranties to purchasers and
insurers of mortgage loans at the time of the loan sales to
third parties regarding the characteristics of the loans sold,
and in certain circumstances, such as in the event of early or
first payment default. To the extent the loans do not meet
specified criteria, such as a breach of contract of a
representation or warranty or an early payment default, Doral
Financial may be required to repurchase the mortgage loan and
bear any subsequent loss related to the loan. Doral Financial
works with purchasers to review the claims and correct alleged
documentation deficiencies. For the years ended
December 31, 2010, 2009 and 2008
11
repurchases amounted to $1.0 million, $13.7 million
and $9.5 million, respectively. Refer to Item 1A.
Risk Factors, Risks related to our
business Defective and repurchased loans may harm
our business and financial condition, and Item 7.
Managements Discussion and Analysis and Results of
Operations, -Liquidity and Capital Resources for
additional information.
Puerto
Rico Secondary Mortgage Market and Favorable Tax
Treatment
In general, the Puerto Rico market for mortgage-backed
securities is an extension of the U.S. market with respect
to pricing, rating of investment instruments, and other matters.
However, Doral Financial has benefited historically from certain
tax incentives provided to Puerto Rico residents to invest in
FHA and VA loans and GNMA securities backed by such loans.
Under the Puerto Rico Internal Revenue Code (the PR
Code), the interest received on FHA and VA loans used to
finance the original purchase of newly constructed housing in
Puerto Rico and mortgage-backed securities backed by such loans
is exempt from Puerto Rico income taxes. This favorable tax
treatment allows 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
U.S. mainland, and reduces its effective tax rate through
the receipt of tax-exempt interest.
Insurance
Agency Activities
In order to take advantage of the cross-marketing opportunities
provided by financial modernization legislation, enacted in
2000, Doral Financial entered the insurance agency business in
Puerto Rico. Doral Insurance Agency currently earns commissions
by acting as agent in connection with the sale of insurance
policies issued by unaffiliated insurance companies. During
2010, 2009 and 2008, Doral Insurance Agency produced insurance
fees and commissions of $13.3 million, $12.0 million
and $12.8 million, respectively. Doral Insurance
Agencys activities are closely integrated with the
Companys mortgage loan originations with most policies
sold to mortgage customers. Future growth of Doral Insurance
Agencys revenues will be tied to the Companys level
of mortgage originations, its ability to expand the products and
services it provides and its ability to cross-market its
services to Doral Financials existing customer base.
Puerto
Rico Income Taxes
The maximum statutory corporate income tax rate in Puerto Rico
is 39.0%. 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 or
any other Puerto Rico subsidiary subject to tax under the PR
Code.
On March 9, 2009, the Governor of Puerto Rico signed into
law various legislative bills as part of a plan to stimulate
Puerto Ricos economy and address recurring government
budget deficits by reducing government expenses and increasing
government revenues. One of these measures establishes for
calendar years 2009 to 2011 a special 5.0% surtax on
corporations that have gross income in excess of $100,000 (a
corporation subject to such surtax would have to pay an
additional tax of 5.0% of its total tax liability). This
increases the Companys income tax rate from 39.00% to
40.95% for tax years from 2009 to 2011.
On November 15, 2010, Act 171 was enacted into law
(Act 171) generally providing, among other things:
(i) an income tax credit equal to 7% of the tax
liability due to corporations that paid the Christmas
Bonus required by local labor laws, and (ii) extending to
10 years the carry forward term of net operating losses
incurred for the years commenced after December 31, 2004
and before December 31, 2012.
On January 31, 2011, the Governor signed into law the
Internal Revenue Code of 2011 (2011 Code) making the
PR Code ineffective, for the most part, for years commenced
after December 31, 2010. Under the provisions of the 2011
Code, the maximum statutory corporate income tax rate is 30% for
years commenced after December 31, 2010 and ending before
January 1, 2014; if the Government meets its income
generation and expense control goals, for years commenced after
December 31, 2013, the maximum corporate tax rate will be
25%. The 2011 Code, however, eliminated the special 5% surtax on
corporations for tax year 2011. In
12
general, the 2011 Code maintains the carry forward periods for
net operating losses to 7 and 10 years as provided for in
Act 171; maintains the concept of the alternative minimum tax
although it changed the way it is computed; and specifies what
types of auditors report will be acceptable when audited
financial statements are required to be filed with the income
tax return. Notwithstanding, a corporation may be subject to the
provisions of the PR Code if it so elects it by the time it
files its income tax return for the first year commenced after
December 31, 2010 and ending before January 1, 2012.
Once the election is made, it will be effective for such year
and the next 4 succeeding years.
In computing its interest expense deduction, Doral
Financials interest deduction is reduced in the same
proportion that its average exempt obligations (including FHA
and VA loans and GNMA securities) bear to its average total
assets. Therefore, to the extent that Doral Financial holds FHA
or VA loans and other tax exempt obligations, part of its
interest expense may be disallowed for tax purposes.
Refer to Note 28 of the accompanying Consolidated Financial
Statements for additional information.
United
States Income Taxes
Except for Doral Bank US and Doral Money, Doral Financial and
its subsidiaries are corporations organized under the laws of
Puerto Rico. Accordingly, Doral Financial and its Puerto Rico
subsidiaries are generally only required to pay
U.S. federal 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 U.S. sources. Doral Bank US and Doral Money are
subject to both federal and state income taxes on the income
derived from their operations in the United States. Dividends
paid by Doral Bank US to Doral Financial or by Doral Money to
Doral Bank PR are subject to a 10% withholding tax. Please refer
to Note 28 of the accompanying Consolidated Financial
Statements for additional information.
Employees
As of December 31, 2010, Doral Financial employed
1,352 persons compared to 1,154 as of December 31,
2009. Of the total number of employees 1,281 were employed in
Puerto Rico and 71 employed in the U.S. as of
December 31, 2010 compared to 1,124 employed in Puerto Rico
and 30 employed in New York City as of December 31, 2009.
As of December 31, 2010, of the total number of employees,
299 were employed in loan production and servicing activities,
473 were involved in branch operations, and 580 in
administrative activities. None of Doral Financials
employees are represented by a labor union and Doral Financial
considers its employee relations to be good.
Segment
Disclosure
For information regarding Doral Financials operating
segments, please refer to Note 41 of the accompanying
Consolidated Financial Statements, Segment
Information, and the information provided under
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation,
Operating Segments in this report.
Puerto Rico is the principal market for Doral Financial. Doral
Financials Puerto Rico-based operations accounted for 89%
of Doral Financials consolidated assets as of
December 31, 2010 and 100% of Doral Financials
consolidated losses for the year then ended. Approximately 55%
of total loan originations were secured by real estate
properties located in Puerto Rico. The following table sets
forth the geographic composition of Doral Financials loan
originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
2010
|
|
2009
|
|
2008
|
|
Puerto Rico
|
|
|
55
|
%
|
|
|
74
|
%
|
|
|
86
|
%
|
United States
|
|
|
45
|
%
|
|
|
26
|
%
|
|
|
14
|
%
|
The increase in originations in the U.S. is due primarily
to loans originated by the new syndicated lending unit.
13
Market
Area and Competition
Puerto Rico is Doral Financials primary service area. The
competition in Puerto Rico for the origination of loans and
attracting of deposits is substantial. Competition comes not
only from local commercial banks and credit unions, but also
from banking affiliates of banks headquartered in the United
States, Spain and Canada. In mortgage lending, the Company also
faces competition from independent mortgage banking companies.
Doral Financial competes principally by offering loans with
competitive features, by emphasizing the quality of its service
and by pricing its range of products at competitive rates.
As previously announced, on December 2, 2010, the Company
sent a letter to the Board of Directors of First BanCorp
proposing the acquisition of First BanCorp by the Company
subject to certain terms and conditions. On December 6,
2010, First BanCorp issued a press release announcing that it
had received and rejected such proposal. The Companys
invitation to the First BanCorp Board of Directors to commence
discussions with respect to its proposal remains open.
During 2010 and 2009, Doral Financial increased its business
activities in the U.S. expanding its lending activities in the
New York metropolitan area and establishing deposit taking
and lending operations in northwest Florida. While these markets
are competitive, Doral perceives that well managed community
banks with appropriately priced products in the New York
metropolitan area and northwest Florida markets can successfully
compete for deposits and loans. The Companys plans are to
continue to expand its New York and northwest Florida
business activities.
The
Commonwealth of Puerto Rico
General. The Commonwealth of Puerto Rico, an
island located in the Caribbean, is approximately 100 miles
long and 35 miles wide, with an area of 3,423 square
miles. According to the information published by the United
States Census Bureau in December 2010 in connection with the
completion of the 2010 census, the population of Puerto Rico was
3,725,789 as of April 1, 2010. According to the United
States Census Bureau, the population of Puerto Rico decreased
from 3,808,610 in 2000 to 3,725,789 in 2010, a decrease of 2.2%.
Puerto Rico is the fourth largest and most economically
developed of the Caribbean islands. Its capital, San Juan,
is located approximately 1,600 miles southeast of New York
City and had an estimated population of 420,326 as of
July 1, 2009, according to the latest estimate published by
the United States Census Bureau, compared to 434,374 in 2000.
Relationship of Puerto Rico with the United
States. Puerto Rico has been under the
jurisdiction of the United States since 1898. Puerto Ricos
constitutional status is that of a territory of the United
States, and, pursuant to the territorial clause of the
U.S. Constitution, the ultimate source of power over Puerto
Rico is the U.S. Congress. The United States and Puerto
Rico share a common defense, market and currency. Puerto Rico
exercises virtually the same control over its internal affairs
as do the fifty states. It differs from the states, however, in
its relationship with the federal government. The relationship
between Puerto Rico and the United States is referred to as
commonwealth status.
There is a federal district court in Puerto Rico and most
federal laws are applicable to Puerto Rico. The United States
postal service 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. They are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives,
and has limited voting rights in committees and
sub-committees
of the House of Representatives. 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 certain
federal employees who are subject to taxes on their salaries.
Income earned by Puerto Rico residents from sources outside of
Puerto Rico, however, is subject to federal income tax. The
official languages of Puerto Rico are Spanish and English.
Governmental Structure. The Constitution of
Puerto Rico provides for the separation of powers of the
executive, legislative and judicial branches of government. The
Governor is elected every four years. The Legislative Assembly
consists of a Senate and a House of Representatives, the members
of which are elected
14
for four-year terms. The highest local court in Puerto Rico is
the Supreme Court of Puerto Rico. Decisions of the Supreme Court
of Puerto Rico may be appealed to the Supreme Court of the
United States under the same conditions as decisions from state
courts. Puerto Rico also constitutes a district in the federal
judiciary and has its own United States District Court.
Decisions of this federal district court may be appealed to the
United States Court of Appeals for the First Circuit and from
there to the United States Supreme Court.
Governmental responsibilities assumed by the central government
of Puerto Rico are similar in nature to those of the various
state governments. In addition, the central government of Puerto
Rico assumes responsibility for local police and fire
protection, education, public health and welfare programs, and
economic development.
The Economy. The economy of Puerto Rico is
closely linked to the United States economy, as most of the
external factors that affect the Puerto Rico economy (other than
the price of oil) are determined by the policies of, and
economic conditions prevailing in, the United States. These
external factors include exports, direct investment, the amount
of federal transfer payments, the level of interest rates, the
rate of inflation, and tourist expenditures. During the fiscal
year ended June 30, 2010, approximately 68.1% of Puerto
Ricos exports went to the U.S. mainland, which was
also the source of approximately 51.2% of Puerto Ricos
imports. In the past, the economy of Puerto Rico has generally
followed economic trends in the overall United States economy.
However, in recent years, economic growth in Puerto Rico has
lagged behind growth in the United States.
The dominant sectors of the Puerto Rico economy in terms of
production and income are manufacturing and services. The
manufacturing sector has undergone fundamental changes over the
years as a result of an increased emphasis on higher-wage,
high-technology industries, such as pharmaceuticals,
biotechnology, computers, microprocessors, professional and
scientific instruments, and certain high-technology machinery
and equipment. The services sector, including finance,
insurance, real estate, wholesale and retail trade, and tourism,
also plays a major role in the economy. It ranks second to
manufacturing in contribution to Puerto Ricos gross
domestic product and leads all sectors in providing employment.
Puerto Ricos economy is currently in a recession that
began in the fourth quarter of the fiscal year that ended
June 30, 2006. Although the Puerto Rico economy is closely
linked to the United States economy, for fiscal years 2007, 2008
and 2009, Puerto Ricos real gross national product
decreased by 1.2%, 2.8% and 3.7%, respectively, while the United
States economy grew at a rate of 1.8% and 2.8% during fiscal
years 2007 and 2008, respectively, and contracted at a rate of
2.5% during fiscal year 2009. According to the Puerto Rico
Planning Boards latest projections, Puerto Ricos
real gross national product was projected to contract by 3.6%
during fiscal year 2010. Puerto Ricos real gross national
product for fiscal year 2011, however, is projected to grow by
0.4%.
The number of persons employed in Puerto Rico during fiscal year
2010 averaged 1,102,700, a decrease of 5.6% compared to the
previous fiscal year. During the first six months of fiscal year
2011, total employment averaged 1,084,500, a decline of 2.5%
compared with the same period of the previous fiscal year, and
the unemployment rate averaged 15.9%.
Future growth of the Puerto Rico economy will depend on several
factors including the condition of the United States economy,
the relative stability of the price of oil imports, the exchange
value of the United States dollar, the level of interest rates,
the effectiveness of the recently approved changes to the Puerto
Rico income tax code and other tax laws, and the continuing
economic uncertainty generated by the Puerto Rico
governments fiscal condition described below. The economy
of Puerto Rico is very sensitive to the price of oil in the
global market. Puerto Rico does not have significant mass
transit available to the public and most of its electricity is
currently powered by oil, making it highly sensitive to
fluctuations in oil prices. A substantial increase in the price
of oil could impact adversely the economy by reducing disposable
income and increasing the operating costs of most businesses and
government. Consumer spending is particularly sensitive to wide
fluctuations in oil prices.
Fiscal Condition. Since 2000, Puerto Rico has
experienced a structural imbalance between recurring government
revenues and total expenditures. Prior to fiscal year 2009, the
Puerto Rico government bridged the
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deficit resulting from the structural imbalance through the use
of non-recurring measures, such as borrowing from the Government
Development Bank for Puerto Rico (GDB) or in the
bond market, postponing the payment of various government
expenses, such as payments to suppliers and utilities providers,
and other one time measures such as the use of derivatives and
borrowings collateralized with government assets such as real
estate. Since March 2009, the government has taken multiple
steps to address and resolve the structural imbalance.
For fiscal year 2009, the deficit was approximately
$3.3 billion, consisting of the difference between revenues
and expenses for such fiscal year. The estimated deficit is
projected to be approximately $2.1 billion for fiscal year
2010 and approximately $1.0 billion for fiscal year 2011.
Fiscal Stabilization Plan. In January 2009,
the new Puerto Rico government administration, which controls
the Executive and Legislative branches of government, developed
and commenced implementing a multi-year Fiscal Stabilization and
Economic Reconstruction Plan designed to achieve fiscal balance,
restore sustainable economic growth and safeguard the
investment-grade ratings of the Commonwealth. The fiscal
stabilization plan seeks to achieve budgetary balance, while
addressing expected fiscal deficits in the intervening years
through the implementation of a number of initiatives, including
the following: (i) gradual operating expense-reduction plan
through reduction of operating expenses, including payroll,
which is the main component of government expenditures, and the
reorganization of the Executive Branch; (ii) a combination
of temporary and permanent revenue raising measures, coupled
with additional tax enforcement measures; and (iii) a bond
issuance program through Puerto Rico Sales Tax Financing
Corporation (COFINA by its
Spanish-language
acronym).
The proceeds obtained from COFINA bond issuance program have
been used (and are being used) to repay existing government debt
(including debt with GDB), finance operating expenses of the
Commonwealth for fiscal years 2009 through 2011 (and for fiscal
year 2012, to the extent included in the governments
annual budget for such fiscal year), including costs related to
the implementation of a workforce reduction plan, the funding of
an economic stimulus plan, as described below, and for other
purposes to address the fiscal imbalance while the fiscal
stabilization plan was being implemented. Legislation was
enacted during 2009 authorizing the implementation of all the
measures in the fiscal stabilization plan.
Government Reorganization Plan. The
administration has also taken the first steps to reorganize and
modernize the Executive Branch. On December 11, 2009, the
Governor signed Act No. 182 that seeks to reduce the number
of government agencies and operational expenditures.
Unfunded Pension Benefit Obligations and Funding Shortfalls
of the Retirement Systems. One of the challenges
every Puerto Rico administration has faced during the past
twenty years is how to address the growing unfunded pension
obligations and funding shortfalls of the three government
retirements systems that are funded principally with government
appropriations. As of June 30, 2009, the date of the latest
actuarial valuations of the three retirement systems, the total
unfunded accrued actuarial liability for the three retirement
systems was $23.9 billion. According to preliminary
actuarial valuations as of June 30, 2010, the total
unfunded accrued actuarial liability for the three retirement
systems was $25.1 billion.
Based on current employer and employee contributions to the
retirement systems, the unfunded actuarial accrued liabilities
will continue to increase significantly, with a corresponding
decrease in their funded ratios, since the annual contributions
are not sufficient to fund pension benefits, and thus, are also
insufficient to amortize the unfunded actuarial accrued
liabilities. Because annual benefit payments and administrative
expenses of the retirement systems have been significantly
larger than annual employer and employee contributions, the
retirement systems have been forced to use investment income,
borrowings and sale of investment portfolio assets to cover
funding shortfalls. The total funding shortfall (basic system
benefits, administrative expenses and debt service in excess of
contributions) for fiscal year 2011 for the three systems is
expected to be approximately $1.0 billion.
As a result, the assets of the retirement systems are expected
to continue to decline and eventually be depleted during the
next ten years. Since the Commonwealth and other participating
employers are ultimately responsible for any funding deficiency
in the three retirement systems, the depletion of the assets
available to
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cover retirement benefits will require the Commonwealth and
other participating employers to cover such funding deficiency.
It is estimated that the Commonwealth would be responsible for
approximately 74% of the combined funding deficiency of the
three retirement systems, with the balance being the
responsibility of the municipalities and public corporations.
In order to address the growing unfunded benefit obligations and
funding shortfalls of the three retirement systems, the Governor
of Puerto Rico established in February 2010 a special commission
to make recommendations for improving the fiscal solvency of the
three retirement systems. The special commission delivered its
recommendations to the Governor in October 2010. The individual
recommendations made by the members of the special commission,
which included increasing the amount of the employer and
employee contributions and changing the benefits structure, are
being analyzed with the intent of presenting a comprehensive,
consensus legislation during calendar year 2011 to improve the
fiscal solvency of the three retirement systems.
Economic Reconstruction Plan. The Puerto Rico
government administration also developed and implemented a
short-term economic reconstruction plan. The cornerstone of this
plan was the implementation of U.S. federal and local
economic stimuli. Puerto Rico has benefitted and will benefit
from the American Recovery and Reinvestment Act of 2009
(ARRA) enacted by the U.S. government to
provide a stimulus to the U.S. economy in the wake of the
global economic downturn. Puerto Rico has been awarded
approximately $6.8 billion in stimulus funds from ARRA
during fiscal years 2009 to 2011, which includes tax relief,
expansion of unemployment benefits and other social welfare
provisions, and domestic spending in education, health care, and
infrastructure, among other measures. The administration
complemented the U.S. federal stimulus with additional
short- and medium-term supplemental stimulus measures seeking to
address specific local challenges and providing investment in
strategic areas. These measures included a local
$500.0 million economic stimulus plan to supplement the
federal plan. The local stimulus was composed of three main
elements: (i) capital improvements; (ii) stimulus for
small and medium-sized businesses, and (iii) consumer
relief in the form of direct payments to retirees, mortgage-debt
restructuring for consumers that face risk of default, and
consumer stimulus for the purchase of housing.
The economic reconstruction plan also included a supplemental
stimulus plan, which was designed to provide investment in
strategic areas with the objective of laying the foundations for
long-term growth in Puerto Rico. The supplemental stimulus plan
is being conducted through a combination of direct investments
and guaranteed lending. It targets critical areas such as key
infrastructure projects, public capital improvement programs,
private-sector lending to specific industries, and the export
and
research-and-development
knowledge industries. One example was the adoption of the Real
Estate Market Stimulus Act of 2010, which provides certain
incentives to help reduce the existing unsold housing inventory.
The housing incentives will be effective from September 1,
2010 to June 30, 2011.
Economic Development Plan. The administration
also developed the Strategic Model for a New Economy,
which is a comprehensive long-term economic development plan
aimed at improving Puerto Ricos overall competitiveness
and business environment and increasing private-sector
participation in the Puerto Rico economy.
As part of this plan, the administration is emphasizing
(i) the simplification and shortening of the permitting and
licensing process; (ii) promoting the development of
various projects through public-private partnerships,
(iii) the adoption of a new energy policy that seeks to
lower energy costs and reduce energy-price volatility,
(iv) the adoption of a comprehensive tax reform that takes
into account the Commonwealths current financial
situation; and (v) implementing strategic initiatives
targeted at specific economic sectors and development of certain
strategic/regional projects.
One of these goals was accomplished on December 1, 2009,
when the Puerto Rico Governor signed Act No. 161, which
overhauls the existing permitting and licensing process in
Puerto Rico in order to provide for a leaner and more efficient
process the fosters economic development. The administration
also enacted Acts No. 82 and 83 in July 2010, which provide
for a new energy policy that seeks to lower energy costs and
reduce energy-price volatility by reducing Puerto Ricos
dependence on fuel oil and the promotion of diverse, renewable
energy technologies.
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To further stimulate economic development and cope with the
fiscal crisis, the administration established a legal framework
via legislation approved in June 2009 to authorize and promote
the use of public-private partnerships to finance and develop
infrastructure projects and operate and manage certain public
assets. Private-public partnerships provide the opportunity for
the government to lower project development costs, accelerate
project development, reduce financial risk, create additional
revenue sources, establish service quality metrics, and redirect
government resources to focus on the implementation of public
policy. During fiscal year 2011 the administration has commenced
and expects to commence procurement for several public-private
partnership priority projects involving, among other things,
school modernization, toll roads concession, airport concession
and improvements in the water authoritys meter reading,
billing systems and customer services.
In February 2010, the Governor named a committee to review the
Commonwealths income tax system and propose a tax reform
directed at reducing personal and corporate income tax rates.
The committee presented its findings to the Governor and in
October 2010, the Governor announced that he was submitting to
the Legislative Assembly various bills in order to implement tax
reform. Legislation to implement the first phase of tax reform
was enacted as Act No. 171 on November 15, 2010.
Legislation to implement the second phase of tax reform was
enacted as Act No. 1 on January 31, 2011. The tax
reform is focused on providing tax relief to individuals and
corporations, providing economic development and job creation,
simplifying the tax system and reducing tax evasion through
enhanced tax compliance measures. In general terms, the tax
reform is intended to be revenue positive for the Commonwealth
as it includes, among other things, a temporary excise tax on
affiliates of multinational manufacturers operating in Puerto
Rico, the elimination of certain incentives and tax credits, and
enhanced tax compliance measures to finance the tax rate
reductions for corporations and individuals.
The administration has also identified strategic initiatives to
promote economic growth in various sectors of the economy where
the Commonwealth has competitive advantages and several
strategic/regional projects aimed as fostering balanced economic
development throughout the island. These projects, some of which
are ongoing, include tourism and urban redevelopment projects.
REGULATION AND
SUPERVISION
Described below are the material elements of selected federal
and Puerto Rico laws and regulations applicable to Doral
Financial and its subsidiaries. In general terms, many of these
laws and regulations generally aim to protect our depositors and
our customers, not necessarily our shareholders or our
creditors. Any changes in applicable laws or regulations, and in
their application by regulatory agencies, may materially affect
our business and prospects. Proposed legislative or regulatory
changes may also affect our operations. The following
description summarizes some of the laws and regulations to which
we are subject. References to applicable statutes and
regulations are brief summaries, do not purport to be complete,
and are qualified in their entirety by reference to such
statutes and regulations.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010
On July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the Dodd-Frank Act). The Dodd-Frank Act will
have a broad impact on the financial services industry,
including significant regulatory and compliance changes
including, among other things, (i) enhanced resolution
authority of troubled and failing banks and their holding
companies; (ii) increased capital and liquidity
requirements; (iii) increased regulatory examination fees;
(iv) changes to assessments to be paid to the FDIC for
federal deposit insurance; and (v) numerous other
provisions designed to improve supervision and oversight of, and
strengthening safety and soundness for, the financial services
sector. Additionally, the Dodd-Frank Act establishes a new
framework for systemic risk oversight within the financial
system to be distributed among new and existing federal
regulatory agencies, including the Financial Stability Oversight
Council, the Federal Reserve, the Office of the Comptroller of
the Currency, and the FDIC. A summary of certain provisions of
the Dodd-Frank Act is set forth below, along with information
set forth in other parts of this Regulation and
Supervision section.
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Increased Capital Standards and Enhanced
Supervision. The federal banking agencies are
required to establish minimum leverage and risk-based capital
requirements for banks and bank holding companies. These new
standards will be no lower than current regulatory capital and
leverage standards applicable to insured depository institutions
and may, in fact, be higher when established by the agencies.
The Dodd-Frank Act also increases regulatory oversight,
supervision and examination of banks, bank holding companies and
their respective subsidiaries by the appropriate regulatory
agency.
The Consumer Financial Protection Bureau
(Bureau). The Dodd-Frank Act creates
the Bureau within the Federal Reserve. The Bureau is tasked with
establishing and implementing rules and regulations under
certain federal consumer protection laws with respect to the
conduct of providers of certain consumer financial products and
services. The Bureau has rulemaking authority over many of the
statutes governing products and services offered to bank
consumers. In addition, the Dodd-Frank Act permits states to
adopt consumer protection laws and regulations that are more
stringent than those regulations promulgated by the Bureau, and
state attorneys general are permitted to enforce consumer
protection rules adopted by the Bureau against state-chartered
institutions.
Deposit Insurance. The Dodd-Frank Act makes
permanent the $250,000 deposit insurance limit for insured
deposits. Amendments to the Federal Deposit Insurance Act also
revise the assessment base against which an insured depository
institutions deposit insurance premiums paid to the
Deposit Insurance Fund (DIF) will be calculated.
Under the amendments, the assessment base will no longer be the
institutions deposit base, but rather its average
consolidated total assets less its average tangible equity
during the assessment period. Additionally, the Dodd-Frank Act
makes changes to the minimum designated reserve ratio of the
DIF, increasing the minimum from 1.15 percent to
1.35 percent of the estimated amount of total insured
deposits and eliminating the requirement that the FDIC pay
dividends to depository institutions when the reserve ratio
exceeds certain thresholds. In December 2010, the FDIC increased
the reserve ratio to 2.0 percent. The Dodd-Frank Act also
provides that, effective one year after the date of enactment,
depository institutions may pay interest on demand deposits.
Transactions with Affiliates. The Dodd-Frank
Act enhances the requirements for certain transactions with
affiliates under Section 23A and 23B of the Federal Reserve
Act, including an expansion of the definition of covered
transactions and increasing the amount of time for which
collateral requirements regarding covered transactions must be
maintained.
Transactions with Insiders. Insider
transaction limitations are expanded through the strengthening
of loan restrictions to insiders and the expansion of the types
of transactions subject to the various limits, including
derivative transactions, repurchase agreements, reverse
repurchase agreements and securities lending or borrowing
transactions. Restrictions are also placed on certain asset
sales to and from an insider to an institution, including
requirements that such sales be on market terms and, in certain
circumstances, approved by the institutions board of
directors.
Enhanced Lending Limits. The Dodd-Frank Act
strengthens the existing limits on a depository
institutions credit exposure to one borrower. Current
banking law limits a depository institutions ability to
extend credit to one person (or group of related persons) in an
amount exceeding certain thresholds. The Dodd-Frank Act expands
the scope of these restrictions to include credit exposure
arising from derivative transactions, repurchase agreements, and
securities lending and borrowing transactions.
Compensation Practices. The Dodd-Frank Act
provides that the appropriate federal regulators must establish
standards prohibiting as an unsafe and unsound practice any
compensation plan of a bank holding company or other
covered financial institution that provides an
insider or other employee with excessive
compensation or could lead to a material financial loss to
such firm. In February 2011, the FDIC and other federal banking
and securities agencies issued a notice or proposed rulemaking
on incentive-based compensation arrangements as required by the
Dodd-Frank Act. The proposed rule has five key components:
(i) requiring the deferral of at least 50% of incentive
compensation for a minimum of three years for executive officers
of financial institutions with consolidated assets of
$50.0 billion or more; (ii) prohibiting
incentive-based compensation arrangements for executive
officers, employees, directors and principal shareholders
(covered persons) that would encourage inappropriate
risks by providing excessive compensation;
(iii) prohibiting
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incentive-based compensation arrangements for covered persons
that would expose the institution to inappropriate risks by
providing compensation that could lead to material financial
loss; (iv) requiring policies and procedures for
incentive-based compensation arrangements that are commensurate
with the size and complexity of the institution; and
(v) requiring annual reports on incentive compensation
structures to the institutions appropriate federal
regulator.
Debit Card Interchange Fees and Routing. The
Dodd-Frank Act amends the Electronic Funds Transfer Act to,
among other things, give the Federal Reserve the authority to
establish rules regarding interchange fees charged for
electronic debit transactions by payment card issuers having
assets over $10.0 billion and to enforce a new statutory
requirement that such fees be reasonable and proportional to the
actual cost of the transaction to the issuer. In December 2010
the Federal Reserve issued a proposed rule that would have the
effect to limiting the amount of debit charge interchange fees
charged by banks. The proposal outlines two alternatives for
computing a reasonable and proportional fee. In the
press release accompanying the proposed rule, the Federal
Reserve noted that if it adopts either of the proposed
standards, the maximum allowable debit card interchange fee
received by covered issuers would be more than 70% lower that
the 2009 average. The proposed rule also seeks to limit network
exclusivity, requiring issuers to ensure that a debit card
transaction can be carried on several unaffiliated networks. The
new rules would apply to bank issuers with more than
$10.0 billion in assets and would take effect in July 2011.
We expect that many of the requirements called for in the
Dodd-Frank Act will be implemented over time, and most will be
subject to implementing regulations over the course of several
years. Given the uncertainty associated with the manner in which
the provisions of the Dodd-Frank Act will be implemented by the
various regulatory agencies and through regulations, the full
extent of the impact such requirements will have on financial
institutions operations is unclear. The changes resulting
from the Dodd-Frank Act may impact the profitability of our
business activities, require changes to certain of our business
practices, impose upon us more stringent capital, liquidity and
leverage ratio requirements or otherwise adversely affect our
business. These changes may also require us to invest
significant management attention and resources to evaluate and
make necessary changes in order to comply with new statutory and
regulatory requirements.
Mortgage
Origination and Servicing Activities
Federal
Regulation
Doral Financials mortgage origination and servicing
operations are subject to the rules and regulations of the FHA,
VA, RHS, FNMA, FHLMC, HUD and GNMA with respect to the
origination, processing, selling and servicing of 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 requirements. Doral Financials affairs are also
subject to supervision and examination by FHA, VA, RHS, FNMA,
FHLMC, GNMA and HUD at all times to ensure 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, the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things,
prohibit discrimination and require the disclosure of certain
basic information to mortgagors concerning credit terms and
settlement costs.
The Dodd-Frank Act included certain provisions that, upon the
approval of final regulations, create certain new standards for
residential mortgage lenders. The principal restrictions are the
following: (i) prohibits mortgage lenders and brokers from
giving or receiving compensation that varies based on loan terms
other than the principal amount of the loan (this prohibition
effectively eliminates yield spread premiums);
(ii) requires mortgage lenders to determine that the
consumer has the reasonable ability to repay the loan according
to its terms based upon a variety of factors (including credit
history, current income, expected income, and current
obligations); and (iii) creates a safe harbor for mortgage
lenders with respect to qualified
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mortgages (a qualified mortgage is a mortgage
that meets the following requirements: term does not exceed
30 years, the consumer may not defer the payment of
principal, points and fees may not exceed 3% of the amount of
the loan, negative amortization is not allowed, and no balloon
payments are permitted except under certain circumstances).
Puerto
Rico Regulation
Doral Mortgage and Doral Financial are licensed by the Office of
the Commissioner of Financial Institutions of Puerto Rico (the
Office of the Commissioner) as mortgage banking
institutions. Such authorization to act as mortgage banking
institutions must be renewed as of December 1 of each year. In
the past, Doral Financial and its subsidiaries have not had any
difficulty in renewing their authorizations to act as mortgage
banking institutions 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 Financials is also subject to regulation by
the Office of the Commissioner, with respect to, among other
things, maximum origination fees and prepayment penalties on
certain types of mortgage loan products.
Doral Financials operations in the mainland U.S. are
subject to regulation by state regulators in the states in which
it conducts a mortgage loan 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.
On July 30, 2008, President Bush signed into law the
Housing and Economic Recovery Act of 2008 (the Housing
Recovery Act). Title V of the Housing Recovery Act,
entitled The Secure and Fair Enforcement Mortgage Licensing Act
of 2008 (SAFE Act), recognizes and builds on
states efforts by requiring all mortgage loan originators,
regardless of the type of entity they are employed by, to be
either state-licensed or federally-registered. Under the SAFE
Act, all states (including the Commonwealth of Puerto Rico) must
implement a mortgage originator licensing process that meets
certain minimum standards and must license mortgage originators
through a Nationwide Mortgage Licensing System and Registry (the
NMLS). As a result of this federal legislation, the
Office of the Commissioner announced that it would begin
accepting submissions through the NMLS on April 2, 2009 and
that all mortgage lenders/servicers or mortgage brokers
operating in Puerto Rico were required to be duly registered
through the NMLS commencing June 1, 2009. In terms of
federal registrations, on January 31, 2011 the FDIC and
other federal banking agencies issued a notice stating that the
initial registration period for federal registrations of
employees of banks and savings associations will run from
January 31, 2011 to June 29, 2011. This Federal
registration is required by the SAFE Act for employees of banks
and savings associations that act as originators of residential
mortgage loans and will also be accomplished through the NMLS.
On December 30, 2010, the Puerto Rico Governor signed into
law Act No. 247, which repeals the Mortgage Banking Law and
enacts a new mortgage loan law that will regulate the activities
of mortgage companies (including the business and activities of
mortgage lenders, mortgage brokers and mortgage originators).
The new mortgage loan law becomes effective 120 days after
its adoption, and it provides that any currently licensed
mortgage lender will have a period of 90 days from the
laws effective date to comply with the laws
licensing requirements. In general terms, the licensing
provisions require mortgage lenders, mortgage brokers and
individual mortgage originators (other than those that are
federally registered) to submit the required license fees and
information through the NLMS. The new law also has a change in
control
21
requirement comparable to the requirement described above that
is presently applicable under the Mortgage Banking Law.
Banking
Activities
Federal
Regulation
General
Doral Financial is a bank holding company subject to supervision
and regulation by 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, Doral Financials
activities and those of its banking and non-banking subsidiaries
are limited to banking activities and such other activities the
Federal Reserve has determined to be closely related to the
business of banking. Under the Gramm-Leach-Bliley Act, financial
holding companies can engage in a broader range of financial
activities than bank holding companies. Given the difficulties
faced by Doral Financial following the restatement of its
audited financial statements for the period from January 1,
2000 to December 31, 2004, the Company filed a notice with
the Federal Reserve withdrawing its election to be treated as a
financial holding company, which became effective on
January 8, 2008. See Financial
Modernization Legislation below for a description of the
expanded powers of financial holding companies. The withdrawal
of its election to be treated as a financial holding company has
not adversely affected and is not expected to adversely affect
Doral Financials current operations, all of which are
permitted for bank holding companies that have not elected to be
treated as financial holding companies. Specifically, Doral
Financial is authorized to engage in insurance agency activities
in Puerto Rico pursuant to Regulation K promulgated by the
Federal Reserve under the BHC Act. 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 US is
subject to supervision and examination by the Office of Thrift
Supervision (OTS) and the FDIC. The Dodd-Frank Act
abolishes the OTS and provides for the transfer of its functions
and authorities to the Federal Reserve, FDIC and Office of the
Comptroller of the Currency (the OCC). Although the
Dodd-Frank Act abolishes the OTS as a federal regulator, it did
not eliminate the federal thrift charter. The Dodd-Frank Act
requires that the transfer of OTS powers take place within one
year of enactment, with the possibility of a six-month
extension. In terms of federal savings banks such as Doral Bank
US, the OCC will succeed the OTS as the primary regulator of
federal thrifts. All OTS functions related to federal savings
banks and OTS rulemaking authority over all savings banks are
assigned to the OTS. The Federal Reserve will succeed the OTS as
the primary regulator of thrift holding companies.
Doral Financials 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
Financials banking and other 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.
Federal and state banking laws grant substantial enforcement
power to federal and state banking regulators. The enforcement
authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal
orders and to initiate injunctive actions against banking
organizations and institution-affiliated parties. In general,
these enforcement actions may be initiated for violations of
laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with
regulatory authorities.
22
On March 16, 2006, the Company and its principal Puerto
Rico banking subsidiary, Doral Bank PR, entered into consent
orders with the Federal Reserve, the FDIC and the Office of the
Commissioner. On January 14, 2008, the FDIC and the Office
of the Commissioner jointly released Doral Bank PR from the
March 16, 2006 consent order. The consent order between the
Company and the Federal Reserve remains in effect. Please refer
to Part I, Item 3, Legal Proceeding for
additional information regarding regulatory enforcement matters.
Doral Financials banking and other subsidiaries are
subject to certain regulations promulgated by the Federal
Reserve including 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). In general
terms, these regulations mandate certain disclosure requirements
and regulate the manner in which financial institutions must
deal with customers in taking deposits and making loans. Doral
Financials banking and other subsidiaries must comply with
the applicable provisions of these consumer protection
regulations as part of their ongoing customer relations.
Holding
Company Structure
Doral Bank PR and Doral Bank US, as well as any other insured
depository institution subsidiary organized by Doral Financial
in the future, are subject to restrictions under federal law
that govern certain transactions with Doral Financial or other
non-banking subsidiaries of Doral Financial, whether in the form
of loans, other extensions of credit, investments or asset
purchases. Such transactions by any depository institution
subsidiary with Doral Financial, or with any one of Doral
Financials non-banking subsidiaries, are limited in amount
to 10% of the depository institutions capital stock and
surplus and, with respect to Doral Financial and all of its
non-banking subsidiaries, to an aggregate of 20% of the
depository institutions capital stock and surplus. Please
refer to Transactions with Affiliates and Related
Parties, below.
Under Federal Reserve policy, which has been codified by the
Dodd-Frank Act, 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 furtherance of this policy,
the Federal Reserve may require a bank holding company to
terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserves determination that such activity or
control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank
holding company. Further, federal bank regulatory authorities
have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository
institutions financial condition.
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 the event of a bank holding companys
reorganization in a Chapter 11 bankruptcy proceeding, any
commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary
depository institution will be assumed by the bankruptcy trustee
and entitled to priority of payment.
As a bank holding company, Doral Financials right to
participate in the assets of any subsidiary upon the
latters liquidation or reorganization will be subject to
the prior claims of the subsidiarys creditors (including
depositors in the case of depository institution subsidiaries)
except to the extent that Doral Financial 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
23
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 owed by a subsidiary
depository institution to its parent company is subordinated to
the subsidiary banks cross-guarantee liability with
respect to commonly controlled insured depository institutions.
Financial
Modernization Legislation
As discussed above, on January 8, 2008, Doral Financial
withdrew its election to be treated as a financial holding
company. Under the Gramm-Leach-Bliley Act, bank holding
companies, 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 permitted
to other 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 other limits
applicable to foreign securities affiliates (which include
Puerto Rico securities affiliates for these purposes). As noted
above, the withdrawal of financial holding company status did
not adversely affect Doral Financials current operations.
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 Financials
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 Reserves 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 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).
In computing total risk-weighted assets, bank and bank holding
company assets are given risk-weights of 0%, 20%, 50% and 100%.
In addition, certain off-balance sheet items are given similar
credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. Most
loans will be assigned to the 100% risk category, except for
performing first mortgage loans fully secured by 1- to 4-family
and certain multi-family residential property, which carry a 50%
risk rating. Most investment securities (including, primarily,
general obligation claims on states or other political
subdivisions of the United States) will be assigned to the 20%
category, except for municipal or state revenue bonds, which
have a 50% risk-weight, and direct obligations of the
U.S. Treasury or obligations backed by the full faith and
credit of the U.S. Government, which have a 0% risk-weight.
In covering off-balance sheet items, direct credit substitutes,
including general guarantees and standby letters of credit
backing financial obligations, are given a 100% conversion
factor. Transaction-related contingencies such as bid bonds,
standby letters of credit backing non-financial obligations, and
undrawn commitments (including commercial credit lines with an
initial maturity of more than one year) have a 50% conversion
factor. Short-term commercial letters of credit are converted at
20% and certain short-term unconditionally cancelable
commitments have a 0% factor.
In addition, the Federal Reserve has established minimum
leverage ratio guidelines for bank holding companies. These
guidelines provide for a minimum ratio of Tier 1 Capital to
total assets, less goodwill and certain other intangible assets
(the Leverage Ratio) of 3% for bank holding
companies that have the highest regulatory rating or have
implemented the Federal Reserves market risk capital
measure. All other bank
24
holding companies are required to maintain a minimum Leverage
Ratio of 4%. The guidelines also provide that banking
organizations experiencing significant internal growth or making
acquisitions are 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 indicators of capital strength in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage
ratio is the ratio of a banking organizations Tier 1
Capital, less all intangibles, to average total assets, less all
intangibles.
The FDIC and the OTS have established regulatory capital
requirements for state non-member insured banks and federal
savings banks, such as Doral Bank PR and Doral Bank US,
respectively, that are substantially similar to those adopted by
the Federal Reserve for bank holding companies.
On March 17, 2006, Doral Financial entered into a consent
order with the Federal Reserve, pursuant to which the Company
submitted a capital plan in which it established a target
minimum leverage ratio of 5.5% for Doral Financial and 6.0% for
Doral Bank PR. Please refer to Part I, Item 3 Legal
Proceedings for additional information regarding Doral
Financials regulatory matters.
Set forth below are Doral Financials, Doral Bank PRs
and Doral Bank USs capital ratios at December 31,
2010, based on existing Federal Reserve, FDIC and OTS guidelines.
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Banking
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Well
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Doral
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Doral
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Doral
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Capitalized
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Financial
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Bank PR
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Bank US
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Minimum
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Total capital ratio (total capital to risk weighted assets)
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14.5
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%
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15.6
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%
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11.0
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%
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10.0
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%
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Tier 1 capital ratio (Tier 1 capital to risk weighted
assets)
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13.3
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%
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14.4
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%
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10.7
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%
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6.0
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%
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Leverage
ratio(1)
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8.6
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%
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8.0
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%
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6.5
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%
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5.0
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%
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(1) |
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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 US.
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As of December 31, 2010, Doral Bank PR and Doral Bank US
were in compliance with all the regulatory capital requirements
that were applicable to them as a state non-member bank and
federal savings bank, respectively. Please refer to
Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Regulatory Capital Ratios for additional
information regarding Doral Financials regulatory capital
ratios.
As of December 31, 2010, both of the Companys banking
subsidiaries were considered well capitalized banks for purposes
of prompt corrective action regulations adopted by the FDIC
pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991.
On March 19, 2009, the Board of Directors of Doral
Financial approved a capital infusion of up to
$75.0 million to Doral Bank PR, of which $19.8 million
was made during the first quarter of 2009. On November 20,
2009, the Board of Directors approved an additional capital
contribution of up to $100.0 million to Doral Bank PR,
which was made during November and December 2009.
During the second and third quarter of 2010, the Board of
Directors of Doral Financial approved capital contributions to
Doral Bank PR totaling $194.0 million.
Failure to meet minimum regulatory capital requirements could
result in the initiation of certain mandatory and additional
discretionary actions by banking regulators against Doral
Financial and its banking subsidiaries that, if undertaken,
could have a material adverse effect on Doral Financial, such as
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 Prompt Corrective Action Plan under
FDICIA below.
Under the Dodd-Frank Act, federal banking agencies are required
to establish minimum leverage and risk-based capital
requirements for banks and bank holding companies. These new
standards will be no lower
25
than current regulatory capital and leverage standards
applicable to insured depository institutions and may, in fact,
be higher when established by the agencies.
Basel
Capital Standards
The current risk-based capital guidelines are based upon the
1988 capital accord of the International Basel Committee on
Banking Supervision, a committee of central banks and bank
supervisors and regulators from the major industrialized
countries that develops broad policy guidelines for use by each
countrys supervisors in determining the supervisory
policies they apply. A new international accord, referred to as
Basel II, became mandatory for large or core
international banks outside the U.S. in 2008 (total assets
of $250.0 billion or more or consolidated foreign exposures
of $10.0 billion or more) and emphasizes internal
assessment of credit, market and operational risk, as well as
supervisory assessment and market discipline in determining
minimum capital requirements. It is optional for other banks. In
September 2010, the Group of Governors and Heads of Supervisors
of the Basel Committee on Banking Supervision, the oversight
body of the Basel Committee, published its
calibrated capital standards for major banking
institutions, referred to as Basel III. Under these standards,
when fully phased-in on January 1, 2019, banking
institutions will be required to maintain heightened Tier 1
common equity, Tier 1 capital, and total capital ratios, as
well as maintaining a capital conservation buffer.
The Tier 1 common equity and Tier 1 capital ratio
requirements will be phased-in incrementally between
January 1, 2013 and January 1, 2015; the deductions
from common equity made in calculating Tier 1 common equity
will be phased-in incrementally over a four-year period
commencing on January 1, 2014; and the capital conservation
buffer will be phased-in incrementally between January 1,
2016 and January 1, 2019. The Basel Committee also
announced that a countercyclical buffer of 0% to 2.5% of common
equity or other fully loss-absorbing capital will be implemented
according to national circumstances as an extension of the
conservation buffer.
The U.S. banking agencies have indicated informally that
they expect to propose regulations implementing Basel III
in mid-2011 with final adoption of implementing regulations in
mid-2012. Notwithstanding the release of the Basel III
framework as a final framework, the Basel Committee is
considering further amendments to Basel III. In addition to
Basel III, Dodd-Frank Act requires or permits the Federal
banking agencies to adopt regulations affecting the capital
requirements of financial institutions in a number of respects,
including potentially more stringent capital requirements. The
ultimate impact on Doral Financial and its banking subsidiaries
of the new capital and liquidity standards that may be adopted
cannot be determined at this time and will depend on a number of
factors, including the final regulatory actions taken by Federal
banking regulators. However, any requirement that Doral
Financial and its banking subsidiaries maintain more capital,
with common equity as a more predominant component, or meet new
liquidity requirements, could significantly affect our financial
condition, operations, capital position and ability to pursue
certain business opportunities.
Prompt
Corrective Action under FDICIA
Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 and the regulations promulgated thereunder
(FDICIA), federal banking regulators must take
prompt corrective action with respect to depository institutions
that do not meet minimum capital requirements. FDICIA and the
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
26
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, 2010, Doral Financials banking
subsidiaries were well capitalized pursuant to the prompt
corrective action standard as implemented by the primary
regulators. Doral Bank PRs and Doral Bank USs
capital categories, as determined by applying the prompt
corrective action provisions of FDICIA, may not constitute an
accurate representation of the overall financial condition or
prospects of Doral Bank PR or Doral Bank US, and should be
considered in conjunction with other available information
regarding the institutions financial condition and results
of operations.
FDICIA generally prohibits a depository institution from making
any capital distribution (including payment of a dividend) or
paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized.
Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject
to growth limitations and are required to submit capital
restoration plans. A depository institutions holding
company must guarantee the capital plan, up to an amount equal
to the lesser of (i) 5% of the depository
institutions assets at the time it becomes
undercapitalized or (ii) 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 institutions 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 US,
but they are not directly applicable to bank holding companies,
such as Doral Financial, which control such institutions.
However, federal banking agencies have indicated that, in
regulating bank 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-Neal
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 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 PRs 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
27
harmonized, with respect either to which federal agency will
approve interstate transactions or with respect to which
home state determination rules will apply.
Under the Dodd-Frank Act, national banks and state banks are now
able to establish branches in any state if that state would
permit the establishment of the branch by a state bank chartered
in that state.
As a federal savings bank, Doral Bank US is subject to the
branching regulations promulgated by the OTS. Such regulations
allow Doral Bank US to branch on an interstate basis without
geographic limitations.
Dividend
Restrictions
The payment of dividends to Doral Financial by its banking
subsidiaries 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, (depending on the
financial condition of the depository institution, could include
the payment of dividends), such authority may require, after
notice and hearing, that such depository institution cease and
desist from such practice. The FDIC has indicated that the
payment of dividends would constitute unsafe and unsound
practice if the payment would deplete a depository
institutions capital base to an inadequate level.
Moreover, the Federal Reserve and the FDIC have issued policy
statements that generally provide 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. Please refer to -FDICIA above
for additional information.
On March 16, 2006, Doral Financial and its principal Puerto
Rico banking subsidiary, Doral Bank PR, entered into consent
orders with the Federal Reserve, the FDIC and the Office of the
Commissioner. The mutually agreed upon orders prohibit Doral
Bank PR from paying dividends to Doral Financial without
obtaining prior written approval from the FDIC and Federal
Reserve, and the Federal Reserve Order prohibits Doral Financial
from paying dividends to its stockholders without the prior
written approval of the Federal Reserve. The FDIC and the Office
of the Commissioner lifted their consent order on
January 14, 2008. The consent order with the Federal
Reserve remains in effect.
Please refer to Regulation and Supervision
Banking Activities Puerto Rico Regulation,
below, for a description of certain restrictions on Doral Bank
PRs ability to pay dividends under Puerto Rico law. Please
refer to Regulation and Supervision Banking
Activities Savings Bank Regulation, below, for
a description of certain restrictions on Doral Bank USs
ability to pay dividends under OTS regulations.
FDIC
Insurance Assessments
The deposits of Doral Bank PR and Doral Bank US are insured by
the Deposit Insurance Fund (DIF) of the FDIC, and
are therefore subject to FDIC deposit insurance assessments.
As mentioned above, the Dodd-Frank Act permanently raised the
basic limit on deposit insurance by the FDIC from $100,000 to
$250,000. The coverage limit is per depositor, per insured
depository institution for each account ownership category.
The Dodd-Frank Act also set a new minimum DIF reserve ratio at
1.35% of estimated insured deposits. The FDIC is required to
attain this ratio by September 30, 2020. In December 2010,
the FDIC approved a final rule raising its industry target ratio
of reserves to insured deposits to 2.0%, 65 basis points
above the statutory minimum, but the FDIC does not project that
goal to be met until 2027.
In addition, the Dodd-Frank Act will have a significant impact
on the calculation of deposit insurance assessment premiums
going forward. Specifically, the Dodd-Frank Act generally
requires the FDIC to define the deposit insurance assessment
base for an insured depository institution as an amount equal to
the institutions average consolidated total assets during
the assessment period minus average tangible equity. The FDIC
issued a final rule that implements this change to the
assessment calculation on February 7, 2011, but has said
that the new assessment rate schedule should result in the
collection of assessment revenue that is approximately revenue
neutral (although the amounts that individual depository
institutions will pay may
28
change) even though the new assessment base under the Dodd-Frank
Act is larger than the current assessment base. As presently
done under the current rule, the assessment rate of a depository
institution will be determined according to its supervisory
ratings and capital levels, with adjustments for the depository
institutions unsecured debt and brokered deposits. The
deposit insurance rates for depository institutions under the
new rule will range from 2.5 to 45 basis points per $100 of
the assessment base (average consolidated assets minus average
tangible equity).
The new rule will take effect for the quarter beginning
April 1, 2011, and will be reflected in the June 30,
2011 fund balance and the invoices for assessments due
September 30, 2011. The FDIC rule also provides the
FDICs board with the flexibility to adopt actual rates
that are higher or lower than the total base assessment rates
adopted without notice and comment, if certain conditions are
met.
Under the current rule, the amount of the assessment is a
function of the institutions risk category, of which there
are four, and the assessment base. An institutions risk
category is determined according to its supervisory ratings and
capital levels and is used to determine the institutions
assessment rate. The assessment rate for risk categories is
calculated according to a formula, which relies on supervisory
ratings and either financial ratios or long-term debt ratings.
An insured banks assessment base is determined by the
balance of its insured deposits. Because the system is
risk-based, it allows banks to pay lower assessments to the FDIC
as their capital levels and supervisory ratings improve. By the
same token, if these indicators deteriorate, the institution
will have to pay higher assessments to the FDIC. As of
December 31, 2010, deposit insurance rates for depository
institutions range from 7 to 77.5 basis points per $100 of
assessable deposits based upon assessment rates that are
calculated based upon the depository institutions risk
rating as adjusted by its levels of unsecured debt, secured
liabilities, and brokered deposits.
Under the FDIA, the FDIC also has the authority to impose
special assessments upon insured depository institutions when
deemed necessary by the FDICs board. The FDIC adopted a
final rule, in May 2009, effective June 30, 2009, that
imposed a special assessment of five cents for every $100 on
each insured depository institutions assets minus its
Tier 1 capital as of June 30, 2009, subject to a cap
equal to 10 cents per $100 of assessable deposits for the second
quarter of 2009.
On September 29, 2009, in order to strengthen the cash
position of the FDICs Deposit Insurance Fund, the FDIC
issued a notice of proposed rulemaking that would require our
banking subsidiaries to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for
all of 2010, 2011 and 2012. Under the proposed rule each
institutions deposit assessment base would be calculated
using its third quarter 2009 deposit assessment base, adjusted
quarterly for an estimated 5 percent annual growth rate in
the deposit assessment base through the end of 2012. The prepaid
assessment would be collected on December 30, 2009 and
would be mandatory for all institutions (subject to the exercise
of the FDICs discretion to exempt an institution if the
FDIC determines that the prepayment would affect the safety and
soundness of the institution). The FDIC adopted the final rule
implementing the prepayment of assessments on November 12,
2009. Our total prepaid assessments were $67.1 million,
which according to the final rule were recorded as a prepaid
expense as of December 30, 2009. The prepaid assessments
will be amortized and recognized as an expense over the
following three years.
The Deposit Insurance Funds Act of 1996 separated the Financing
Corporation assessment to service the interest on its bond
obligations from the DIF assessments. The amount assessed on
individual institutions by the Financing Corporation is in
addition to the amount paid for deposit insurance according to
the FDICs risk-related assessment rate schedules. The
current Financing Corporation annual assessment rate is $0.0102
to $0.0104 per $100 of deposits. These assessments will continue
until the Financing Corporation bonds mature in 2019.
As of December 31, 2010, Doral Bank PR and Doral Bank US
had a DIF deposit base of approximately $4.6 billion and
$146.3 million, respectively.
29
Temporary
FDIC Insurance of Non-Interest Bearing Transaction
Accounts
The Dodd-Frank Act amended the FDIA to fully insure the amounts
deposited in non-interest bearing transaction accounts at all
insured depository institutions from December 31, 2010
until December 31, 2012. This amendment became effective on
December 31, 2010, which is the date that the FDICs
Transaction Account Guarantee (TAG) Program
terminated. The new program applies to all insured depository
institutions, while the TAG Program applied to only to insured
depository institutions that opted in (Doral Bank PR and Doral
Bank US had opted in to the TAG Program). Under the new program,
low-interest checking (NOW) accounts will no longer be eligible
for unlimited deposit insurance. This unlimited insurance
coverage for non-interest bearing transaction accounts is
separate from, and in addition to, the insurance coverage
provided to a depositors other deposit accounts held at an
FDIC-insured institution. FDIC-insured depository institutions
are not permitted to opt out of this temporary insurance program
and the FDIC will not charge a separate assessment for this
coverage.
Community
Reinvestment
Under the Community Reinvestment Act (CRA), each
insured depository institution has a continuing and affirmative
obligation, consistent with the safe and sound operation of such
institution, to help meet the credit needs of its entire
community, including low-and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs
for such institutions nor does it limit an institutions
discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent
with the CRA. The CRA requires each federal banking agency, in
connection with its examination of an insured depository
institution, to assess and assign one of four ratings to the
institutions record of meeting the credit needs of its
community and to take such records into account in its
evaluation of certain applications by the institution, including
application for charters, branches and other deposit facilities,
relocations, mergers, consolidations, acquisitions of assets or
assumptions of liabilities and savings and loan holding company
acquisitions. The CRA also requires that all institutions make
public disclosure of their CRA ratings. Doral Bank PR and Doral
Bank US received ratings of satisfactory as of the most recent
CRA report of the FDIC and the OTS, respectively.
Safety
and Soundness Standards
Section 39 of the FDIA, as amended by FDICIA, requires each
federal banking agency to prescribe for all insured depository
institutions that it supervises safety and soundness standards
relating to internal control, information systems and internal
audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits and
such other operational and managerial standards as the federal
banking agency deems appropriate. If an insured depository
institution fails to meet any of the standards described above,
it may be required to submit to the appropriate federal banking
agency a plan specifying the steps that will be taken to cure
the deficiency. If the depository institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate
federal banking agency will require the depository institution
to correct the deficiency and, until it is corrected, may impose
other restrictions on the depository institution, including any
of the restrictions applicable under the prompt corrective
action provisions of the FDICIA.
The FDIC and other federal banking agencies have adopted
Interagency Guidelines Establishing Standards for Safety and
Soundness that, among other things, set forth standards relating
to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, employee compensation and benefits,
asset growth and earnings.
Interagency
Appraisal and Evaluation Guidelines
In December 2010, the federal banking agencies issued the
Interagency Appraisal and Evaluation Guidelines. This guidance,
which updated guidance originally issued in 1994, sets forth the
minimum regulatory standards for appraisals. In incorporates
previous regulatory issuances affecting appraisals, addresses
advances in information technology used in collateral
evaluation, and clarifies standards for use of analytical
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methods and technological tools in developing evaluations. This
guidance also requires institutions to utilize strong internal
controls to ensure reliable appraisals and evaluations and
periodically update valuations of collaterals for existing real
estate loans and transactions.
Brokered
Deposits
FDIC regulations adopted under FDICIA govern the receipt of
brokered deposits by insured depository institutions. 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 certain prevailing rates specified by regulation) 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, 2010 and 2009, Doral Bank PR had a total
of approximately $2.3 billion and $2.6 billion of
brokered deposits, respectively. Doral Bank PR uses brokered
deposits as a source of less costly funding. As of
December 31, 2010, Doral Bank US had a total of
approximately $10.1 million of brokered deposits, compared
to $20.1 million as of December 31, 2009.
Federal
Home Loan Bank System
Doral Bank PR is a member of the Federal Home Loan Bank
(FHLB) system. The FHLB system consists of twelve
regional Federal Home Loan Banks governed and regulated by the
Federal Housing Finance Agency. The Federal Home Loan Banks
serve as reserve or credit facilities for member institutions
within their assigned regions. They are funded primarily from
proceeds derived from the sale of consolidated obligations of
the FHLB system, and they make loans (advances) to members in
accordance with policies and procedures established by the FHLB
system and the board of directors of each regional FHLB.
Doral Bank PR is a member of the FHLB of New York
(FHLB-NY) and as such is required to acquire and
hold shares of capital stock in the FHLB-NY for a certain
amount, which is calculated in accordance with the requirements
set forth in applicable laws and regulations. Doral Bank PR is
in compliance with the stock ownership requirements of the
FHLB-NY. All loans, advances and other extensions of credit made
by the FHLB-NY to Doral Bank PR are secured by a portion of
Doral Bank PRs mortgage loan portfolio, certain other
investments and the capital stock of the FHLB-NY held by Doral
Bank PR.
Doral Bank US is also a member of the FHLB-NY and is subject to
similar requirements as those of Doral Bank PR described above.
Activity
restrictions on state-chartered banks
Section 24 of the FDIA, as amended by FDICIA, generally
provides that state-chartered banks and their subsidiaries are
limited in their investment and activities engaged in as
principal to those permissible under state law and that are
permissible to national banks and their subsidiaries, unless
such investments and principal activities are specifically
permitted by the FDIA or the FDIC determines that such activity
or investment would pose no significant risk to the DIF and the
banks are, and continue to be, in compliance with applicable
capital standards. Any insured state-chartered bank directly or
indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
USA
Patriot Act of 2001
On October 26, 2001, the President of the United States
signed into law comprehensive anti-terrorism legislation known
as the USA PATRIOT Act of 2001 (the USA Patriot
Act). Title III of the USA Patriot Act substantially
broadened the scope of U.S. anti-money laundering laws and
regulations by imposing significant
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new compliance and due diligence obligations, creating new
crimes and penalties and expanding the extra-territorial
jurisdiction of the United States.
The U.S. Treasury Department (Treasury) has
issued a number of regulations implementing the USA Patriot Act
that apply certain of its requirements to financial
institutions, including Doral Financials banking
subsidiaries. The regulations impose new obligations on
financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money
laundering and terrorist financing.
Among other requirements, the USA Patriot Act and the related
regulations require financial institutions to establish
anti-money laundering programs that include, at a minimum:
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internal policies, procedures and controls designed to implement
and maintain the depository institutions compliance with
all of the requirements of the USA Patriot Act, the Bank Secrecy
Act and related laws and regulations;
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systems and procedures for monitoring and reporting of
suspicious transactions and activities;
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employee training;
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an independent audit function to test the anti-money laundering
program;
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procedures to verify the identity of each customer upon the
opening of accounts; and
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heightened due diligence policies, procedures and controls
applicable to certain foreign accounts and relationships.
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Failure of a financial institution to comply with the USA
Patriot Acts requirements could have serious legal and
reputational consequences for the institution. Doral Financial
believes that the cost of complying with Title III of the
USA Patriot Act is not likely to be material to Doral Financial.
Doral Bank PR was subject to a consent order with the FDIC
relating to failure to comply with certain requirements of the
Bank Secrecy Act. The order required Doral Bank PR, among other
things, to engage an independent consultant to review account
and transaction activity from April 1, 2006 through
March 31, 2007 to determine compliance with suspicious
activity reporting requirements (the Look Back
Review). The FDIC terminated the consent order on
September 15, 2008. Since the Look Back Review was still
ongoing, Doral Bank PR and the FDIC agreed to a Memorandum of
Understanding that covered the remaining portion of the Look
Back Review. On June 30, 2009, Doral Bank received a
notification letter from the FDIC terminating the Memorandum of
Understanding because the Look Back Review had been completed.
Please refer to Item 3. Legal Proceedings
Banking Regulatory Matters, for additional information
regarding the terminated consent order relating to compliance
with various provisions of the Bank Secrecy Act.
Transactions
with Affiliates and Related Parties
Transactions between one of the banking subsidiaries of the
Company and any of its affiliates are governed by
sections 23A and 23B of the Federal Reserve Act. These
sections are important statutory provisions designed to protect
a depository institution from transferring to its affiliates the
subsidy arising from the institutions access to the
Federal safety net on deposits. An affiliate of a bank is any
company or entity that controls, is controlled by or is under
common control with the bank. Generally, sections 23A and
23B (1) limit the extent to which a bank or its
subsidiaries may engage in covered transactions with
any one affiliate to an amount equal to 10% of the banks
capital stock and surplus, and limit such transactions with all
affiliates to an amount equal to 20% of the banks capital
stock and surplus, and (2) require that all such
transactions be on terms that are consistent with safe and sound
banking practices. The term covered transactions
includes the making of loans, purchase of or investment in
securities issued by the affiliate, purchase of assets, issuance
of guarantees and other similar types of transactions. Most
loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of
the loan amount, depending on the nature of the collateral. In
addition, any covered transaction by a bank with an affiliate
and any sale of assets or provision of services to an affiliate
must be on terms that are substantially the same, or at least as
favorable to the bank, as those prevailing at the time for
comparable transactions with nonaffiliated companies.
32
Regulation W of the Federal Reserve Board comprehensively
implements sections 23A and 23B. The regulation unified and
updated Federal Reserve Board staff interpretations issued over
the years prior to its adoption, incorporated several
interpretative proposals (such as to clarify when transactions
with an unrelated third party will be attributed to an
affiliate), and addressed issues arising as a result of the
expanded scope of non-banking activities engaged in by banks and
bank holding companies and authorized for financial holding
companies under the Gramm-Leach-Bliley Act.
The Dodd-Frank Act also changed the definition of covered
transaction in sections 23A and 23B and established
limitations on asset purchases from insiders. With respect to
the definition of covered transaction, the
Dodd-Frank Act defines that term to include the acceptance of
debt obligations issued by an affiliate as collateral for a
banks loan or extension of credit to another person or
company. In addition, a derivative transaction with
an affiliate is now deemed to be a covered
transaction to the extent that such a transaction causes a
bank or its subsidiary to have a credit exposure to the
affiliate. A separate provision of the Dodd-Frank Act states
that an insured depository institution may not purchase an
asset from, or sell an asset to a bank insider (or their
related interests) unless (1) the transaction is conducted
on market terms between the parties, and (2) if the
proposed transaction represents more than 10% of the capital
stock and surplus of the insured institution, it has been
approved in advance by a majority of the institutions
non-interested directors.
Sections 22(g) and (h) of the Federal Reserve Act set
forth restrictions on loans by a bank to its executive officers,
directors, and principal shareholders. Regulation O of the
Federal Reserve Board implements these provisions. Under
Section 22(h) and Regulation O, loans to a director,
an executive officer and to a greater than 10% shareholder of a
bank and certain of their related interests
(insiders), and insiders of its affiliates, may not
exceed, together with all other outstanding loans to such person
and related interests, the banks single borrower limit
(generally equal to 15% of the institutions unimpaired
capital and surplus). Section 22(h) and Regulation O
also require that loans to insiders and to insiders of
affiliates be made on terms substantially the same as offered in
comparable transactions to other persons, unless the loans are
made pursuant to a benefit or compensation program that
(i) is widely available to employees of the bank and
(ii) does not give preference to insiders over other
employees of the bank. Section 22(h) and Regulation O
also require prior board of directors approval for certain
loans, and the aggregate amount of extensions of credit by a
bank to all insiders cannot exceed the institutions
unimpaired capital and surplus. Furthermore, Section 22(g)
and Regulation O place additional restrictions on loans to
executive officers.
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). Doral Bank PR is
required to file reports with the Office of the Commissioner and
the FDIC concerning its activities and financial condition, and
it must obtain regulatory approval prior to entering into
certain transactions, such as mergers with, or acquisitions of,
other depository institutions and opening or acquiring branch
offices. The Office of the Commissioner and the FDIC conduct
periodic examinations to assess Doral Bank PRs compliance
with various regulatory requirements. The regulatory authorities
have extensive discretion in connection with the exercise of
their supervisory and enforcement authorities, including the
setting of policies with respect to the classification of assets
and the establishment of adequate loan and lease loss reserves
for regulatory purposes.
Doral Bank PR derives its lending, investment and other powers
primarily from the applicable provisions of the Banking Law and
the regulations adopted thereunder. The Banking Law also governs
the responsibilities of directors and officers of Puerto Rico
banks, and the corporate powers, lending, capital and investment
requirements and other activities of Puerto Rico banks. The
Office of the Commissioner has extensive rulemaking power and
administrative discretion under the Banking Law, and generally
examines Doral Bank PR on an annual basis.
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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, 2010,
Doral Bank PRs reserve fund complied with the legal
requirement.
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. This reserve fund is reflected in
Doral Financials consolidated financial statements as
Legal Surplus.
Section 16 of the Banking Law requires every bank to
maintain a reserve requirement 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 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 the Commissioner may permit from
time to time. The Office of the Commissioner has permitted the
inclusion of up to 50% of retained earnings to banks classified
as 1 composite rating and well capitalized. As of
December 31, 2010, the legal lending limit for Doral Bank
PR under this provision based solely on its paid-in capital and
reserve fund was approximately $132.1 million (based on
FDIC regulation the lending limit is more conservative amounting
$101.6 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, 2010, the lending limit for Doral
Bank PR for loans secured by collateral worth at least 25% more
than the amount of the loan was $220.2 million (based on
FDIC regulation the lending limit is more conservative amounting
to $169.4 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. There are also no
restrictions under Section 17 on the amount of loans made
by a Puerto Rico bank to the Government of the United States or
the Commonwealth or to any municipality, instrumentality,
authority or dependency of the United States or 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.
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 Economic Development and
Commerce, the Secretary of Consumer Affairs, the President of
the Planning Board, the President of the Government Development
Bank for Puerto Rico, the President of the Economic Development
Bank, the Commissioner of Insurance and the President of the
Corporation for the Supervision and Insurance of Puerto Rico
Cooperatives, 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 the authority to
regulate the maximum finance charges on retail installment sales
contracts and credit cards. Currently, there is no maximum
interest rate that may be charged on installment sales contracts
or credit cards.
On March 16, 2006, Doral Financial and its principal Puerto
Rico Banking subsidiary, Doral Bank PR, entered into consent
orders with the Federal Reserve, the FDIC and the Office of the
Commissioner. The mutually agreed upon orders require Doral
Financial and Doral Bank PR to conduct reviews of their mortgage
portfolios, and to submit plans regarding the maintenance of
capital adequacy and liquidity. The consent orders also prohibit
Doral Financial and any of its non-banking affiliates, directly
or indirectly, from entering into,
34
participating, or in any other manner engaging in any covered
transactions with its subsidiary banks, Doral Bank PR and Doral
Bank US. The consent order from the Office of the Commissioner
was lifted on January 14, 2008, in a joint action with the
FDIC. The consent order with the Federal Reserve remains in
effect.
Savings
Bank Regulation
As a federal savings bank, Doral Bank USs investments,
borrowings, lending, issuance of securities, establishment of
branch offices and all other aspects of its operations are
subject to the jurisdiction of the OTS.
Doral Bank USs payment of dividends is subject to the
limitations of the capital distribution regulation promulgated
by the OTS. The OTS regulation determines a savings
banks ability to pay dividends, make stock repurchases, or
make other types of capital distributions, according to the
institutions capital position. The rule establishes
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 only with the prior
approval of the OTS.
Savings banks, such as Doral Bank US, that meet all applicable
capital requirements may make a distribution without notice or
an application in an amount equal to the sum of (i) the
current years net income, and (ii) the retained net
income (net income less capital distributions) from the
preceding two years; so long as the savings bank continues to
satisfy applicable capital requirements after the distribution.
If such a distribution would cause Doral Bank US to fall below
the well-capitalized requirement, a prior
30-day
notice to the OTS would be required.
OTS regulations generally permit Doral Bank US to make total
loans and extensions of credit to one borrower up to 15% of its
unimpaired capital and surplus. As of December 31, 2010,
the legal lending limit for Doral Bank US under this regulation
was approximately $2.2 million. Doral Bank USs 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 USs expanded
aggregate legal lending limit under this provision was
approximately $3.6 million as of December 31, 2010.
The Dodd-Frank Act abolishes the OTS and provides for the
transfer of its functions and authorities to the Federal
Reserve, FDIC and the OCC. Although the Dodd-Frank Act abolishes
the OTS as a federal regulator, it did not eliminate the federal
thrift charter. The Dodd-Frank Act requires that the transfer of
OTS powers take place within one year of enactment, with the
possibility of a six-month extension. In terms of federal
savings banks such as Doral Bank US, the OCC will succeed the
OTS as the primary regulator of federal thrifts. All OTS
functions related to federal savings banks and OTS rulemaking
authority over all savings banks are assigned to the OCC. The
Federal Reserve will succeed the OTS as the primary regulator of
thrift holding companies.
IBC
Act
On July 1, 2008, Doral International, Inc., an
international banking entity (IBE), subject to
supervision, examination and regulation by the Office of the
Commissioner under the Puerto Rico International Banking Center
Regulatory Act (the IBC Act), was merged with and
into Doral Bank PR, Doral Internationals parent company,
with Doral Bank PR being the surviving corporation, in a
transaction structured as a tax free reorganization.
On December 16, 2008, Doral Investment International LLC
was organized to become a new subsidiary of Doral Bank PR that
was granted license to operate as an international banking
entity under the IBC Act of Puerto Rico on February 2,
2010, but is not currently operational. Doral Investment
International LLC is subject to the supervision, examination and
regulation by the Office of the Commissioner under the IBC Act.
Under the IBC Act, no sale, encumbrance, assignment, merger,
exchange or transfer of shares, interest or participation in the
capital of an IBE may be initiated without the prior approval of
the Office of the
35
Commissioner, if by such transaction a person would acquire,
directly or indirectly, control of 10% or more of any class of
stock, interest or participation in the capital of the IBE. The
IBC Act and the regulations issued thereunder by the Office of
the Commissioner limit the business activities that may be
carried out in an IBE. Such activities are generally limited to
persons and assets located outside of Puerto Rico. The IBC Act
provides that every IBE must have not less than $300,000 in
unencumbered assets or acceptable financial securities in Puerto
Rico.
Pursuant to the IBC Act and the regulations issued thereunder by
the Office of the Commissioner, an international banking entity
has to maintain books and records of all of its transactions in
the ordinary course of business. International banking entities
are also required to submit quarterly and annual reports of
their financial condition and results of operations to the
Office of the Commissioner.
The IBC Act empowers the Office of the Commissioner to revoke or
suspend, after notice and hearing, a license issued to an
international banking entity if, among other things, such entity
fails to comply with the IBC Act, the applicable regulation or
the terms of the license, or if the Office of the Commissioner
finds that the business and affairs of the international banking
entity are conducted in a manner that is not consistent with the
public interest.
Certain
Regulatory Restrictions on Investments in Common
Stock
Because of Doral Financials status as a bank holding
company, owners of Doral Financials 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 Exchange Act, 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 Banking Law 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, acquires 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 Banking Law, the
determination of the Office of the Commissioner whether to
approve a change of control filing is final and non-appealable.
The provisions of the Mortgage Banking Law also require
regulatory approval for the acquisition of more than 10% of
Doral Financials outstanding voting securities. Please
refer to Regulation and Supervision
Mortgage Origination and Servicing above.
The above regulatory restrictions relating to investment in
Doral Financial 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 Financials board of directors, to solicit or
exercise proxies, or otherwise exercise voting rights, in
connection with matters submitted to a vote of Doral
Financials stockholders.
Insurance
Operations
Doral Insurance Agency is registered as a corporate agent and
general agency with the Office of the Commissioner of Insurance
of Puerto Rico (the Commissioner of Insurance). The
operations of Doral
36
Insurance Agency are subject to the applicable provisions of the
Puerto Rico Insurance Code and to regulation by the Commissioner
of Insurance relating to, among other things, licensing of
employees, sales practices, charging of commissions and
obligations to customers. Doral Insurance Agency is subject to
supervision and examination by the Commissioner of Insurance.
Changes
to Legislation or Regulation
Changes to federal and local laws and regulations (including
changes in interpretation and enforcement) can affect the
operating environment of the Company and its subsidiaries in
substantial and unpredictable ways. From time to time, various
legislative and regulatory proposals are introduced. These
proposals, if adopted, may change laws and regulations and the
Companys operating environment. If adopted, some of these
laws and regulations could increase or decrease the cost of
doing business, limit or expand permissible activities or affect
the competitive balance among banks, savings institutions,
credit unions and other financial institutions. The Company
cannot accurately predict whether those changes in laws and
regulations will occur, and, if those changes occur, the
ultimate effect they would have upon our financial condition or
results of operations. It is likely, however, that the current
high level of enforcement and compliance-related activities of
federal and Puerto Rico authorities will continue and
potentially increase.
Readers should carefully consider, in connection with other
information disclosed in this Annual Report on
Form 10-K,
the risk factors set forth below. The following discussion sets
forth some of the more important risk factors that could affect
our business, financial condition or results of operations.
However, other factors, besides those discussed below or
elsewhere in this report or other of our reports filed with or
furnished to the SEC, also could adversely affect our business,
financial condition or results of operations. We cannot assure
you that the risk factors described below or elsewhere in this
document are a complete set of all potential risks we may face.
These risk factors also serve to describe factors which may
cause our results to differ materially from those discussed in
forward looking statements included herein or in other documents
or statements that make reference to this Annual Report on
Form 10-K.
Please also refer to the section titled Forward Looking
Statements in this Annual Report on
Form 10-K.
Risks
related to the general business environment and our
industry
Difficult
market conditions have already affected us and our industry and
may continue to adversely affect us.
Given that almost all of our business is in Puerto Rico and the
United States and given the degree of interrelation between
Puerto Ricos economy and that of the United States, we are
particularly exposed to downturns in the U.S. economy.
Dramatic declines in the U.S. housing market over the past
few years, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the
credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities as well as major commercial banks
and investment banks. These write-downs, initially of
mortgage-backed securities but spreading to credit default swaps
and other derivative and cash securities, in turn, have caused
many financial institutions to seek additional capital from
private and government entities, to merge with larger and
stronger financial institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and
institutional investors reduced or ceased providing funding to
borrowers, including other financial institutions. This market
turmoil and tightening of credit led to an increased level of
commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction
of business activity generally. The resulting economic pressure
on consumers and lack of confidence in the financial markets has
already adversely affected our industry and has and may continue
to adversely affect our business, financial condition and
results of operations. The Company experienced increased levels
of non-performing assets and OTTI charges on its non-agency MBSs
as a result of market conditions. We do not
37
expect that the difficult conditions in the financial markets
are likely to improve in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these
difficult market conditions on us and others in the financial
institutions industry. In particular, we may face the following
risks in connection with these events:
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Our ability to assess the creditworthiness of our customers may
be impaired if the models and approaches we use to select,
manage, and underwrite our customers become less predictive of
future behaviors.
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The processes and models we use to estimate losses inherent in
our credit exposure requires difficult, subjective, and complex
judgments, including forecast of economic conditions and how
these economic conditions might impair the ability of our
borrowers to repay their loans, which may no longer be capable
of accurate estimation and which may, in turn, impact the
reliability of the processes and models.
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Regulatory agency views of market conditions and the effect of
market conditions on our borrowers may differ from those of
management, and such variance in views, if any, may contribute
to changes in charge-offs and loan loss provisions.
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Our ability to borrow from other financial institutions or to
engage in sales of mortgage loans to third parties (including
mortgage loan securitization transactions with government
sponsored entities) on favorable terms or at all could be
adversely affected by further disruptions in the capital markets
or other events, including deteriorating investor expectations.
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Competition in our industry could intensify as a result of
increasing consolidation of financial services companies in
connection with current market conditions.
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We expect to face increased regulation of our industry.
Compliance with such regulation may increase our costs and limit
our ability to pursue certain business opportunities.
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We may be required to pay in the future significantly higher
FDIC assessments to insure our deposits if market conditions do
not improve or if market conditions deteriorate.
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We may face higher credit losses because of federal or state
legislation or regulatory action that either (i) reduces
the amount that our borrowers are required to pay us, or
(ii) limits our ability to foreclose on properties or
collateral or makes foreclosures less economically viable.
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If current levels of market disruption and volatility continue
or worsen, our ability to access capital and our business,
financial condition and results of operations may be materially
and adversely affected.
Adverse
credit market conditions may affect the Companys ability
to meet its liquidity needs; unforeseen disruptions in the
brokered deposits market could compromise the Companys
liquidity position.
The credit markets, although recovering, have experienced
extreme volatility and disruption. At times during the past few
years, the volatility and disruptions reached unprecedented
levels. In some cases, the markets have exerted downward
pressure on availability of liquidity and credit capacity of
certain issuers, particularly for non-investment grade issuers
like us.
We need liquidity to, among other things, pay our operating
expenses, interest on our debt and dividends on our preferred
stock (if dividends are declared and paid), maintain our lending
activities and replace certain maturing liabilities. Without
sufficient liquidity, we may be forced to curtail our
operations. The availability of additional financing will depend
on a variety of factors such as market conditions, the general
availability of credit and our credit capacity. Our cash flows
and financial condition could be materially affected by
continued disruptions in the financial markets.
A relatively large portion of our funding is retail brokered
deposits issued by Doral Bank PR. The Companys total
brokered deposits as of December 31, 2010 were
$2.4 billion. An unforeseen disruption in the brokered
deposits market, stemming from factors such as legal, regulatory
or financial risks, could adversely affect our ability to fund a
portion of our operations
and/or meet
obligations.
38
Our
business concentration in Puerto Rico imposes
risks.
We conduct our operations in a geographically concentrated area,
as our main market is in Puerto Rico. This imposes risks from
lack of diversification in the geographical portfolio. The
Companys financial condition and results of operations are
highly dependent on the economic conditions of Puerto Rico,
where adverse political or economic developments or natural
disasters, among other things, could affect the volume of loan
originations, increase the level of non-performing assets,
increase the rate of foreclosure losses and reduce the value of
our loans and loan servicing portfolio.
Our
credit quality may continue to be adversely affected by Puerto
Ricos current economic conditions.
The Companys business activities and credit exposure are
concentrated in Puerto Rico. Consequently, our financial
condition and results of operations are highly dependent on
economic conditions in Puerto Rico.
Puerto Ricos economy is currently in a recession that
began in the fourth quarter of the fiscal year that ended
June 30, 2006. Although the Puerto Rico economy is closely
linked to the United States economy, for fiscal years 2007, 2008
and 2009, Puerto Ricos real gross national product
decreased by 1.2%, 2.8% and 3.7%, respectively, while the United
States economy grew at a rate of 1.8% and 2.8% during fiscal
years 2007 and 2008, respectively, and contracted at a rate of
2.5% during fiscal year 2009. According to the Puerto Rico
Planning Boards latest projections, Puerto Ricos
real gross national product was projected to contract by 3.6%
during fiscal year 2010. Puerto Ricos real gross national
product for fiscal year 2011, however, is projected to grow by
0.4%. The number of persons employed in Puerto Rico during
fiscal year 2010 averaged 1,102,700, a decrease of 5.6% compared
to the previous fiscal year. During the first six months of
fiscal year 2011, total employment averaged 1,084,500, a decline
of 2.5% compared with the same period of the previous fiscal
year, and the unemployment rate averaged 15.9%.
Since 2000, the Government of Puerto Rico has experienced a
structural imbalance between recurring government revenues and
total expenditures. The structural imbalance was exacerbated
during fiscal years 2008 and 2009, with recurring government
expenditures significantly exceeding recurring government
revenues. Prior to fiscal year 2009, the Puerto Rico government
bridged the deficit resulting from the structural imbalance
through the use of non-recurring measures, such as borrowing
from the Government Development Bank for Puerto Rico or in the
bond market, postponing the payment of various government
expenses, such as payments to suppliers and utilities providers,
and other one time measures such as the use of derivatives and
borrowings collateralized with government assets such as real
estate. Since March 2009, the government has taken multiple
steps to address and resolve the structural imbalance.
For fiscal year 2009, the deficit was approximately
$3.3 billion, consisting of the difference between revenues
and expenses for such fiscal year. The estimated deficit is
projected to be approximately $2.1 billion for fiscal year
2010 and approximately $1.0 billion for fiscal year 2011.
Measures that the Government of Puerto Rico has implemented have
included reducing expenses, including public sector employment
through layoffs of employees. Since the Government of Puerto
Rico is the largest source of employment in Puerto Rico, these
measures have had the effect of increasing unemployment and
could have the effect of intensifying the current recessionary
cycle. In addition, a payment or other material default by the
Government of Puerto Rico or any of its agencies, public
corporations or instrumentalities with respect to their
municipal bond or note obligations could have a material adverse
effect on our financial condition and results of operations.
The current state of the Puerto Rico economy and continued
uncertainty in the public and private sectors has had an adverse
effect on the credit quality of our loan portfolios and reduced
the level of our originations in Puerto Rico. The continuation
of the economic slowdown would cause those adverse effects to
continue, as delinquency rates may continue to increase in the
short term, until sustainable growth of the Puerto Rico economy
resumes. Also, potential reduction in consumer spending as a
result of continued recessionary conditions may also impact
growth in other interest and non-interest revenue sources of the
Company.
39
A
prolonged economic slowdown or decline in the residential real
estate market in the U.S. mainland and in Puerto Rico and an
increase in the continued unemployment in Puerto Rico could
continue to adversely affect our results of
operations.
The residential mortgage loan origination business has
historically been cyclical, enjoying periods of strong growth
and profitability followed by periods of shrinking volumes and
industry-wide losses. The market for residential mortgage loan
originations is currently in decline and this trend could also
reduce the level of mortgage loans we may produce in the future
and adversely affect our business. During periods of rising
interest rates, refinancing originations for many mortgage
products tend to decrease as the economic incentives for
borrowers to refinance their existing mortgage loans are
reduced. In addition, the residential mortgage loan origination
business is impacted by home values. Over the past three years,
residential real estate values in many areas of the
U.S. have decreased significantly, which has led to lower
volumes and higher losses across the industry, adversely
impacting our mortgage business.
The actual rates of delinquencies, foreclosures and losses on
loans have been higher during the recent economic slowdown.
Rising unemployment, higher interest rates or declines in
housing prices have had a greater negative effect on the ability
of borrowers to repay their mortgage loans. Any sustained period
of increased delinquencies, foreclosures or losses could
continue to harm our ability to sell loans, the prices we
receive for loans, the values of mortgage loans held for sale or
residual interests in securitizations, which could continue to
harm our financial condition and results of operations. In
addition, any additional material decline in real estate values
would further weaken the collateral
loan-to-value
ratios and increase the possibility of loss if a borrower
defaults. In such event, we will be subject to the risk of loss
on such loan arising from borrower defaults to the extent not
covered by third-party credit enhancement.
The
soundness of other financial institutions could affect
us.
Our ability to engage in routine funding transactions could be
adversely affected by the actions and commercial soundness of
other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty
and other relationships. We have exposure to different
industries and counterparties, and we routinely execute
transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks,
investment banks, investment companies and other institutional
clients. In certain of these transactions, we are required to
post collateral to secure our obligations to the counterparties.
In the event of a bankruptcy or insolvency proceeding involving
one of such counterparties, we may experience delays in
recovering the assets posted as collateral or may incur a loss
to the extent that the counterparty was holding collateral in
excess of the obligation to such counterparty.
Many of these transactions expose us to credit risk in the event
of a default by our counterparty or client. In addition, our
credit risk may be exacerbated when the collateral held by us
cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the loan or derivative
exposure due to us. Any such losses could materially and
adversely affect our business, financial condition and results
of operations.
Monetary
policies and regulations of the Federal Reserve could adversely
affect our business, financial condition and results of
operations.
In addition to being affected by general economic conditions,
our earnings and growth are affected by the policies of the
Federal Reserve. An important function of the Federal Reserve is
to regulate the money supply and credit conditions. Among the
instruments used by the Federal Reserve to implement these
objectives are open market operations in U.S. government
securities, adjustments of the discount rate and changes in
reserve requirements against bank deposits. These instruments
are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments
and deposits. Their use also affects interest rates charged on
loans or paid on deposits.
On January 6, 2010, the member agencies of the Federal
Financial Institutions Examination Council, which includes the
Federal Reserve and the FDIC, issued an interest rate risk
advisory reminding banks to maintain sound practices for
managing interest rate risk, particularly in the current
environment of historically low short-term interest rates.
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The monetary policies and regulations of the Federal Reserve
have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do
so in the future. The effects of such policies upon our
business, financial condition and results of operations may be
adverse.
Our income and cash flows depend to a great extent on the
difference between the interest rates earned on interest-earning
assets such as loans and investment securities, and the interest
rates paid on interest-bearing liabilities such as deposits and
borrowings. These rates are highly sensitive to many factors
that are beyond our control, including general economic
conditions and the policies of various governmental and
regulatory agencies (in particular, the Federal Reserve).
Changes in monetary policy, including changes in interest rates,
will influence the origination of loans, the prepayment speed of
loans, the value of loans, investment securities and mortgage
servicing assets, the purchase of investments, the generation of
deposits, and the rates received on loans and investment
securities and paid on deposits or other sources of funding.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act will
affect our business.
On July 21, 2010, President Obama signed into law the
Dodd-Frank Act. The legislation is making significant structural
reforms to the financial services industry. The legislation,
among other things, is:
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establishing a Bureau of Consumer Financial Protection having
broad authority to regulate providers of credit, savings and
other consumer financial products and services, narrows the
scope of federal preemption of state consumer laws and expands
the authority of state attorneys general to bring actions to
enforce federal consumer protection legislation;
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(ii)
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creating a structure to regulate systematically important
financial companies, and provide regulators with the power to
require such companies to sell or transfer assets and terminate
activities if the regulators determine the size or the scope of
the activities of the company pose a threat to the safety and
soundness of the company or the financial stability of the
United States;
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requiring more comprehensive regulation of the
over-the-counter
derivatives market, including providing for more strict capital
and margin requirements, the central clearing of standardized
over-the-counter
derivatives, and heightened supervision of all
over-the-counter
derivatives dealers and major market participants;
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limiting the ability of banking entities to engage in certain
proprietary trading activities and restricting their ownership
of, investment in or sponsorship of hedge funds and private
equity funds;
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(v)
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restricting the interchange fees payable on debit card
transactions;
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(vi)
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abolishing the Office of Thrift Supervision (OTS)
and transferring its functions and responsibilities regarding
the supervision of federal savings banks, such as Doral Bank US,
to the Office of the Comptroller of the Currency
(OCC);
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(vii)
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strengthening the regulatory oversight of securities and capital
markets activities by the US Securities and Exchange Commission
(SEC) and enhancing the safety and soundness of the
securitization process, including a requirement that
securitizers and originators retain a portion of the credit risk
for any asset that they securitize or originate;
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permanently increasing the federal deposit insurance from
$100,000 to $250,000, permitting depository institutions to pay
interest on demand deposit accounts (such as commercial checking
accounts) and permitting de novo interstate branching by
federal and state depository institutions alike; and
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(ix)
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strengthening existing laws and regulations applicable to public
companies governing corporate accountability, giving
shareholders say on pay and other corporate
governance rights, and imposing limitations on certain executive
compensation practices.
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Some of the provisions of the legislation have already become
effective. Other provisions will have extended implementation
periods and delayed effective dates, and will be required to be
implemented through
41
regulatory action of various federal regulatory authorities.
Because many of the provisions require future regulatory actions
for their implementation, the ultimate impact of the legislation
on the financial services industry and on our business, are not
completely known at this time. The implementation of many of the
provisions of the legislation will affect our business and are
expected to add new regulatory risk and compliance burdens and
costs on the financial services industry and us. The
implementation of this legislation could result in loss of
revenue, limit our ability to pursue certain business
opportunities we might otherwise consider engaging in, impact
the value of some of the assets we hold, require us to change
certain of our business practices, impose additional costs on
us, establish more stringent capital, liquidity and leverage
ratio requirements, or otherwise adversely affect our business.
The
Company operates within a highly regulated industry and its
business and results are significantly affected by the
regulations to which it is subject; changes in statutes and
regulations could adversely affect the Company.
We operate within a highly regulated environment. The
regulations to which the Company is subject will continue to
have a significant impact on the Companys operations and
the degree to which it can grow and be profitable. Certain
regulators which supervise the Company have significant power in
reviewing the Companys operations and approving its
business practices. These powers include the ability to place
limitations or conditions on activities in which the Company
engages or intends to engage. Particularly in recent years, the
Companys businesses have experienced increased regulation
and regulatory scrutiny, often requiring additional Company
resources.
Current economic conditions, particularly in the financial
markets, have resulted in government regulatory agencies and
political bodies placing increased focus and scrutiny on the
financial services industry. The U.S. Government has
intervened on an unprecedented scale, responding to what has
been commonly referred to as the financial crisis, by enhancing
the liquidity support available to financial institutions,
establishing a commercial paper funding facility, temporarily
guaranteeing money market funds and certain types of debt
issuances, and increasing insurance on bank deposits.
These programs have subjected participating financial
institutions to additional restrictions, oversight and costs. In
addition, new proposals for legislation continue to be
introduced in the U.S. Congress that could further increase
regulation of the financial services industry and impose
restrictions on the operations and general ability of firms
within the industry to conduct business consistent with
historical practices. Federal and state regulatory agencies also
frequently adopt changes to their regulations or change the
manner in which existing regulations are applied.
We cannot predict the substance or impact of any change in
regulation, whether by regulators or as a result of legislation
enacted by the United States Congress or by the Puerto Rico
Legislature, or in the way such statutory or regulatory
requirements are interpreted or enforced. Compliance with such
current and potential regulation and scrutiny may significantly
increase our costs, impede the efficiency of our internal
business practices, require us to increase our regulatory
capital and limit our ability to pursue business opportunities
in an efficient manner.
Further
increases in the FDIC insurance assessment premiums or required
reserves may have a significant impact on us.
The FDIC insures deposits at FDIC-insured depository
institutions up to certain limits. The FDIC charges insured
depository institutions premiums to maintain the Deposit
Insurance Fund (the DIF). Current economic
conditions have resulted in higher bank failures and
expectations of future bank failures. In the event of a bank
failure, the FDIC takes control of a failed bank and ensures
payment of deposits up to insured limits (which have recently
been increased) using the resources of the DIF. The FDIC is
required by law to maintain adequate funding of the DIF, and the
FDIC may increase premium assessments to maintain such funding.
On November 12, 2009, the FDIC adopted the final rule
implementing a prepayment assessment for the fourth quarter of
2009 and for all of 2010, 2011 and 2012 in order to strengthen
the cash position of the DIF. The Companys total prepaid
assessment was $67.1 million, which according to the final
rule was recorded as
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a prepaid expense as of December 30, 2009. The prepaid
assessment will be amortized and recognized by the Company as an
expense over the period from 2010 to 2012.
The Dodd-Frank Act requires the FDIC to increase the DIFs
reserves against future losses, which will necessitate increased
deposit insurance premiums that are expected to be borne
primarily by institutions with assets of greater than
$10 billion.
In October 2010, the FDIC addressed plans to bolster the DIF by
increasing the required reserve ratio for the industry to
1.35 percent (ratio of reserves to insured deposits) by
September 30, 2020, as required by the Dodd-Frank Act. In
December 2010, the FDIC approved a final rule raising its
industry target ratio of reserves to insured deposits to
2 percent, 65 basis points above the statutory
minimum, but the FDIC does not project that goal to be met until
2027.
On February 7, 2010, the FDIC approved a final rule that
amends its current deposit insurance assessment regulations. The
final rule implements a provision in the Dodd-Frank Act that
changes the assessment base for deposit insurance premiums from
one based on domestic deposits to one based on average
consolidated total assets minus average Tier 1 capital. The
final rule also changes the assessment rate schedules for
insured depository institutions so that approximately the same
amount of revenue would be collected under the new assessment
base as would be collected under the current rate schedule and
the schedules previously proposed by the FDIC in October 2010.
The final rule also revises the risk-based assessment system for
all large insured depository institutions (generally,
institutions with at least $10 billion in total assets).
Under the proposed rule, the FDIC would use a scorecard method
to calculate assessment rates for all such institutions.
As noted by the FDIC in the final rule it adopted, the final
rule should keep the overall amount collected from the industry
very close to unchanged, although the amounts that individual
institutions pay will be different. The new large bank pricing
system is expected to result in higher assessments for banks
with high-risk asset concentrations, less stable balance sheet
liquidity, or potentially higher loss severity in the event of
failure.
We are generally unable to control the amount of assessments
that we are required to pay for FDIC insurance. If there are
additional bank or financial institution failures, or if our
risk rating deteriorates for purposes of determining the level
of our FDIC insurance assessments, we may be required to pay
even higher FDIC insurance assessments than the recently
increased levels. Any future increases in FDIC insurance
assessments may materially adversely affect our results of
operations.
The
consolidation of the Puerto Rico banking industry as a result of
bank failures in 2010 may adversely affect
us.
In April 2010, the FDIC closed three Puerto Rico banks and sold
some of their assets and liabilities to other banks in Puerto
Rico. In the future, there may be additional bank failures,
mergers and acquisitions in our industry. Any business
combinations could significantly alter industry conditions and
competition within the Puerto Rico banking industry and could
have a material adverse effect on our financial condition and
results of operations.
In addition, the strategies adopted by the FDIC and the three
acquiring banks in connection with some of the residential,
construction and commercial real estate loans acquired may
adversely affect residential and commercial real estate values
in Puerto Rico. This in turn may adversely affect the value of
some of our residential, construction and commercial real estate
loans, and our ability to sell or restructure some of our
residential, construction and commercial real estate loans.
Changes
in accounting standards issued by the Financial Accounting
Standards Board or other standard-setting bodies may adversely
affect the Companys financial statements.
Our financial statements are subject to the application of GAAP,
which are periodically revised
and/or
expanded. Accordingly, from time to time we are required to
adopt new or revised accounting standards issued by the
Financial Accounting Standards Board (the FASB). The
impact of accounting pronouncements that have been issued but
not yet implemented is disclosed by the Company in its filings
with the SEC. An
43
assessment of proposed standards is not provided as such
proposals are still subject to change. It is possible that
future accounting standards that the Company is required to
adopt could change the current accounting treatment that the
Company applies to its consolidated financial statements and
that such changes could have a material adverse effect on the
Companys financial condition and results of operations.
Risks
related to our business
Deteriorating
credit quality has adversely impacted the Company and may
continue to adversely impact the Company.
The Companys has experienced a downturn in credit quality
since 2006. The Companys credit quality has continued to
be under pressure during 2010 as a result of continued
recessionary conditions in Puerto Rico and the recent slow down
in consumer activity and economic growth in the United States
that have led to, among other things, higher unemployment
levels, much lower absorption rates for new residential
construction projects and further declines in property values.
The Company expects that credit conditions and the performance
of its loan portfolio may continue to deteriorate in the near
future.
Our business depends on the creditworthiness of our customers
and counterparties and the value of the assets securing our
loans or underlying our investments. If the credit quality of
the customer base materially decreases, if the risk profile of a
market, industry or group of customers changes materially, our
business, financial condition, allowance levels, asset
impairments, liquidity, capital and results of operations could
be adversely affected.
The
allowance for loan losses is an estimate of incurred losses
inherent in the loan portfolio and as such it may not be
adequate to cover the actual portfolio losses. As a result,
future loan loss provisions may be required.
The Company establishes an allowance for loan and lease losses
at a level estimated as the amount of incurred losses inherent
in the portfolio as of the related financial statement date
based upon analysis of past portfolio default trends, severity
experience, and fair value estimates, and records a provision
for loan and lease losses which adjusts the allowance for loan
and lease loss balance to the estimated amount as a charge to
current period income.
The allowance for loan and leases is an estimate of incurred
losses in the loan portfolio made pursuant to accounting
guidance, that by accounting principles does not consider or
estimate all future losses that will be incurred. In addition,
bank regulatory agencies, such as FDIC and the Office of the
Commissioner, periodically review the adequacy of our allowance
for loan and lease losses and may require an increase in the
provision for loan and lease losses or loan charge-offs.
Accordingly, additional loan loss provisions may be required,
and such provisions may materially affect our results of
operations, financial condition and capital.
Changes
in collateral values of properties located in recessionary
economies may require increased reserves.
The performance of our loan portfolio and the collateral value
backing the loan transactions are dependent upon the performance
of and conditions within each specific real estate market.
Recent economic reports related to the real estate market in
Puerto Rico indicate that certain pockets of the real estate
market are subject to readjustments in value driven not by
demand but more by the purchasing power of the consumers and
general recessionary economic conditions. We measure the
impairment of a loan based on the fair value of the collateral,
if collateral dependent, which is generally obtained from
appraisals. Updated appraisals are requested when we determine
that loans are impaired and are updated annually thereafter. In
addition, appraisals are also obtained for certain residential
mortgage loans on a spot basis based on specific characteristics
such as delinquency levels, age of the appraisal and LTV ratios.
The appraised value of the collateral may decrease or we may not
be able to recover collateral at its appraised value. A
significant decline in collateral valuations for collateral
dependent loans may require increases in our specific provision
for loan losses and an increase in the general valuation
allowance. Any such increase would have an adverse effect on our
future financial condition and results of operations.
44
Interest
rate shifts may reduce net interest income.
Shifts in short-term interest rates may reduce net interest
income, which is the principal component of our earnings. Net
interest income is the difference between the amounts received
by us on our interest-earning assets and the interest paid by us
on our interest-bearing liabilities. When interest rates rise,
the rate of interest we pay on our liabilities generally rises
more quickly than the rate of interest that we receive on our
interest-bearing assets, which may cause our profits to
decrease. The impact on earnings is more adverse when the slope
of the yield curve flattens, that is, when short-term interest
rates increase more than long-term interest rates or when
long-term interest rates decrease more than short-term interest
rates.
Increases
in interest rates may reduce the value of holdings of securities
and demand for mortgage and other loans.
Fixed-rate securities acquired by us are generally subject to
decreases in market value when interest rates rise, which may
require recognition of a loss (e.g., the identification of
other-than-temporary
impairment on our investments portfolio), thereby adversely
affecting our results of operations. Market-related reductions
in value also influence our ability to finance these securities.
Higher interest rates also increase the cost of mortgage and
other loans to consumers and businesses and may reduce demand
for such loans, which may negatively impact our profits by
reducing the amount of our loan origination income.
The
Company and its banking subsidiaries are subject to regulatory
capital adequacy and other supervisory guidelines, and if we
fail to meet those guidelines our business and financial
condition would be adversely affected.
Under regulatory capital adequacy guidelines and other
regulatory requirements, our banking subsidiaries must meet
guidelines that include quantitative measures of assets,
liabilities and certain off balance sheet items, subject to
quantitative judgments by regulators regarding components, risk
weightings and other factors. Supervisory guidelines also
address, among other things, asset quality and liquidity. If the
Company and its banking subsidiaries fail to meet these minimum
capital and other supervisory and regulatory requirements, our
business and financial condition will be adversely affected. A
failure to meet regulatory capital adequacy guidelines, among
other things, would affect our banking subsidiaries ability to
accept or rollover brokered deposits and could result in
supervisory actions by federal
and/or
Puerto Rico banking authorities.
The
hedging transactions that the Company enters into may not be
effective in managing the exposure to interest rate
risk.
The Company uses derivatives, to a limited extent, to manage
part of its exposure to market risk caused by changes in
interest rates. The derivative instruments that the Company may
use also have their own risks, which include: (i) basis
risk, which is the risk of loss associated with variations in
the spread between the asset yield and funding
and/or hedge
cost; (ii) credit or default risk, which is the risk of
insolvency or other inability of the counterparty to a
particular transaction to perform its obligations; and
(iii) legal risk, which is the risk that the Company is
unable to enforce the terms of such instruments. All or any of
these risks could expose the Company to losses.
Our
risk management policies and procedures may leave us exposed to
unidentified or unanticipated risk, which could negatively
affect us.
Management of risk requires, among other things, policies and
procedures to record properly and verify a large number of
transactions and events. We have devoted significant resources
to develop our risk management policies and procedures and
expect to continue to do so in the future. Nonetheless, our
policies and procedures may not be comprehensive given current
market conditions. Some of our methods for managing risk and
exposures are based upon the use of observed historical market
behavior or statistics based on historical models. As a result,
these methods may not fully predict future exposures, which
could be significantly greater than our historical measures
indicate. Other risk management methods depend on the
45
evaluation of information regarding markets, clients or other
matters that is publicly available or otherwise accessible to
us. This information may not always be accurate, complete,
up-to-date
or properly evaluated.
The
preparation of our financial statements requires the use of
estimates that may vary from actual results.
The preparation of consolidated financial statements in
conformity with GAAP requires management to make significant
estimates that affect our financial statements. Three of the
Companys most critical estimates are the level of the
allowance for loan and lease losses, the valuation of mortgage
servicing rights, and the amount of its deferred tax asset.
Due to the inherent nature of these estimates the Company may
significantly increase the allowance for loan and lease losses
and/or
sustain credit losses that are significantly higher than the
provided allowance, and may recognize a significant provision
for impairment of its mortgage servicing rights. If the
Companys allowance for loan and lease losses is not
adequate, the Companys business, financial condition,
including its liquidity and capital, and results of operations
could be materially adversely affected. Additionally, in the
future, the Company may increase its allowance for loan and
lease losses, which could have a material adverse effect on its
capital and results of operations.
As of December 31, 2010, the Company had a deferred tax
asset of approximately $105.7 million. The deferred tax
asset is net of a valuation allowance of $462.7 million.
The realization of the Companys deferred tax asset
ultimately depends on the existence of sufficient taxable income
to realize the value of this asset. Due to significant estimates
utilized in establishing the valuation allowance and the
potential for changes in facts and circumstances, it is
reasonably possible that the Company will be required to record
adjustments to the valuation allowance in future reporting
periods. The Companys results of operations would be
negatively impacted if it determines that increases to its
deferred tax asset valuation allowance are required in a future
reporting period.
Defective
and repurchased loans may harm our business and financial
condition.
In connection with the sale and securitization of mortgage
loans, the Company is required to make a variety of customary
representations and warranties regarding the Company and the
loans being sold or securitized. The Companys obligations
with respect to these representations and warranties are
generally outstanding for the life of the loan, and they relate
to, among other things:
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compliance with laws and regulations;
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underwriting standards;
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the accuracy of information in the loan documents and loan
file; and
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the characteristics and enforceability of the loan.
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A loan that does not comply with these representations and
warranties may take longer to sell, may impact the
Companys ability to obtain third-party financing for the
loan, and be unsalable or salable only at a significant
discount. If such a loan is sold before the Company detects a
noncompliance, the Company may be obligated to repurchase the
loan and bear any associated loss directly, or the Company may
be obligated to indemnify the purchaser against any such loss,
either of which could reduce the Companys cash available
for operations and liquidity. The Companys management
believes that it has established controls to ensure that loans
are originated in accordance with the secondary markets
requirements, but mistakes may be made, or certain employees may
deliberately violate the Companys lending policies. The
Company seeks to minimize repurchases and losses from defective
loans by correcting flaws, if possible, and selling or
re-selling such loans. The Company does not have a reserve on
its financial statements for possible losses related to
repurchases resulting from representation and warranty
violations because it does not expect any such losses to be
significant. Losses associated with defective loans may
adversely impact our results of operations or financial
condition.
46
We are
exposed to credit risk from mortgage loans held pending sale and
mortgage loans that have been sold subject to recourse
arrangements.
The Company is generally at risk for mortgage loan defaults from
the time it funds a loan until the time the loan is sold or
securitized into a mortgage-backed security. In the past, the
Company retained, through recourse arrangements, part of the
credit risk on sales of mortgage loans that did not qualify for
GNMA, FNMA or FHLMC sale or exchange programs and consequently
may suffer losses on these loans. The Company suffers losses on
these loans when the proceeds from a foreclosure sale of the
property underlying a defaulted mortgage loan are less than the
outstanding principal balance of the loan and the costs of
holding and disposing of the related property. The Company
estimates the fair value of the retained recourse obligation or
any liability incurred at the time of sale and includes such
obligation with the net proceeds from the sale, resulting in
lower
gain-on-sale
recognition. The Company evaluates the fair value of its
recourse obligation based on historical losses from foreclosure
and disposition of mortgage loans adjusted for expectations of
changes in portfolio behavior and market environment.
We are
subject to risks in servicing loans for others.
The Companys 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, the Company must advance all or part of the scheduled
payments to the owner of an outstanding 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 the Company, as servicer, pay
mortgage and hazard insurance and tax payments on schedule even
if sufficient escrow funds are not available. The Company
generally recovers its advances from the mortgage owner or from
liquidation proceeds when the mortgage loan is foreclosed.
However, in the interim, the Company must absorb the cost of the
funds it advances during the time the advance is outstanding.
The Company must also bear the 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 the Company will not receive
any future servicing income with respect to that loan.
As a
result of our credit ratings, we may be subjected to increased
collateral requirements and other measures that could have an
adverse impact on our results of operations and financial
condition.
We have previously sold or securitized mortgage loans in
transactions with FNMA and other counterparties subject to
partial or full recourse. As of December 31, 2010, the
maximum contractual exposure to the Company if it were required
to purchase all loans sold subject to partial or full recourse
was $0.7 billion, $0.6 billion of which consisted of
exposure to FNMA. Our contractual agreements with FNMA authorize
FNMA to require us to post additional collateral to secure our
recourse obligations with FNMA, and FNMA has the contractual
right to request collateral for the full amount of our recourse
obligations when, as now, we do not maintain an investment grade
rating. In January 2006, we agreed to post with FNMA
$44.0 million in collateral to secure our recourse
obligations. In addition, certain of our servicing agreements,
such as those with FNMA, FHLMC, and GNMA, contain provisions
triggered by changes in our financial condition or failure to
maintain required credit ratings. We do not currently maintain
the credit ratings required by GNMA and possibly other
counterparties, which may result in increased collateral
requirements
and/or
require us to engage a substitute fund custodian, or could
result in termination of our servicing rights. Termination of
our servicing rights, requirements to post additional collateral
or the loss of custodian funds could reduce our liquidity and
have an adverse impact on our operating results.
Our
ability to sell loans and other mortgage products to
government-sponsored entities could be impacted by changes in
our financial condition or the historical performance of our
mortgage products.
Our ability to sell mortgage products to government-sponsored
entities (GSEs), such as FNMA, FHLMC and GNMA,
depends, among other things, on our financial condition and the
historical performance of our mortgage products. To protect our
ability to continue to sell mortgage products to GNMA and other
GSEs, we have and may in the future repurchase defaulted loans
from such counterparties. During 2010 and
47
2009, we repurchased $68.2 million and $127.9 million,
respectively, of defaulted FHA guaranteed loans from GNMA. Any
such repurchases in the future may negatively impact our
liquidity and operating results. Termination of our ability to
sell mortgage products to the GSEs would have a material adverse
effect on our results of operations and financial condition.
We may
engage in FDIC-assisted transactions, which could present
additional risks to our business.
We may have opportunities to acquire the assets and liabilities
of failed banks in FDIC-assisted transactions. Although these
transactions typically provide for FDIC assistance to an
acquirer to mitigate certain risks, such as sharing exposure to
loan losses and providing indemnification against certain
liabilities of the failed institution, we would still be subject
to many of the same risks we would face in acquiring another
bank in a negotiated transaction, including risks associated
with maintaining customer relationships and failure to realize
the anticipated acquisition benefits in the amounts and within
the timeframes we expect. In addition, because these
transactions are structured in a manner that would not allow us
the time and access to information normally associated with
preparing for and evaluating a negotiated transaction, we may
face additional risk in FDIC-assisted transactions, including
additional strain on management resources, management of problem
loans, problems related to integration of personnel and
operating systems and impact to our capital resources requiring
us to raise additional capital. We may not be successful in
overcoming these risks or any other problems encountered in
connection with FDIC-assisted transactions. Our inability to
overcome these risks could have a material effect on our
business, financial condition and results of operations.
We may
fail to retain and attract key employees and management
personnel.
Our success has been and will continue to be influenced by our
ability to retain and attract key employees and management
personnel, including senior and middle management. Our ability
to attract and retain key employees and management personnel may
be adversely affected as a result of the workload and stress
associated with the resolution of legacy issues and business
transformation efforts, and related risks and uncertainties; the
consolidation of the Puerto Rico banking industry; or by
additional work relating to any potential or actual acquisition.
Competition
with other financial institutions could adversely affect the
profitability of our operations.
The Company faces significant competition from other financial
institutions, many of which have significantly greater assets,
capital and other resources. As a result, many of the
Companys competitors have advantages in conducting certain
businesses and providing certain services. This competitive
environment could force the Company to increase the rates it
offers on deposits or lower the rates it charges on loans and,
consequently, could adversely affect the profitability of its
operations.
Damage
to our reputation could damage our businesses.
Maintaining a positive reputation for the Company is critical to
the Company attracting and maintaining customers, investors and
employees. Damage to its reputation can therefore cause
significant harm to the Companys business and prospects.
Harm to the Companys reputation can arise from numerous
sources, including, among others, employee misconduct,
litigation or regulatory outcomes, failing to deliver minimum
standards of service and quality, compliance failures, unethical
behavior, and the activities of customers and counterparties.
Negative publicity regarding the Company, whether or not true,
may also result in harm to the Companys prospects.
We
must respond to rapid technological changes, and these changes
may be more difficult or expensive than
anticipated.
If competitors introduce new products and services embodying new
technologies, or if new industry standards and practices emerge,
our existing product and service offerings, technology and
systems may become obsolete. Further, if we fail to adopt or
develop new technologies or to adapt our products and services
to emerging industry standards, we may lose current and future
customers, which could have a
48
material adverse effect on our business, financial condition and
results of operations. The financial services industry is
changing rapidly and in order to remain competitive, we must
continue to enhance and improve the functionality and features
of our products, services and technologies. These changes may be
more difficult or expensive than we anticipate.
Doral
Financial and its banking subsidiaries are subject to the
supervision and regulation of various banking regulators and
have entered into consent orders with these regulators, and
these regulators could take action against the Company or its
banking subsidiaries.
As a regulated financial services firm, the Companys good
standing with its regulators is of fundamental importance to the
continuation and growth of its businesses. Doral Financial is
subject to supervision and regulation by the Federal Reserve and
the Office of the Commissioner, Doral Bank PR is subject to
supervision and regulation by the FDIC and the Office of the
Commissioner and Doral Bank US is subject to supervision and
regulation by the OTS and the FDIC.
Federal banking regulators, in the performance of their
supervisory and enforcement duties, have significant discretion
and power to initiate enforcement actions for violations of laws
and regulations and unsafe or unsound practices. The enforcement
powers available to federal banking regulators include, among
others, the ability to assess civil monetary penalties, to issue
cease-and-desist
or removal orders, to require written agreements and to initiate
injunctive actions. Doral Financial and Doral Bank PR have
entered into consent orders with the Federal Reserve, the FDIC
and the Office of the Commissioner, which, among other things,
prohibited the Companys banking subsidiaries from paying
dividends to the parent company, and prohibited Doral Financial
from paying dividends to its common and preferred shareholders,
without regulatory approval and required Doral Bank PR to take
various actions to ensure compliance with the provisions of the
Bank Secrecy Act. While the FDIC and the Office of the
Commissioner have lifted their consent orders, these banking
regulators could take further action with respect to Doral
Financial or our banking subsidiaries and, if any such further
action were taken, such action could have a material adverse
effect on Doral Financial. Doral Financials consent order
with the Federal Reserve is still in effect and the
Companys banking regulators could take additional actions
to protect the Companys banking subsidiaries or to ensure
that the holding company remains as a source of financial and
managerial strength to its banking subsidiaries, and such action
could have adverse effects on the Company or its stockholders.
Doral
Financial has been the subject of an investigation by the U.S.
Attorneys Office for the Southern District of New York,
which could require it to pay substantial fines or
penalties.
On August 24, 2005, Doral Financial received a grand jury
subpoena from the U.S. Attorneys Office for the
Southern District of New York regarding the production of
certain documents, including financial statements and corporate,
auditing and accounting records prepared during the period
relating to the restatement of Doral Financials financial
statements. Doral Financial cannot predict when this
investigation will be completed or what the results of this
investigation will be. The effects and results of this
investigation could have a material adverse effect on Doral
Financials business, results of operations, financial
condition and liquidity. Adverse developments related to this
investigation, including any expansion of its scope, could
negatively impact the Company and could divert efforts and
attention of its management team from Doral Financials
ordinary business operations. Doral Financial may be required to
pay material fines, judgments or settlements or suffer other
penalties, each of which could have a material adverse effect on
its business, results of operations, financial condition and
liquidity. This investigation could adversely affect Doral
Financials ability to obtain,
and/or
increase the cost of obtaining, directors and
officers liability insurance
and/or other
types of insurance, which could have a material adverse effect
on Doral Financials businesses, results of operations and
financial condition.
Doral
Financial may be required to advance significant amounts to
cover the reasonable legal and other expenses of its former
officers and directors.
Under Doral Financials by-laws, Doral Financial is
obligated to pay in advance the reasonable expenses incurred by
former officers and directors in defending civil or criminal
actions or proceedings pending final
49
disposition of such actions. Since 2005, Doral Financial has
been advancing funds on behalf of various former officers and
directors in connection with the grand jury proceeding referred
to above and ongoing investigations by the SEC relating to the
restatement of Doral Financials financial statements.
On March 6, 2008, a former treasurer of Doral Financial was
indicted for alleged criminal violations involving securities
and wire fraud. On April 29, 2010, the former treasurer of
Doral was convicted on three of the five counts of securities
and wire fraud he was facing after a five-week jury trial.
On August 13, 2009, the former treasurer of Doral filed a
complaint against the Company in the Supreme Court of the State
of New York. The complaint alleges that the Company breached a
contract with the plaintiff and the Companys by-laws by
failing to advance payment of certain legal fees and expenses
that Mr. Levis has incurred in connection with a criminal
indictment filed against him in the U.S. District Court for
the Southern District of New York. Further, the complaint claims
that Doral Financial fraudulently induced the plaintiff to enter
into agreements concerning the settlement of a civil litigation
arising from the restatement of the Companys financial
statements for fiscal years 2000 through 2004. The complaint
seeks declaratory relief, damages, costs and expenses. The
former treasurer further moved for preliminary injunctive
relief. On December 16, 2009, the parties entered into a
Settlement Agreement. On December 17, 2009, the former
treasurers motion for a preliminary injunction was denied
as moot, and all further proceedings were stayed, but the
procedures for future disputes between the parties and outlined
in the Settlement Agreement were not affected by the stay. The
amounts required to be advanced in an appeal of the criminal
conviction could be substantial and could materially adversely
affect Doral Financials results of operations.
Our
businesses may be adversely affected by
litigation.
From time to time, our customers, or the government on their
behalf, may make claims and take legal action relating to our
performance of fiduciary or contractual responsibilities. We may
also face employment lawsuits or other legal claims. In any such
claims or actions, demands for substantial monetary damages may
be asserted against us resulting in financial liability or an
adverse effect on our reputation among investors or on customer
demand for our products and services. We may be unable to
accurately estimate our exposure to litigation risk when we
record balance sheet reserves for probable loss contingencies.
As a result, any reserves we establish to cover any settlements
or judgments may not be sufficient to cover our actual financial
exposure, which may have a material impact on our consolidated
results of operations or financial condition.
In the ordinary course of our business, we are also subject to
various regulatory, governmental and law enforcement inquiries,
investigations and subpoenas. These may be directed generally to
participants in the businesses in which we are involved or may
be specifically directed at us. In regulatory enforcement
matters, claims for disgorgement, the imposition of penalties
and the imposition of other remedial sanctions are possible.
Risks
related to our common stock
Additional
issuances of common stock or securities convertible into common
stock may further dilute existing holders of our common
stock.
We may determine that it is advisable, or we may encounter
circumstances where we determine it is necessary, to issue
additional shares of our common stock, securities convertible
into or exchangeable for shares of our common stock, or
common-equivalent securities to fund strategic initiatives or
other business needs or to raise additional capital. Depending
on our capital needs, we may make such a determination in the
near future or in subsequent periods. The market price of our
common stock could decline as a result of any such future
offering, as well as other sales of a large block of shares of
our common stock or similar securities in the market thereafter,
or the perception that such sales could occur.
In addition, such additional equity issuances would reduce any
earnings available to the holders of our common stock and the
return thereon unless our earnings increase correspondingly. We
cannot predict the timing or size of future equity issuances, if
any, or the effect that they may have on the market price of the
50
common stock. The issuance of substantial amounts of equity, or
the perception that such issuances may occur, could adversely
affect the market price of our common stock.
Dividends
on our common stock have been suspended; Doral Financial may not
be able to pay dividends on its common stock in the
future.
Holders of our common stock are only entitled to receive such
dividends as our board of directors may declare out of funds
legally available for such payments. On April 25, 2006, we
announced that, as a prudent capital management decision
designed to preserve and strengthen the Companys capital,
our board of directors had suspended the quarterly dividend on
common stock. In addition, we will be unable to pay dividends on
our common stock unless and until we resume payments of
dividends on our preferred stock, which were suspended by the
Board of Directors in March 2009.
The Companys ability to pay dividends in the future is
limited by various regulatory requirements and policies of bank
regulatory agencies having jurisdiction over the Company and
such other factors deemed relevant by our board of directors.
Under an existing consent order with the Federal Reserve, we are
restricted from paying dividends on our capital stock without
the prior written approval of the Federal Reserve. We are
required to request permission for the payment of dividends on
our common stock and preferred stock not less than 30 days
prior to a proposed dividend declaration date. We may not
receive approval for the payment of such dividends in the future
or, even with such approval, our board of directors may not
resume payment of dividends.
The
price of our common stock may be subject to fluctuations and
volatility.
The market price of our common stock could be subject to
significant fluctuations because of factors specifically related
to our businesses and general market conditions. Factors that
could cause such fluctuations, many of which could be beyond our
control, include the following:
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changes or perceived changes in the condition, operations,
results or prospects of our businesses and market assessments of
these changes or perceived changes;
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announcements of strategic developments, acquisitions and other
material events by us or our competitors;
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changes in governmental regulations or proposals, or new
government regulations or proposals, affecting us, including
those relating to general market or economic conditions and
those that may be specifically directed to us;
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the continued decline, failure to stabilize or lack of
improvement in general market and economic conditions in our
principal markets;
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the departure of key personnel;
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changes in the credit, mortgage and real estate markets;
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operating results that vary from expectations of management,
securities analysts and investors;
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operating and stock price performance of companies that
investors deem comparable to us;
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changes in financial reports by securities analysts;
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developments related to investigations, proceedings, or
litigation that involves us; and
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the occurrence of major catastrophic events, including terrorist
attacks.
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All of
our debt obligations and our preferred stock will have priority
over our common stock with respect to payment in the event of a
liquidation, dissolution or winding up.
In any liquidation, dissolution or winding up of Doral
Financial, our common stock would rank below all debt claims
against us and all of our outstanding shares of preferred stock.
As a result, holders of our common
51
stock will not be entitled to receive any payment or other
distribution of assets upon the liquidation or dissolution until
after our obligations to our debt holders and holders of
preferred stock have been satisfied.
Our
certificate of incorporation, our by-laws and certain banking
law provisions contain provisions that could discourage an
acquisition or change of control of the Company.
Certain provisions under Puerto Rico and federal banking laws
and regulations, together with certain provisions of our
certificate of incorporation and by-laws, may make it more
difficult to effect a change in control of our company, to
acquire us or to replace incumbent management. These provisions
could potentially deprive our stockholders of opportunities to
sell shares of our common stock at above-market prices.
Our
suspension of preferred stock dividends could result in the
expansion of our board of directors.
On March 20, 2009, our board of directors announced that it
had suspended the declaration and payment of all dividends on
all outstanding series of our convertible preferred stock and
our noncumulative preferred stock. The suspension of dividends
for our noncumulative preferred stock was effective and
commenced with the dividends for the month of April 2009. The
suspension of dividends for our convertible preferred stock was
effective and commenced with the dividends for the quarter
commencing in April 2009.
Since we have not paid dividends in full on our noncumulative
preferred stock for at least eighteen consecutive monthly
periods, or paid dividends in full on our convertible preferred
stock for consecutive dividend periods containing in the
aggregate a number of days equivalent to at least six fiscal
quarters, the holders of our preferred stock, all acting
together as a single class, have the right to elect two
additional members to our board of directors.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Doral Financial maintains its principal administrative and
executive offices in an office building known as the Doral
Financial Plaza, located at 1451 Franklin D. Roosevelt Avenue in
San Juan, Puerto Rico. The Doral Financial Plaza is owned
in fee simple by Doral Properties, Inc., a wholly-owned
subsidiary of Doral Financial, and has approximately
200,000 square feet of office and administrative space. The
cost of the building, related improvements and land was
approximately $48.4 million. The building is subject to a
mortgage in the amount of $38.4 million.
In addition, Doral Financial maintains 34 retail banking
branches in Puerto Rico at which mortgage origination offices
are co-located in 33 of these branches. Of the properties on
which the 34 branch locations are located, 10 properties are
owned by Doral Financial and 24 properties are leased by Doral
Financial from third parties.
Also, Doral Financial maintains approximately 31,311 square
feet leased to tenants unrelated to the Company.
The administrative and executive offices of Doral Bank US and
Doral Money are located at 623 Fifth Avenue in New York,
New York, where it leases approximately 19,400 square feet.
Also, Doral Bank US opened an additional administrative office
located at 100 Richard Jackson Blvd. in Panama City Beach,
Florida, where it leases approximately 4,750 square feet.
In addition, Doral Bank US opened during 2010 one branch in the
metropolitan area of New York City and three branches in the
northwest area of Florida. All these new branches are leased by
Doral Bank US from third parties. In addition to these new
branches, Doral Bank US plans to open during 2011 three
additional branches in Florida which are owned by Doral Bank US
and at least one additional branch in the metropolitan area of
New York that was leased by Doral Bank US from third parties.
Doral Financial considers that its properties are generally in
good condition, are well maintained and are generally suitable
and adequate to carry on Doral Financials business.
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Item 3.
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Legal
Proceedings.
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Doral Financial and its subsidiaries are defendants in various
lawsuits or arbitration proceedings arising in the ordinary
course of business, including employment related matters.
Management believes, based on the opinion of legal counsel, that
the aggregated liabilities, if any, arising from such actions
will not have a material adverse effect on the financial
condition or results of operations of Doral Financial.
Since 2005, Doral Financial became a party to various legal
proceedings, including regulatory and judicial investigations
and civil litigation, arising as a result of the Companys
restatement.
Legal
Matters
On August 24, 2005, the U.S. Attorneys Office
for the Southern District of New York served Doral Financial
with a grand jury subpoena seeking the production of certain
documents relating to issues arising from the restatement,
including financial statements and corporate, auditing and
accounting records prepared during the period from
January 1, 2000 to the date of the subpoena. Doral
Financial is cooperating with the U.S. Attorneys
Office in this matter. Doral Financial cannot predict the
outcome of this matter and is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact to
Doral Financial of this matter.
On August 13, 2009, Mario S. Levis, the former Treasurer of
Doral, filed a complaint against the Company in the Supreme
Court of the State of New York. The complaint alleges that the
Company breached a contract with the plaintiff and the
Companys by-laws by failing to advance payment of certain
legal fees and expenses that Mr. Levis has incurred in
connection with a criminal indictment filed against him in the
U.S. District Court for the Southern District of New York.
Further, the complaint claims that Doral Financial fraudulently
induced the plaintiff to enter into agreements concerning the
settlement of a civil litigation arising from the restatement of
the Companys financial statements for fiscal years 2000
through 2004. The complaint seeks declaratory relief, damages,
costs and expenses. On December 18, 2009, the parties
entered into a Settlement Agreement. On December 17, 2009,
Mr. Levis motion for a preliminary injunction was
denied as moot, and all further proceedings were stayed, but the
procedures for future disputes between the parties and outlined
in the Settlement Agreement were not affected by the stay.
Lehman
Brothers Transactions
Doral Financial and Doral Bank PR (combined Doral),
had counterparty exposure to Lehman Brothers, Inc.
(LBI) in connection with repurchase financing
agreements and forward To-Be-Announced (TBA)
agreements. LBI was placed in a Securities Investor Protection
Corporation (SIPC) liquidation proceeding after the
filing for bankruptcy of its parent Lehman Brothers Holdings,
Inc. The filing of the SIPC liquidation proceeding was an event
of default under the repurchase financing agreements and the
forward TBA agreements resulting in their termination as of
September 19, 2008.
The termination of the agreements led to a reduction in the
Companys total assets and total liabilities of
approximately $509.8 million and caused Doral to recognize
a previously unrealized loss on the value of the securities
subject to the agreements, resulting in a $4.2 million
charge during the third quarter of 2008. In January 2009, Doral
timely filed customer claims against LBI in the SIPC liquidation
proceeding for LBI that it is owed approximately
$43.3 million, representing the excess of the value of the
securities held by LBI above the amounts owed by Doral under the
agreements, plus ancillary expenses and interest. Doral has
fully reserved ancillary expenses and interest.
On August 19, 2009, the SIPC trustee issued notices of
determination to Doral (i) denying Dorals claims for
treatment as a customer with respect to the cash
and/or
securities held by LBI under the repurchase financing agreements
and forward TBA agreements between Doral and LBI, and
(ii) converting Dorals claims to general creditor
claims. On September 18, 2009, Doral timely filed its
objections in bankruptcy court to these determinations by the
SIPC trustee, which objections remain pending.
In December 2008, the SIPC trustee announced that it expected to
have enough assets to cover customer claims, but stated that it
could not determine at that point what would be available to pay
general creditors.
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Based on the information available in the fourth quarter of
2008, Doral determined that the process would likely take more
than a year and that mounting legal and operating costs would
likely impair the ability of LBI to pay 100% of the claims filed
against it, especially for general creditors. The fourth quarter
of 2008 also saw the continued decline in asset values, and
management concluded that it was likely that LBI assets would
also decline in value. As a result, Doral accrued as of
December 31, 2008, a loss of $21.6 million against the
$43.3 million owed by LBI.
On October 5, 2009, the SIPC trustee filed a motion in
bankruptcy court seeking leave to allocate property within the
LBI estate entirely to customer claims in which it asserted that
the colorable customer claims will approach
and, depending on how certain disputed issues are resolved,
could exceed- the assets available to the SIPC trustee for
distribution. Based on the information available in the
second quarter of 2010, Doral determined that there was further
impairment in the likely ability of LBI to pay 100% of the
claims filed against it. As a result, Doral recognized an
additional loss of $10.8 million against the
$43.3 million owed by LBI. A net receivable of
$10.9 million was recorded in Accounts
Receivable on the Companys consolidated statements
of financial condition.
During the fourth quarter of 2010, Doral sold and assigned to a
third party all of Dorals rights, title, and interest in
and to its claims in the SIPC proceeding, including all of its
rights to prosecute its claims, as a result of which Doral
recognized a loss of $1.5 million on the net receivable.
Banking
Regulatory Matters
On March 16, 2006, Doral Financial entered into a consent
cease and desist order with the Federal Reserve. The mutually
agreed upon order required Doral Financial to conduct reviews of
its mortgage portfolio, and to submit plans regarding the
maintenance of capital adequacy and liquidity. The consent order
contains restrictions on Doral Financial from obtaining
extensions of credit from, or entering into certain asset
purchase and sale transactions with its banking subsidiaries,
without the prior approval of the Federal Reserve. The consent
order restricts Doral Financial from receiving dividends from
the banking subsidiaries without the approval of the respective
primary banking regulatory agency. Doral Financial is also
required to request permission from the Federal Reserve for the
payment of dividends on its common stock and preferred stock not
less than 30 days prior to a proposed dividend declaration
date and requires Doral Financial and Doral Bank PR to submit
plans regarding the maintenance of minimum levels of capital and
liquidity. Doral Financial has complied with these requirements
and no fines or civil money penalties were assessed against the
Company under the order.
Effective January 14, 2008, the FDIC and the Office of the
Commissioner terminated a cease and desist order that had been
entered by these regulatory agencies with Doral Bank PR on
March 16, 2006 (the Former Order). The Former
Order was similar to the consent order of Doral Financial with
the Federal Reserve described above, and related to safety and
soundness issues in connection with the announcement by Doral
Financial in April 2005 of the need to restate its financial
statements for the period from January 1, 2000 to
December 31, 2004.
As a result of an examination conducted during the third quarter
of 2008, on July 8, 2009, Doral Bank PR consented with the
FDIC and paid civil monetary penalties of $38,030 related to
deficiencies in compliance with the National Flood Insurance Act
as a result of flood insurance coverage, failure to maintain
continuous flood insurance protection and failure to ensure that
borrowers obtain flood insurance in a timely manner.
On February 19, 2008, Doral Bank PR entered into a consent
order with the FDIC relating to failure to comply with certain
requirements of the Bank Secrecy Act (BSA). The
regulatory findings that resulted in the order were based on an
examination conducted for the period ended December 31,
2006, and were related to findings that had initially occurred
in 2005 prior to the Companys change in management and the
Recapitalization. The order replaced the Memorandum of
Understanding with the FDIC and the Office of the Commissioner
dated August 23, 2006. Doral Bank PR was not required to
pay any civil monetary penalties in connection with this order.
The order required Doral Bank PR to correct certain violations
of law, within the timeframes set forth in the order (generally
120 days) including certain violations regarding the BSA,
failure to maintain an adequate BSA/Anti-Money Laundering
Compliance Program (a BSA/AML Compliance
54
Program) and failure to operate with an effective
compliance program to ensure compliance with the regulations
promulgated by the United States Department of Treasurys
Office of Foreign Asset Control (OFAC). The order
further required Doral Bank PR to, among other things, amend its
policies, procedures and processes and training programs to
ensure full compliance with the BSA and OFAC; conduct an
expanded BSA/AML risk assessment of its operations, enhance its
due diligence and account monitoring procedures, review its
BSA/AML staffing and resource needs, amend its policies and
procedures for internal and external audits to include periodic
reviews for BSA/AML compliance, OFAC compliance and perform
annual independent testing programs for BSA/AML and OFAC
requirements. The order also required Doral Bank PR to engage an
independent consultant to review account and transaction
activity from April 1, 2006 through March 31, 2007 to
determine compliance with suspicious activity reporting
requirements (the Look Back Review). On
September 15, 2008, the FDIC terminated this consent order.
As the Look Back Review was in process, Doral Bank PR and the
FDIC agreed to a Memorandum of Understanding that covered the
remaining portion of the Look Back Review. On June 30,
2009, the FDIC terminated this Memorandum of Understanding
because the Look Back Review had been completed.
Doral Financial and Doral Bank PR have undertaken specific
corrective actions to comply with the requirements of the
terminated enforcement actions and the single remaining
enforcement action, but cannot give assurance that such actions
are sufficient to prevent further enforcement actions by the
banking regulatory agencies.
|
|
Item 4.
|
Removed
and Reserved
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Doral Financials common stock, $0.01 par value per
share (the Common Stock), is traded and quoted on
the New York Stock Exchange (NYSE) under the symbol
DRL.
The table below sets forth, for the calendar quarters indicated,
the high and low closing sales prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar
|
|
Price Range
|
|
Year
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
2010
|
|
|
4th
|
|
|
$
|
1.82
|
|
|
$
|
1.23
|
|
|
|
|
3rd
|
|
|
|
2.70
|
|
|
|
1.13
|
|
|
|
|
2nd
|
|
|
|
6.48
|
|
|
|
2.28
|
|
|
|
|
1st
|
|
|
|
5.04
|
|
|
|
3.13
|
|
2009
|
|
|
4th
|
|
|
$
|
3.80
|
|
|
$
|
2.63
|
|
|
|
|
3rd
|
|
|
|
4.26
|
|
|
|
1.83
|
|
|
|
|
2nd
|
|
|
|
5.21
|
|
|
|
1.74
|
|
|
|
|
1st
|
|
|
|
8.44
|
|
|
|
1.80
|
|
As of February 25, 2011, the approximate number of record
holders of Doral Financials Common Stock was 431, which
does not include beneficial owners whose shares are held in
record names of brokers and nominees. The last sales price for
the Common Stock as quoted on the NYSE on such date was $1.28
per share.
Preferred
Stock
Doral Financial has three outstanding series of nonconvertible
preferred stock: 7.25% noncumulative monthly income preferred
stock, Series C (liquidation preference $25 per share);
8.35% noncumulative monthly income preferred stock,
Series B (liquidation preference $25 per share); and 7%
noncumulative monthly income preferred stock, Series A
(liquidation preference $50 per share) (collectively, the
Noncumulative Preferred Stock).
55
During 2003, Doral Financial issued 1,380,000 shares of its
4.75% perpetual cumulative convertible preferred stock (the
Convertible Preferred Stock) having a liquidation
preference of $250 per share in a private offering to qualified
institutional buyers pursuant to Rule 144A. Each share of
the Convertible Preferred Stock is currently convertible into
0.31428 shares of common stock, subject to adjustment under
specific conditions. The Convertible Preferred Stock ranks on
parity with Doral Financials outstanding Noncumulative
Preferred Stock with respect to dividend rights and rights upon
liquidation, winding up or dissolution. As of December 31,
2010, there were 813,526 shares issued and outstanding of
the Convertible Preferred Stock.
The terms of Doral Financials outstanding preferred stock
do not permit Doral Financial to declare, set apart or pay any
dividends or make any other distribution of assets, or redeem,
purchase, set apart or otherwise acquire shares of the Common
Stock, or any other class of Doral Financials stock
ranking junior to the preferred stock, unless all accrued and
unpaid dividends on the preferred stock and any parity stock, at
the time those dividends are payable, have been paid and the
full dividend on the preferred stock for the current dividend
period is contemporaneously declared and paid or set aside for
payment. The terms of the preferred stock provide that if Doral
Financial is unable to pay in full dividends on the preferred
stock and other shares of stock of equal rank as to the payment
of dividends, all dividends declared upon the preferred stock
and such other shares of stock be declared pro rata.
On May 7, 2009, the Company announced the commencement of
an offer to exchange a stated amount of its shares of common
stock and a cash payment in exchange for a limited number of its
shares of outstanding preferred stock. The offer to exchange
commenced on May 7, 2009 and expired on June 8, 2009.
Each of the series of outstanding preferred stock of Doral
Financial were eligible to participate in the exchange offer,
subject to all terms and conditions set forth in the Tender
Offer Statement that was filed with the SEC on May 7, 2009,
as amended. The transaction was settled on June 11, 2009.
As a result of the exchange offer, Doral issued an aggregate of
3,953,892 shares of common stock and paid an aggregate of
$5.0 million in cash premium payments and recognized a
non-cash credit to retained earnings (with a corresponding
charge to additional paid in capital) of $9.4 million that was
added to net income available to common shareholders in
calculating earnings per share. This exchange resulted in an
increase in common equity of $100.6 million and a decrease
in preferred stock of $105.6 million.
On October 20, 2009, the Company announced the commencement
of an offer to exchange a stated amount of its shares of common
stock for a limited number of its Convertible Preferred Stock.
The offer to exchange commenced on October 20, 2009 and
expired on December 9, 2009. The transaction was settled on
December 14, 2009. Pursuant to the terms of the offer to
exchange, the Company issued 4,300,301 shares of common
stock in exchange for 208,854 shares of Convertible
Preferred Stock. This exchange resulted in an increase in common
equity and a corresponding decrease in preferred stock of
$52.2 million, as well as a non-cash charge to retained
earnings of $18.0 million (with a corresponding credit to
additional paid in capital) that was deducted from net income
available to common shareholders in calculating earnings per
share.
On February 11, 2010, the Company announced the
commencement of an offer to exchange a stated amount of its
shares of common stock in exchange for a limited number of its
shares of outstanding preferred stock. The offer to exchange
commenced on February 11, 2010 and expired on
March 19, 2010. Each of the four series of outstanding
preferred stock of Doral Financial were eligible to participate
in the exchange offer, subject to all terms and conditions set
forth in the Tender Offer Statement and Prospectus that were
filed with the SEC. The transaction was settled on
March 24, 2010. As a result of the exchange offer, Doral
issued an aggregate of 5,219,066 shares of common stock in
exchange for 1,689,459 of the Companys preferred stock
that were retired in connection with this exchange. This
exchange resulted in an increase in common equity and a
corresponding decrease in preferred stock of approximately
$63.3 million.
On April 19, 2010, the Company announced that it had
entered into a definitive Stock Purchase Agreement with various
purchasers of the Companys common stock, including certain
direct and indirect investors in Doral Holdings, the
Companys parent company, to raise up to
$600.0 million of new equity capital for the Company
through a private placement. Shares were sold in two tranches:
(i) a $180.0 million non-contingent tranche consisting
of approximately 180,000 shares of the Companys
Mandatorily Convertible
56
Non-Cumulative Non-Voting Preferred Stock (the Mandatorily
Convertible Preferred Stock), $1.00 par value and
$1,000 liquidation preference per share and (ii) a
$420.0 million contingent tranche consisting of
approximately 13.0 million shares of the Companys
common stock and approximately 359,000 shares of the
Mandatorily Convertible Preferred Stock. In addition, as part of
the non-contingent tranche, the Company issued into escrow
105,002 shares of Mandatorily Convertible Preferred Stock
with a liquidation value of $105.0 million, to be released
to purchasers if the Company did not complete an FDIC assisted
transaction.
Doral used the net proceeds from the placement of the shares in
the Non-Contingent Tranche to provide additional capital to the
Company to facilitate the Company (through its wholly owned
subsidiary, Doral Bank) qualifying as a bidder for the
acquisition of certain assets and assumption of certain
liabilities of one or more Puerto Rico banks from the FDIC, as
receiver.
The Company was approved to bid on the assets and liabilities of
any of all of the three Puerto Rico banks that failed in April
2010. On April 30, 2010, the Company announced it had been
out-bid and would not be acquiring any of the assets or
liabilities of any of the three Puerto Rico failed banks
resolved in separate FDIC assisted purchase and assumption
transactions. As a result, pursuant to the Stock Purchase
Agreement and the related escrow agreement, the
105,002 shares of the Mandatorily Convertible Preferred
Stock and the $420.0 million of contingent funds were
released from escrow to the purchasers and the contingent
tranche of securities was not issued. After giving effect to the
release of the 105,002 shares of the Mandatorily
Convertible Preferred Stock from escrow, the shares of the
Mandatorily Convertible Preferred Stock issued in the capital
raise had an effective sale price of $3.00 per common share
equivalent.
In connection with the Stock Purchase Agreement, the Company
also entered into a Cooperation Agreement with Doral Holdings,
Doral Holdings L.P. and Doral GP Ltd. pursuant to which Doral
Holdings made certain commitments including the commitment to
vote in favor of converting the Mandatorily Convertible
Preferred Stock to common stock and registering the shares
issued pursuant to this capital raise and other previously
issued unregistered shares of common stock and to dissolve Doral
Holdings pursuant to certain terms and conditions.
Accordingly, during the third quarter of 2010, the Company
converted 285,002 shares of Mandatorily Convertible
Non-Voting Preferred Stock into 60,000,386 shares of common
stock.
Refer to Note 34 of the accompanying Consolidated Financial
Statements for additional information.
Dividends
On April 25, 2006, Doral Financial announced that, as a
prudent capital management decision designed to preserve and
strengthen the Companys capital, the Board of Directors
had suspended the quarterly dividend on the Common Stock.
Doral Financials ability to pay dividends on the shares of
Common Stock in the future is limited by various regulatory
requirements and policies of bank regulatory agencies having
jurisdiction over Doral Financial and its banking subsidiaries,
its earnings, cash resources and capital needs, general business
conditions and other factors deemed relevant by Doral
Financials Board of Directors.
Under an existing consent order with the Federal Reserve, Doral
Financial is restricted from paying dividends on its capital
stock without the prior written approval of the Federal Reserve.
Doral Financial is required to request permission for the
payment of dividends on its common stock and preferred stock not
less than 30 days prior to a proposed dividend declaration
date. For the years ended December 31, 2008 and 2007, Doral
Financial received permission from the Federal Reserve to pay
all of the regular monthly cash dividends on the Noncumulative
Preferred Stock and the quarterly cash dividends on the
Convertible Preferred Stock, but cannot provide assurance that
it will receive approval for the payment of such dividends in
the future if it decided to declare dividends.
On March 20, 2009, the Board of Directors of Doral
Financial announced that it had suspended the declaration and
payment of all dividends on all of Doral Financials
outstanding series of cumulative and non-cumulative preferred
stock. The suspension of dividends was effective and commenced
with the dividends for
57
the month of April 2009 for Doral Financials three
outstanding series of non-cumulative preferred stock, and the
dividends for the second quarter of 2009 for Doral
Financials one outstanding series of cumulative preferred
stock.
The PR Code generally imposes a 10% withholding tax on the
amount of any dividends paid by Doral Financial to individuals,
whether residents of Puerto Rico or not, trusts, estates,
special partnerships and non-resident foreign corporations and
partnerships. Prior to the first dividend distribution for the
taxable year, individuals who are residents of Puerto Rico may
elect to be taxed on the dividends at the regular graduated
rates, in which case the special 10% tax will not be withheld
from such years distributions.
United States citizens who are not residents of Puerto Rico may
also make such an election except that notwithstanding the
making of such election, a 10% withholding will still apply to
the amount of any dividend distribution unless the individual
files with Doral Financials transfer agent, prior to the
first distribution date for the taxable year, a certificate to
the effect that said individuals gross income from sources
within Puerto Rico during the taxable year does not exceed
$1,300 if single, or $3,000 if married, in which case dividend
distributions will not be subject to Puerto Rico income taxes.
U.S. income tax law permits a credit against
U.S. income tax liability, subject to certain limitations,
for Puerto Rico income taxes paid or deemed paid with respect to
such dividends.
Special U.S. federal income tax rules apply to
distributions received by U.S. citizens on stock of a
passive foreign investment company (PFIC) as well as
amounts retained from the sale or exchange of stock of a PFIC.
Based upon certain provisions of the Internal Revenue Code of
1986, as amended (the Code) and proposed Treasury
Regulations promulgated thereunder, Doral Financial understands
that it has not been a PFIC for any of its prior taxable years.
For information regarding securities authorized for issuance
under Doral Financials stock-based compensation plans,
please refer to the information included in Part III,
Item 12 of this Annual Report on
Form 10-K,
which is incorporated by reference from the 2011 Proxy
Statement, and to Note 35, Stock Options and Other
Incentive Plans of the Consolidated Financial Statements
of Doral Financial, which are included as an Exhibit in
Part II, Item 15 of this Annual Report on
Form 10-K.
Sales
of unregistered securities during 2010
As previously disclosed by the Company in Current Reports on
Form 8-K
that it filed with the SEC on April 20, 2010,
April 27, 2010 and May 3, 2010 and as discussed above
under Preferred Stock, on April 19, 2010, the
Company announced that it had entered into a definitive Stock
Purchase Agreement with various purchasers of the Companys
common stock, including certain direct and indirect investors in
Doral Holdings, to raise up to $600.0 million of new equity
capital for the Company through a private placement. Shares were
sold in two tranches: (i) a $180.0 million
non-contingent tranche consisting of approximately
180,000 shares of the Companys Mandatorily
Convertible Preferred Stock and (ii) a $420.0 million
contingent tranche consisting of approximately 13.0 million
shares of the Companys common stock and approximately
359,000 shares of Mandatorily Convertible Preferred Stock.
In addition, as part of the non-contingent tranche, the Company
issued into escrow 105,002 shares of the Mandatorily
Convertible Preferred Stock with a liquidation value of
$105.0 million, to be released to purchasers if the Company
did not complete an FDIC assisted transaction.
Doral used the net proceeds from the placement of the shares in
the Non-Contingent Tranche to provide additional capital to the
Company to facilitate the Company (through its wholly owned
subsidiary, Doral Bank) qualifying as a bidder for the
acquisition of certain assets and assumption of certain
liabilities of one or more Puerto Rico banks from the FDIC, as
receiver.
On April 30, 2010, the Company announced that it had not
been selected to acquire the assets and liabilities of any
Puerto Rico bank in an FDIC-assisted transaction. As a result,
pursuant to the Stock Purchase Agreement and the related escrow
agreement, the 105,002 shares of the Mandatorily
Convertible Preferred Stock and the $420.0 million of
contingent funds were released from escrow to the purchasers and
the contingent tranche of securities was not issued. After
giving effect to the release of the 105,002 shares of the
58
Mandatorily Convertible Preferred Stock from escrow, the shares
of the Mandatorily Convertible Preferred Stock issued in the
capital raise had an effective sale price of $3.00 per common
share equivalent.
The shares of Mandatorily Convertible Preferred Stock were
offered and sold in private transactions and were not registered
under the Securities Act in compliance with an exemption from
Securities Act registration provided by Section 4(2) of the
Securities Act.
During the third quarter of 2010, the Company converted the
285,002 shares of Mandatorily Convertible Preferred Stock
into 60,000,386 shares of common stock. These shares of
common stock were registered by the Company under the Securities
Act prior to the conversion.
Stock
Repurchase
No purchases of Doral Financials equity securities were
made by or on behalf of Doral Financial during the fourth
quarter of 2010.
59
STOCK
PERFORMANCE GRAPH
The following Performance Graph shall not be deemed
incorporated by reference by any general statement incorporating
by reference this Annual Report on
Form 10-K
into any filing under the Securities Act of 1933, as amended
(the Securities Act) or the Exchange Act, except to
the extent that Doral Financial specifically incorporates this
information by reference, and shall not otherwise be deemed
filed under these Acts.
The following performance graph compares the yearly percentage
change in Doral Financials cumulative total stockholder
return on its common stock to that of the Center for Research in
Security Prices, Booth School of Business, the University of
Chicago (CRSP) NYSE Market Index
(U.S. Companies) and the CRSP Index for NYSE Depository
Institutions (SIC
6000-6099
U.S. Companies) (the Peer Group). The
Performance Graph assumes that $100 was invested on
December 31, 2005 in each of Doral Financials common
stock, the NYSE Market Index (U.S. Companies) and the Peer
Group. The comparisons in this table are set forth in response
to SEC disclosure requirements, and are therefore not intended
to forecast or be indicative of future performance of Doral
Financials common stock.
60
|
|
Item 6.
|
Selected
Financial Data.
|
The following table sets forth certain selected consolidated
financial data as of the dates and for the periods indicated.
This information should be read in conjunction with Doral
Financials consolidated financial statements and the
related notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Selected Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
401,521
|
|
|
$
|
458,265
|
|
|
$
|
524,674
|
|
|
$
|
578,960
|
|
|
$
|
821,895
|
|
Interest expense
|
|
|
240,917
|
|
|
|
290,638
|
|
|
|
347,193
|
|
|
|
424,619
|
|
|
|
620,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
160,604
|
|
|
|
167,627
|
|
|
|
177,481
|
|
|
|
154,341
|
|
|
|
201,390
|
|
Provision for loan and lease losses
|
|
|
98,975
|
|
|
|
53,663
|
|
|
|
48,856
|
|
|
|
78,214
|
|
|
|
39,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
61,629
|
|
|
|
113,964
|
|
|
|
128,625
|
|
|
|
76,127
|
|
|
|
161,561
|
|
Net gain (loss) on mortgage loans sales and fees
|
|
|
8,614
|
|
|
|
9,746
|
|
|
|
13,112
|
|
|
|
2,223
|
|
|
|
(34,456
|
)
|
Investment
activities(1)
|
|
|
(82,237
|
)
|
|
|
3,964
|
|
|
|
25,082
|
|
|
|
(125,205
|
)
|
|
|
(64,896
|
)
|
Loss on early repayment of debt
|
|
|
(7,749
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,806
|
)
|
|
|
(4,157
|
)
|
Servicing income (loss)
|
|
|
20,906
|
|
|
|
29,337
|
|
|
|
(7,700
|
)
|
|
|
20,687
|
|
|
|
6,904
|
|
Commissions, fees, and other income
|
|
|
46,390
|
|
|
|
44,154
|
|
|
|
49,035
|
|
|
|
41,704
|
|
|
|
37,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest (loss) income
|
|
|
(14,076
|
)
|
|
|
87,201
|
|
|
|
79,529
|
|
|
|
(75,397
|
)
|
|
|
(59,227
|
)
|
Non-interest expenses
|
|
|
324,564
|
|
|
|
243,786
|
|
|
|
240,412
|
|
|
|
303,492
|
|
|
|
374,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(277,011
|
)
|
|
|
(42,621
|
)
|
|
|
(32,258
|
)
|
|
|
(302,762
|
)
|
|
|
(272,008
|
)
|
Income tax expense (benefit)
|
|
|
14,883
|
|
|
|
(21,477
|
)
|
|
|
286,001
|
|
|
|
(131,854
|
)
|
|
|
(48,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
|
$
|
(170,908
|
)
|
|
$
|
(223,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
shareholders(2)
|
|
$
|
(274,418
|
)
|
|
$
|
(45,613
|
)
|
|
$
|
(351,558
|
)
|
|
$
|
(204,207
|
)
|
|
$
|
(257,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
9,109
|
|
|
$
|
15,841
|
|
|
$
|
33,299
|
|
|
$
|
33,299
|
|
|
$
|
33,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock exchange premium (inducement), net
|
|
$
|
26,585
|
|
|
$
|
(8,628
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share(2)(3)
|
|
$
|
(2.96
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(6.53
|
)
|
|
$
|
(7.45
|
)
|
|
$
|
(47.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.60
|
|
Book value per common share
|
|
$
|
4.01
|
|
|
$
|
7.41
|
|
|
$
|
6.17
|
|
|
$
|
14.37
|
|
|
$
|
61.17
|
|
Preferred shares outstanding at end of period
|
|
|
5,811,391
|
|
|
|
7,500,850
|
|
|
|
9,015,000
|
|
|
|
9,015,000
|
|
|
|
9,015,000
|
|
Weighted average common shares outstanding
|
|
|
92,657,003
|
|
|
|
56,232,026
|
|
|
|
53,810,110
|
|
|
|
27,415,242
|
|
|
|
5,397,057
|
|
Common shares outstanding at end of period
|
|
|
127,293,756
|
|
|
|
62,064,303
|
|
|
|
53,810,110
|
|
|
|
53,810,110
|
|
|
|
5,397,412
|
|
Selected Balance Sheet Data at Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
512,426
|
|
|
$
|
820,277
|
|
|
$
|
187,517
|
|
|
$
|
789,169
|
|
|
$
|
1,145,861
|
|
Securities held for trading
|
|
|
45,029
|
|
|
|
47,726
|
|
|
|
251,877
|
|
|
|
276,462
|
|
|
|
183,805
|
|
Securities available for sale
|
|
|
1,505,065
|
|
|
|
2,789,177
|
|
|
|
3,429,151
|
|
|
|
1,921,940
|
|
|
|
2,408,686
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,082,937
|
|
Total loans,
net(4)
|
|
|
5,784,188
|
|
|
|
5,695,964
|
|
|
|
5,506,303
|
|
|
|
5,344,756
|
|
|
|
5,159,027
|
|
Allowance for loan and lease losses (ALLL)
|
|
|
123,652
|
|
|
|
140,774
|
|
|
|
132,020
|
|
|
|
124,733
|
|
|
|
67,233
|
|
Servicing assets, net
|
|
|
114,342
|
|
|
|
118,493
|
|
|
|
114,396
|
|
|
|
150,238
|
|
|
|
176,367
|
|
Total assets
|
|
|
8,646,354
|
|
|
|
10,231,952
|
|
|
|
10,138,867
|
|
|
|
9,304,378
|
|
|
|
11,856,424
|
|
Deposits
|
|
|
4,618,475
|
|
|
|
4,643,021
|
|
|
|
4,402,772
|
|
|
|
4,268,024
|
|
|
|
4,250,760
|
|
Securities sold under agreement to repurchase
|
|
|
1,176,800
|
|
|
|
2,145,262
|
|
|
|
1,907,447
|
|
|
|
1,444,363
|
|
|
|
3,899,365
|
|
Advances from Federal Home Loan Bank (FHLB)
|
|
|
901,420
|
|
|
|
1,606,920
|
|
|
|
1,623,400
|
|
|
|
1,234,000
|
|
|
|
1,034,500
|
|
Other short-term borrowings
|
|
|
|
|
|
|
110,000
|
|
|
|
351,600
|
|
|
|
|
|
|
|
|
|
Loans Payable
|
|
|
304,035
|
|
|
|
337,036
|
|
|
|
366,776
|
|
|
|
402,701
|
|
|
|
444,443
|
|
Notes Payable
|
|
|
513,958
|
|
|
|
270,838
|
|
|
|
276,868
|
|
|
|
282,458
|
|
|
|
923,913
|
|
Total liabilities
|
|
|
7,784,159
|
|
|
|
9,356,908
|
|
|
|
9,233,696
|
|
|
|
7,957,671
|
|
|
|
10,953,020
|
|
Preferred equity
|
|
|
352,082
|
|
|
|
415,428
|
|
|
|
573,250
|
|
|
|
573,250
|
|
|
|
573,250
|
|
Common equity
|
|
|
510,113
|
|
|
|
459,616
|
|
|
|
331,921
|
|
|
|
773,457
|
|
|
|
330,154
|
|
Total stockholders equity
|
|
|
862,195
|
|
|
|
875,044
|
|
|
|
905,171
|
|
|
|
1,346,707
|
|
|
|
903,404
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Selected Average Balance Sheet Data for Period
End:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
2,215,613
|
|
|
$
|
3,381,446
|
|
|
$
|
3,325,813
|
|
|
$
|
3,446,510
|
|
|
$
|
6,516,026
|
|
Total loans
|
|
|
5,894,546
|
|
|
|
5,680,428
|
|
|
|
5,566,644
|
|
|
|
5,156,667
|
|
|
|
6,707,339
|
|
Total interest-earning assets
|
|
|
8,765,849
|
|
|
|
9,515,945
|
|
|
|
9,422,614
|
|
|
|
9,647,512
|
|
|
|
14,309,542
|
|
Total assets
|
|
|
9,477,943
|
|
|
|
10,066,305
|
|
|
|
10,263,563
|
|
|
|
10,544,286
|
|
|
|
15,277,037
|
|
Deposits
|
|
|
4,705,846
|
|
|
|
4,206,209
|
|
|
|
4,257,897
|
|
|
|
4,081,593
|
|
|
|
4,263,587
|
|
Total borrowings
|
|
|
3,534,294
|
|
|
|
4,578,019
|
|
|
|
4,342,235
|
|
|
|
4,945,837
|
|
|
|
9,464,093
|
|
Total interest-bearing liabilities
|
|
|
7,990,149
|
|
|
|
8,539,622
|
|
|
|
8,345,566
|
|
|
|
8,717,948
|
|
|
|
13,386,886
|
|
Preferred equity
|
|
|
410,616
|
|
|
|
511,650
|
|
|
|
573,250
|
|
|
|
573,250
|
|
|
|
573,250
|
|
Common equity
|
|
|
508,137
|
|
|
|
355,014
|
|
|
|
668,224
|
|
|
|
554,823
|
|
|
|
434,078
|
|
Total stockholders equity
|
|
|
918,753
|
|
|
|
866,664
|
|
|
|
1,241,474
|
|
|
|
1,128,073
|
|
|
|
1,007,328
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan production
|
|
$
|
1,439,000
|
|
|
$
|
1,148,000
|
|
|
$
|
1,328,000
|
|
|
$
|
1,332,000
|
|
|
$
|
2,017,000
|
|
Loan servicing
portfolio(6)
|
|
$
|
8,208,000
|
|
|
$
|
8,656,000
|
|
|
$
|
9,460,000
|
|
|
$
|
10,073,000
|
|
|
$
|
11,997,000
|
|
Selected Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
1.83
|
%
|
|
|
1.76
|
%
|
|
|
1.88
|
%
|
|
|
1.60
|
%
|
|
|
1.41
|
%
|
Efficiency ratio
|
|
|
120.05
|
%
|
|
|
97.61
|
%
|
|
|
83.93
|
%
|
|
|
167.76
|
%
|
|
|
211.80
|
%
|
Return on average assets
|
|
|
(3.08
|
)%
|
|
|
(0.21
|
)%
|
|
|
(3.10
|
)%
|
|
|
(1.62
|
)%
|
|
|
(1.47
|
)%
|
Return on average common equity
|
|
|
(59.24
|
)%
|
|
|
(10.42
|
)%
|
|
|
(52.61
|
)%
|
|
|
(36.81
|
)%
|
|
|
(59.25
|
)%
|
Dividend payout ratio for common stock
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
(3.36
|
)%
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
|
8.56
|
%
|
|
|
8.43
|
%
|
|
|
7.59
|
%
|
|
|
10.80
|
%
|
|
|
4.54
|
%
|
Tier 1 risk-based capital ratio
|
|
|
13.25
|
%
|
|
|
13.82
|
%
|
|
|
13.80
|
%
|
|
|
16.52
|
%
|
|
|
10.30
|
%
|
Total risk-based capital ratio
|
|
|
14.51
|
%
|
|
|
15.08
|
%
|
|
|
17.07
|
%
|
|
|
17.78
|
%
|
|
|
13.70
|
%
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs as percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
|
|
|
14.85
|
%
|
|
|
16.65
|
%
|
|
|
14.42
|
%
|
|
|
12.78
|
%
|
|
|
8.01
|
%
|
Total NPAs as percentage of consolidated total assets
|
|
|
9.85
|
%
|
|
|
9.21
|
%
|
|
|
7.69
|
%
|
|
|
7.22
|
%
|
|
|
3.44
|
%
|
Non-performing loans to total loans (excluding GNMA defaulted
loans and FHA/VA guaranteed loans)
|
|
|
11.29
|
%
|
|
|
15.19
|
%
|
|
|
13.19
|
%
|
|
|
11.93
|
%
|
|
|
7.31
|
%
|
ALLL as a percentage of loans receivable outstanding, at year end
|
|
|
2.21
|
%
|
|
|
2.55
|
%
|
|
|
2.51
|
%
|
|
|
2.47
|
%
|
|
|
1.94
|
%
|
ALLL to period-end loans receivable (excluding FHA/VA guaranteed
loans and loans on savings deposits)
|
|
|
2.29
|
%
|
|
|
2.63
|
%
|
|
|
2.54
|
%
|
|
|
2.49
|
%
|
|
|
1.96
|
%
|
ALLL plus partial charge-offs and discounts to loans receivable
(excluding FHA/VA guaranteed loans and loans on savings
deposits)
|
|
|
4.65
|
%
|
|
|
3.42
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
ALLL to non-performing loans (excluding NPLs held for sale)
|
|
|
19.82
|
%
|
|
|
16.91
|
%
|
|
|
18.69
|
%
|
|
|
19.91
|
%
|
|
|
21.85
|
%
|
ALLL plus partial charge-offs and discounts to non-performing
loans (excluding NPLs held for sale)
|
|
|
41.24
|
%
|
|
|
22.15
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
ALLL to net charge-offs
|
|
|
106.51
|
%
|
|
|
313.47
|
%
|
|
|
317.59
|
%
|
|
|
602.17
|
%
|
|
|
880.01
|
%
|
Provision for loan and lease losses to net charge-offs
|
|
|
85.25
|
%
|
|
|
119.49
|
%
|
|
|
117.53
|
%
|
|
|
377.59
|
%
|
|
|
521.32
|
%
|
Net charge-offs to average loan receivable outstanding
|
|
|
2.08
|
%
|
|
|
0.85
|
%
|
|
|
0.80
|
%
|
|
|
0.50
|
%
|
|
|
0.23
|
%
|
Recoveries to charge-offs
|
|
|
1.54
|
%
|
|
|
5.52
|
%
|
|
|
2.37
|
%
|
|
|
3.73
|
%
|
|
|
9.71
|
%
|
Other ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common equity to average assets
|
|
|
5.36
|
%
|
|
|
3.53
|
%
|
|
|
6.11
|
%
|
|
|
4.83
|
%
|
|
|
2.84
|
%
|
Average total equity to average assets
|
|
|
9.69
|
%
|
|
|
8.61
|
%
|
|
|
12.10
|
%
|
|
|
10.70
|
%
|
|
|
6.59
|
%
|
Tier 1 common equity to risk-weighted assets
|
|
|
6.94
|
%
|
|
|
7.16
|
%
|
|
|
6.00
|
%
|
|
|
6.66
|
%
|
|
|
2.65
|
%
|
|
|
|
(1) |
|
Included net credit related OTTI
losses of $14.0 million, $27.6 million and
$0.9 million for the years ended December 31, 2010,
2009 and 2008, respectively. Also, includes the net gain on
trading activities of $25.4 million and $30.0 million
for the years ended December 31, 2010 and 2008,
respectively, and a net loss on trading activities of
$3.4 million for the year ended December 31, 2009.
|
|
(2) |
|
For the years ended
December 31, 2010 and 2009, includes $26.6 million and
$8.6 million related to the net effect of the conversions
of preferred stock during the years indicated.
|
|
(3) |
|
For the years ended
December 31, 2010, 2009, 2008, 2007 and 2006, net loss per
common share represents the basic and diluted loss per share,
respectively.
|
|
(4) |
|
Includes loans held for sale.
|
|
(5) |
|
Average balances are computed on a
daily basis.
|
|
(6) |
|
Represents the total portfolio of
loans serviced for third parties. Excludes $4.4 billion,
$4.4 billion, $4.2 billion, $3.6 billion and,
$3.1 billion of mortgage loans owned by Doral Financial at
December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
|
62
Doral Financials ratios of earnings to fixed charges and
earnings to fixed charges and preferred stock dividends on a
consolidated basis for each of the years ended December 31,
2010, 2009, 2008, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Ratio of Earnings to Fixed Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
Excluding interest on deposits
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
Excluding interest on deposits
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
(A
|
)
|
|
|
|
(A)
|
|
During 2010, 2009, 2008, 2007 and
2006, earnings were not sufficient to cover fixed charges or
preferred dividends and the ratios were less than 1:1. The
Company would have had to generate additional earnings of
$285.7 million, $74.6 million, $35.6 million,
$361.7 million and $312.5 million, to achieve ratios
of 1:1 in 2010, 2009, 2008, 2007 and 2006, respectively.
|
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 expensed and
capitalized, amortization of debt issuance costs, and Doral
Financials 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 Doral Financials outstanding
preferred stock.
On March 20, 2009, the Board of Directors of Doral
Financial announced that it had suspended the declaration and
payment of all dividends on all of Doral Financials
outstanding series of cumulative and non-cumulative preferred
stock. The suspension of dividends was effective and commenced
with the dividends for the month of April 2009 for Doral
Financials three outstanding series of non-cumulative
preferred stock, and the dividends for the second quarter of
2009 for Doral Financials one outstanding series of
cumulative preferred stock. For the year ended December 31,
2010, the Company accrued $9.1 million related to the
cumulative preferred stock. For the year ended December 31,
2009, the Company accrued $15.8 million related to the
cumulative preferred stock of which $8.3 million was paid
during the first quarter of 2009 prior to the suspension of
preferred stock dividends.
The principal balance of Doral Financials 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 five years in the period
ended December 31, 2010 is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Long-term obligations
|
|
$
|
2,429,489
|
|
|
$
|
2,457,944
|
|
|
$
|
3,459,246
|
|
|
$
|
2,885,164
|
|
|
$
|
4,834,163
|
|
Cumulative preferred stock
|
|
$
|
203,382
|
|
|
$
|
218,040
|
|
|
$
|
345,000
|
|
|
$
|
345,000
|
|
|
$
|
345,000
|
|
Non-cumulative preferred stock
|
|
$
|
148,700
|
|
|
$
|
197,388
|
|
|
$
|
228,250
|
|
|
$
|
228,250
|
|
|
$
|
228,250
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations
(MD&A) is intended to help you understand Doral
Financial and its subsidiaries. This MD&A is provided
63
as a supplement to and should be read in conjunction with Doral
Financials consolidated financial statements and the
accompanying notes. The MD&A includes the following
sections:
OVERVIEW OF RESULTS OF OPERATIONS: Provides a
brief summary of the most significant events and drivers
affecting Doral Financials results of operations during
2010.
CRITICAL ACCOUNTING POLICIES: Provides a
discussion of Doral Financials accounting policies that
require critical judgment, assumptions and estimates.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010,
2009 AND 2008: Provides an analysis of the
consolidated results of operations for 2010 compared to 2009,
and 2009 compared to 2008.
OPERATING SEGMENTS: Provides a description of
Doral Financials three operating segments and an analysis
of the results of operations for each of these segments.
BALANCE SHEET AND OPERATING DATA
ANALYSIS: Provides an analysis of the most
significant balance sheet items and operational data that impact
Doral Financials financial statements and business. This
section includes a discussion of the Companys liquidity
and capital resources, regulatory capital ratios, off-balance
sheet activities and contractual obligations.
RISK MANAGEMENT: Provides an analysis of the
most significant risks to which Doral Financial is exposed,
specifically interest rate risk, credit risk, operational risks
and liquidity risk.
MISCELLANEOUS: Provides disclosure about
various matters.
Investors are encouraged to carefully read this MD&A
together with Doral Financials consolidated financial
statements, including the Notes to the consolidated financial
statements.
As used in this report, references to the Company or
Doral Financial refer to Doral Financial Corporation
and its consolidated subsidiaries unless otherwise indicated.
OVERVIEW
OF RESULTS OF OPERATIONS
Net loss for the year ended December 31, 2010 amounted to
$291.9 million, compared to net losses of
$21.1 million and $318.3 million for the years 2009
and 2008, respectively. Doral Financials results for the
year ended December 31, 2010, compared to the corresponding
2009 period were impacted by (i) an increase of
$45.3 million in provision for loan and lease losses;
(ii) a non-interest loss of $93.7 million resulting
from losses associated to sales of securities; and (iii) an
increase in non-interest expense of $80.8 million. Also the
recognition of an income tax expense of $14.9 million
during 2010 impacted the Companys results when compared to
an income tax benefit of $21.5 million for the
corresponding 2009 period.
The significant events affecting the Companys financial
results for the year ended December 31, 2010 included the
following:
|
|
|
|
|
Net loss attributable to common shareholders for the year ended
December 31, 2010 of $274.4 million, resulted in a
diluted loss per share of $2.96, compared to a net loss
attributable to common shareholders for the corresponding 2009
and 2008 periods of $45.6 million and $351.6 million,
or a diluted loss per share of $0.81 and $6.53, respectively.
For additional information please refer to Note 36 of the
accompanying financial statements.
|
|
|
|
Net interest income for the year ended December 31, 2010
was $160.6 million, compared to $167.6 million and
$177.5 million for the corresponding 2009 and 2008 periods,
respectively. The decrease of $7.0 million in net interest
income during 2010, compared to 2009, resulted from a reduction
in interest income of $56.7 million, partially offset by a
reduction in interest expense of $49.7 million. The
reduction in interest income resulted from (i) a reduction
of $2.8 million in interest income on loans primarily
related to a decrease in interest income on mortgage loans of
$9.4 million driven by various factors such as the level of
non-accrual loans and yield concessions on loan loss mitigation
activities, a reduction of $3.3 million in interest income
on construction loans resulting from
|
64
|
|
|
|
|
the sale of a construction portfolio to a third party and
run-off, a reduction of $3.1 million in interest income on
consumer portfolio due primarily to charge-offs, partially
offset by an increase of $13.0 million on interest income
on commercial loans due to increases in the U.S. syndicated
loan portfolio; (ii) a decrease of $45.8 million in
interest on MBS impacted by the sale of non-agency CMOs and
other MBS during the second and third quarter of 2010; and
(iii) a decrease in interest on other investment securities
due to a reduction in the average balance of other investment
securities related to sales, calls
and/or
maturities. The decrease in interest expense resulted
principally from (i) a reduction of $14.3 million in
interest expense on deposits driven by the rollover of maturing
brokered CDs at lower current market rates, as well as shifts in
the composition of the Companys retail deposits;
(ii) a reduction of $18.1 million in interest expense
on securities sold under agreements to repurchase driven by a
decrease of $248.5 million in the average balance of
repurchase agreements and a general decline in interest rates;
and (iii) a decrease of $15.8 million in interest on
advances from FHLB resulted primarily from the decline in the
average balance of advances from FHLB of $421.7 during 2010.
|
|
|
|
|
|
Doral Financials provision for loan and lease losses for
the year ended December 31, 2010 amounted to
$99.0 million, compared to $53.7 million and
$48.9 million for the corresponding 2009 and 2008 periods,
respectively. The higher provision for loan and lease losses in
2010 was driven by increases in the provision for residential,
commercial real estate and construction and land portfolios. The
$45.3 million increase in the provision for loan and lease
losses during 2010 compared to 2009 was due to higher commercial
real estate non-performing loans, the effect of charge-offs
related to foreclosed loans, and the transfer and subsequent
sale of certain construction loans to held for sale, higher loss
mitigation volume and an increase in severities (in the
determination of the provision) due to strategic decision to
accelerate OREO dispositions.
|
|
|
|
Non-interest loss for the year ended December 31, 2010 was
$14.1 million, compared to non-interest income of
$87.2 million and $79.5 million for the corresponding
2009 and 2008 periods. The non-interest loss of $14.1 during
2010 resulted from (i) an OTTI loss of $14.0 million
recognized on eight of the Companys non-agency CMOs;
(ii) a net loss on investment securities of
$101.5 million, net of cost to terminate related
borrowings, due to the sale of approximately $2.2 billion
of mortgage-backed securities at a loss of $138.0 million
partially offset by other securities sold at a gain of
$36.5 million; (iii) a net gain on trading activities
of $25.4 million driven principally by gains on sale of
securities held for trading, on the IO valuation and on the MSR
economic hedge; and (iv) an increase in other income of
$2.2 million due to a gain of $3.0 million on
redemption of shares of VISA, Inc.
|
|
|
|
Non-interest expense for the year ended December 31, 2010
was $324.6 million, compared to $243.8 million and
$240.4 million for the years ended December 31, 2009
and 2008, respectively. Non-interest expenses for the year ended
December 31, 2010 were impacted by (i) an increase of
$26.2 million in total OREO and other related expenses due
to the recognition of an additional provision of
$17.0 million to account for the effect of
managements strategic decision to reduce pricing in order
to accelerate OREO sales, adjustments driven by lower values of
certain of Dorals OREO properties, higher levels of
repossessed units and higher expenses to maintain the properties
in saleable conditions; (ii) an increase of
$22.3 million in professional services expenses driven by
amounts advanced to cover legal expenses of the Companys
former officers, for the management of legacy portfolios and
expenses associated with non-recurring transactions that
occurred during 2010; (iii) an increase of
$6.4 million in compensation and employee benefits mainly
related to bonuses and other compensation paid to certain
officers of the Company, (vi) an additional
$12.3 million loss on Lehman Brothers, Inc. and a
subsequent loss on the sale of the claim; and (v) other
increases in occupancy and advertising expenses.
|
|
|
|
An income tax expense of $14.9 million for the year ended
December 31, 2010 compared to an income tax benefit of
$21.5 million and an income tax expense of
$286.0 million for the corresponding 2009 and 2008 periods.
The recognition of an income tax expense for 2010 was related to
taxes on U.S. source income and to recognize additional
deferred tax assets, primarily NOLs, net of amortization of
existing DTAs and a net increase in the deferred tax asset
valuation allowance. The income tax benefit for 2009 was related
to the effect on DTAs of certain tax agreements.
|
65
|
|
|
|
|
The Company reported other comprehensive income of
$115.6 million for the year ended December 31, 2010,
compared to other comprehensive income of $11.7 million and
other comprehensive loss of $90.1 million for the
corresponding 2009 and 2008 periods. The increase in other
comprehensive income for the year ended December 31, 2010
resulted principally from sale of the Companys non-agency
CMOs during the second quarter of 2010, that drove the
realization of a loss of approximately $129.7 million at
the time of the sale.
|
|
|
|
Doral Financials loan production for the year ended
December 31, 2010 was $1.4 billion, compared to
$1.1 billion and $1.3 billion for the comparable 2009
and 2008 periods. The increase in Doral Financials loan
production during 2010 resulted from an increase in commercial
production of $286.8 million generated by the
Companys U.S. based middle market syndicated lending
unit which is engaged in acquiring participating interests in
credit facilities in the syndicated loan market and to an
increase in construction loans largely due to the issuance of a
note receivable of $96.9 million related to the sale of a
construction loan portfolio to a third party.
|
|
|
|
Total assets as of December 31, 2010 totaled to
$8.6 billion compared to $10.2 billion as of
December 31, 2009. The decrease in total assets was due to
a reduction of $1.3 billion in the Companys
investment securities portfolio that resulted from a combination
of a sale of $2.3 billion of MBS, primarily CMOs, and other
securities partially offset by purchases totalling
$1.6 billion, primarily of shorter duration MBS, as part of
interest rate risk management strategies. There was also a
decrease in cash and cash equivalents of $307.9 million
used to finance the purchase of investments.
|
|
|
|
Non-performing loans (NPLs) as of December 31,
2010 were $626.5 million, a decrease of $211.5 million
from December 31, 2009. During the third quarter of 2010,
the Company sold certain construction loans and OREO to a third
party resulting in a reduction of $63.2 million in
construction and land loans that were non-performing. The
remainder of the decrease resulted from expanded collection
activities and loss mitigation efforts across all portfolios.
Non-performing assets (NPAs) as of December 31,
2010 were $851.8 million, a decrease of $90.8 million
compared to December 31, 2009. Non-performing FHA/VA
guaranteed loans, which are guaranteed by an agency of the
United States government and present little credit risk to
Doral, were $121.3 million, an increase of
$111.0 million from December 31, 2009.
|
CRITICAL
ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP
requires management to make a number of judgments, estimates and
assumptions that affect the reported amount of assets,
liabilities, income and expenses in Doral Financials
consolidated financial statements and accompanying notes.
Certain of these estimates are critical to the presentation of
Doral Financials financial condition since they are
particularly sensitive to the Companys judgment and are
highly complex in nature. Doral Financial believes that the
judgments, estimates and assumptions used in the preparation of
its consolidated financial statements are appropriate given the
factual circumstances as of December 31, 2010. However,
given the sensitivity of Doral Financials consolidated
financial statements to these estimates, the use of other
judgments, estimates and assumptions could result in material
differences in Doral Financials results of operations or
financial condition.
Various elements of Doral Financials accounting policies,
by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective
assessments. Note 2 to Doral Financials consolidated
financial statements contains a summary of the most significant
accounting policies followed by Doral Financial in the
preparation of its financial statements. The accounting policies
that have a significant impact on Doral Financials
statements and that require the most judgment are set forth
below.
Fair
Value Measurements
The Company uses fair value measurements to state certain assets
and liabilities at fair value and to support fair value
disclosures. Securities held for trading, securities available
for sale, derivatives and servicing assets are recorded at fair
value on a recurring basis. Additionally, from time to time, the
Company may be
66
required to record other financial assets at fair value on a
nonrecurring basis, such as loans held for sale, loans
receivable and certain other assets. These nonrecurring fair
value adjustments typically involve application of
lower-of-cost-or-market accounting or write-downs of individual
assets.
The Company discloses for interim and annual reporting periods
the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not in
the statement of financial condition.
Fair
Value Hierarchy
The Company categorized its financial instruments based on the
priority of inputs to the valuation technique into a three level
hierarchy described below:
|
|
|
|
|
Level 1 Valuation is based upon
unadjusted quoted prices for identical instruments traded in
active markets.
|
|
|
|
Level 2 Valuation is based upon quoted
prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all
significant assumptions are observable in the market, or are
derived principally from or corroborated by observable market
data, by correlation or by other means.
|
|
|
|
Level 3 Valuation is generated from
model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions reflect
the Companys estimates of assumptions that market
participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
|
Determination
of Fair Value
The Company bases fair values on the price that would be
received upon sale of an asset, or paid to transfer a liability,
in an orderly transaction between market participants at the
measurement date. It is Doral Financials intent to
maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements, in
accordance with the fair value hierarchy.
Fair value measurements for assets and liabilities where there
is limited or no observable market data are based primarily upon
the Companys estimates, and are generally calculated based
on current pricing policy, the economic and competitive
environment, the characteristics of the asset or liability and
other such factors. Therefore, the fair values represent
managements estimates and may not be realized in an actual
sale or immediate settlement of the asset or liability.
Additionally, there may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions
used, including discount rates and estimates of future cash
flows, could significantly affect the results of current or
future values.
The Company relies on appraisals for valuation of collateral
dependent impaired loans and other real estate owned. An
appraisal of value is obtained at the time the loan is
originated. New estimates of collateral value are obtained when
a loan that has been performing becomes delinquent and is
determined to be collateral dependent, and at the time an asset
is acquired through foreclosure. Updated reappraisals are
requested at least every two years for collateral dependent
loans and other real estate owned.
Residential mortgage loans are considered collateral dependent
when they are 180 days past due (collateral dependent
residential mortgage loans are those past due loans whose
borrowers financial condition has deteriorated to the
point that Doral considers only the collateral when determining
its allowance for loan loss estimate). An updated estimate of
the propertys value is obtained when the loan in
180 days past due, and a second assessment of value is
obtained when the loan is 360 days past due. The Company
generally uses broker price opinions (BPOs) as an
assessment of value of collateral dependent residential mortgage
loans.
As it takes a period of time for commercial loan appraisals to
be completed once they are ordered, Doral must at times estimate
its allowance for loan and lease losses for an impaired loan
using a dated, or stale, appraisal. As Puerto Rico has
experienced some decrease in property values during its extended
recession, the reported values of the stale appraisals must be
adjusted to recognize the fade in market value. In
order to
67
estimate the value of collateral with stale appraisals, Doral
has developed separate collateral price indices for small
commercial loans and large commercial loans that are used to
measure the market value fade in appraisals completed in one
year to the current year. The indices provide a measure of how
much the property value has changed from the year in which the
most recent appraisal was received to the current year. In
estimating its allowance for loan and lease losses on collateral
dependent loans using outdated appraisals, Doral uses the
original appraisal as adjusted for the estimated fade in
property value less selling costs to estimate the current fair
value of the collateral. That current adjusted estimated fair
value is then compared to the reported investment, and if the
adjusted fair value is less than reported investment, that
amount is included in the allowance for loan and lease loss
estimate.
Residential development construction loans that are collateral
dependent present unique challenges to estimating the fair value
of the underlying collateral. Residential development
construction loans are partially completed with additional
construction costs to be incurred, have units being sold and
released from the construction loan, and may have additional
land collateralizing the loan on which the developer hopes or
expects to build additional units. Therefore, the value of the
collateral is regularly changing and any appraisal has a limited
useful life. Doral uses an internally developed estimate of
value that considers Dorals exit strategy of foreclosing
and completing the construction started and selling the
individual units constructed for residential buildings, and
separately uses the most recent appraised value for any remnant
land adjusted for the fade in value since the appraisal date as
described above. This internally developed estimate is prepared
in conjunction with a third party servicer of the portfolio who
validates and determines the inputs used to arrive at the
estimate of value (e.g. units sold, expected sales, cost to
complete, etc.)
Once third party appraisals are obtained the previously
estimated property values are updated with the actual values
reflected in the appraisal and any additional loss incurred is
recognized in the period when the appraisal is received. The
internally developed collateral price index is also updated and
any changes resulting from the update in the index are also
recognized in the period.
Refer to Note 38 of the accompanying Consolidated Financial
Statements for a discussion about the extent to which fair value
is used to measure assets and liabilities, the valuation
methodologies used and its impact on earnings.
Gain
or Loss on Mortgage Loan Sales
The Company generally sells or securitizes a portion of the
residential mortgage loans that it originates. FHA and VA loans
are generally securitized into GNMA mortgage-backed securities
and held as trading securities. After holding these securities
for a period of time, usually less than one month, Doral
Financial sells these securities for cash through
broker-dealers. Conforming conventional loans are generally sold
directly to FNMA, FHLMC or institutional investors or exchanged
for FNMA or FHLMC-issued mortgage-backed securities, which Doral
Financial also sells for cash through broker-dealers.
As part of its mortgage loan sale and securitization activities,
Doral Financial generally retains the right to service the
mortgage loans it sells. Doral Financial determines the gain on
sale of a mortgage-backed security or loan pool by allocating
the carrying value, also known as basis, of the underlying
mortgage loans between the mortgage-backed security or mortgage
loan pool sold and its retained interests, based on their
relative estimated fair values. The gain on sale reported by
Doral Financial is the difference between the proceeds received
from the sale and the cost allocated to the loans sold. The
proceeds include cash and other assets received in the
transaction (primarily MSRs) less any liabilities incurred
(i.e., representations and warranty provisions). The reported
gain or loss is the difference between the proceeds from the
sale of the security or mortgage loan pool and its allocated
cost. The amount of gain on sale is therefore influenced by the
values of the MSRs and retained interest recorded at the time of
sale. See Retained Interest Valuation below
for additional information.
If in a transfer of financial assets in exchange for cash or
other consideration (other than beneficial interests in
transferred assets), Doral Financial has not surrendered control
over the transferred assets, Doral Financial accounts for the
transfer as a secured borrowing (loan payable) with a pledge of
collateral.
68
Retained
Interest Valuation
The Company routinely originates, securitizes and sells mortgage
loans into the secondary market. The Company generally retains
the servicing rights and, in the past, also retained IOs. MSRs
represent the estimated present value of the normal servicing
fees (net of related servicing costs) expected to be received on
a loan being serviced over the expected term of the loan. MSRs
entitle Doral Financial to a future stream of cash flows based
on the outstanding principal balance of the loans serviced and
the contractual servicing fee. The annual servicing fees
generally range between 25 and 50 basis points, less, in
certain cases, any corresponding guarantee fee. In addition,
MSRs may entitle Doral Financial, depending on the contract
language, to ancillary income including late charges, float
income, and prepayment penalties net of the appropriate expenses
incurred for performing the servicing functions. In certain
instances, the Company also services loans with no contractual
servicing fee. The servicing asset or liability associated with
such loans is evaluated based on ancillary income, including
float, late fees, prepayment penalties and costs. The
Companys interests that continue to be held
(retained interest) are subject to prepayment and
interest rate risk. MSRs are classified as servicing assets in
Doral Financials Consolidated Statements of Financial
Condition. Any servicing liability recognized is included as
part of accrued expenses and other liabilities in Doral
Financials Consolidated Statements of Financial Condition.
The fair value of the Companys MSRs is determined based on
a combination of market information on trading activity
(servicing trades and broker valuations), benchmarking of
servicing assets (valuation surveys) and cash-flow modeling. The
valuation of the Companys MSRs incorporate two sets of
assumptions: (i) market derived assumptions for discount
rates, servicing costs, escrow earnings rate, float earnings
rate and cost of funds and (ii) market derived assumptions
adjusted for the Companys loan characteristics and
portfolio behavior for escrow balances, delinquencies and
foreclosures, late fees, prepayments and prepayment penalties.
For the year ended December 31, 2010, the fair value of the
MSRs amounted to $114.3 million, which represents a value
decline of $4.2 million compared to December 31, 2009.
IOs represent the estimated present value of cash flows retained
by the Company that are generated by the underlying fixed rate
mortgages (as adjusted for prepayments) after subtracting:
(i) the interest rate payable to the investor (adjusted for
any embedded cap, if applicable); and (ii) a contractual
servicing fee. As of December 31, 2010, the carrying value
of the IOs of $44.3 million is related to
$302.4 million of outstanding principal balance of mortgage
loans sold to investors. IOs are classified as securities held
for trading in Doral Financials Consolidated Statements of
Financial Condition.
To determine the value of its portfolio of variable IOs, Doral
Financial uses an internal valuation model that forecasts
expected cash flows using forward LIBOR rates derived from the
LIBOR/Swap yield curve at the date of the valuation. The
characteristics of the variable IOs result in an increase in
cash flows when LIBOR rates fall and a reduction in cash flows
when LIBOR rates rise. This provides a mitigating effect on the
impact of prepayment speeds on the cash flows, with prepayments
expected to rise when long-term interest rates fall reducing the
amount of expected cash flows and the opposite when long-term
interest rise. Prepayment assumptions incorporated into the
valuation model for variable and fixed IOs are based on publicly
available, independently verifiable, prepayment assumptions for
FNMA mortgage pools and statistically derived prepayment
adjusters based on observed relationships between the
Companys and FNMAs U.S. mainland mortgage pool
prepayment experiences.
This methodology resulted in a CPR of 9.0% for 2010, 10.4% for
2009 and 12.7% for 2008. The change in the CPR between 2010 and
2009 was due mostly to reflect changes in experienced
prepayments speeds.
The Company continues to benchmark its assumptions for setting
its liquidity/credit risk premium to a third party valuation
provider. This methodology resulted in a discount rate 13.0%
that was used for the years ended December 31, 2010, 2009
and 2008, respectively.
For IOs, Doral Financial recognizes as interest income (through
the life of the IO) the excess of all estimated cash flows
attributable to these interests over their recorded balance
using the effective yield method. The Company updates its
estimates of expected cash flows periodically and recognizes
changes in calculated effective yield on a prospective basis.
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Valuation
of Trading Securities and Derivatives
Doral Financials net gain (loss) on trading activities
includes gains and losses, whether realized or unrealized, on
securities accounted for as held for trading, including IOs, as
well as various other financial instruments, such as derivative
contracts, that Doral Financial uses to manage its interest rate
risk. Securities held for trading and derivatives are recorded
at fair values with increases or decreases in such values
reflected in current earnings. The fair values of many of Doral
Financials trading securities (other than IOs) are based
on market prices obtained from market data sources. For
instruments not traded on a recognized market, Doral Financial
generally determines fair value by reference to quoted market
prices for similar instruments. The fair values of derivative
instruments are obtained using internal valuation models based
on financial modeling tools and using market derived assumptions
obtained from market data sources.
Until the second quarter of 2009, securities accounted as held
for trading included U.S. Treasury security positions,
taken as economic hedges against the valuation adjustment of the
Companys capitalized mortgage servicing rights.
Subsequently, the U.S. Treasury positions were unwound and
other derivative instruments were used as economic hedges on the
MSR.
Generally, derivatives are financial instruments with little or
no initial net investment in comparison to their notional amount
and whose value is based on the value of an underlying asset,
index, reference rate or other variable. They may be
standardized contracts executed through organized exchanges or
privately negotiated contractual agreements that can be
customized to meet specific needs, including certain commitments
to purchase and sell mortgage loans and mortgage-backed
securities. The fair value of derivatives is generally reported
net by counterparty, provided that a legally enforceable master
agreement exists. Derivatives in a net asset position are
reported as part of securities held for trading, at fair value.
Similarly, derivatives in a net liability position are reported
as part of accrued expenses and other liabilities, at fair value.
For those derivatives not designated as an accounting hedge,
fair value gains and losses are reported as part of net gain
(loss) on trading activities in the Consolidated Statements of
Operations.
Other
Than Temporary Impairment
The Company performs an assessment of OTTI whenever the fair
value of an investment security is less than its amortized cost
basis at the balance sheet date. Amortized cost basis includes
adjustments made to the cost of a security for accretion,
amortization, collection of cash, previous OTTI recognized into
earnings (less any cumulative effect adjustments) and fair value
hedge accounting adjustments. OTTI is considered to have
occurred under the following circumstances:
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If the Company intends to sell the investment security and its
fair value is less than its amortized cost.
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If, based on available evidence, it is more likely than not that
the Company will decide or be required to sell the investment
security before the recovery of its amortized cost basis.
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If the Company does not expect to recover the entire amortized
cost basis of the investment security. This occurs when the
present value of cash flows expected to be collected is less
than the amortized cost basis of the security. In determining
whether a credit loss exists, the Company uses its best estimate
of the present value of cash flows expected to be collected from
the investment security. Cash flows expected to be collected are
estimated based on a careful assessment of all available
information. The amount of estimated credit loss is determined
as the amount by which the amortized cost basis exceeds the
present value of expected cash flows.
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The Company evaluates its individual available for sale
investment securities for OTTI on at least a quarterly basis. As
part of this process, the Company considers its intent to sell
each investment security and whether it is more likely than not
that it will be required to sell the security before its
anticipated recovery. If either of these conditions is met, the
Company recognizes an OTTI charge to earnings equal to the
entire difference between the securitys amortized cost
basis and its fair value at the balance sheet date. For
securities that meet neither of these conditions, an analysis is
performed to determine if any of these securities are at risk
for OTTI. To determine which securities are at risk for OTTI and
should be quantitatively evaluated
70
utilizing a detailed cash flow analysis, the Company evaluates
certain indicators which consider various characteristics of
each security including, but not limited to, the following: the
credit rating and related outlook or status of the securities;
the creditworthiness of the issuers of the securities; the value
and type of underlying collateral; the duration and level of the
unrealized loss; any credit enhancements; and other
collateral-related characteristics such as the ratio of credit
enhancements to expected credit losses. The relative importance
of this information varies based on the facts and circumstances
surrounding each security, as well as the economic environment
at the time of assessment. The amount of estimated credit loss
is determined as the amount by which the amortized cost basis
exceeds the present value of expected cash flows.
Other
Income Recognition Policies
Interest income on loans is accrued by Doral Financial when
earned. Loans are placed on non-accrual status when any portion
of principal or interest is more than 90 days past due,
except for revolving lines of credit and credit cards that are
still accruing until 180 days past due and FHA and VA loans
that are still accruing until 270 days past due, or earlier
if concern exists as to the ultimate collectability of principal
or interest. When a loan is placed on non-accrual status, all
accrued but unpaid interest to date is reversed against interest
income and the loan is accounted for on the cash or cost
recovery method, until it qualifies for return to accrual
status. Loans return to accrual status when principal and
interest become current under the terms of the loan agreement or
when the loan is both well-secured and in the process of
collection and collectability is no longer doubtful.
Loan origination fees, as well as discount points and certain
direct origination costs for loans held for sale, are deferred
at origination of the loan and are recognized in non-interest
income when the loan is sold or securitized into a
mortgage-backed security. In the case of loans held for
investment, such fees and costs are deferred and amortized to
income as adjustments to the yield of the loan.
Allowance
for Loan and Lease Losses
Doral Financial maintains an allowance for loan and lease losses
to absorb probable credit-related losses on its loans receivable
portfolio. The allowance consists of specific and general
components and is based on Doral Financials assessment of
default probabilities, internal risk ratings (based on
borrowers financial stability, external credit ratings,
management strength, earnings and operating environment),
probable loss and recovery rates, and the degree of risk
inherent in the loans receivable portfolio. The allowance is
maintained at a level that Doral Financial considers to be
adequate to absorb probable losses. Credit losses are charged
and recoveries are credited to the allowance, while increases to
the allowance are charged to operations. Unanticipated increases
in the allowance for loan and lease losses could adversely
impact Doral Financials net income in the future.
Doral estimates and records its ALLL on a monthly basis. For all
performing loans and non-performing small balance homogeneous
loans the ALLL is estimated based upon estimated probability of
default and loss given default by shared product characteristics
using Doral Financials historical experience. For larger
construction, commercial real estate, commercial and industrial
loans and TDRs that are 90 or more days past due or are
otherwise considered to be impaired, management estimates the
related ALLL based upon an analysis of each individual
loans characteristics. The ALLL estimate methodologies are
described more fully in the following paragraphs.
Residential mortgage. The general allowance
for residential mortgage loans is calculated based on the
probability that loans within different delinquency buckets will
default and, in the case of default, the extent of losses that
the Company expects to realize. In determining the probabilities
of default, the Company considers recent experience of rolls of
loans from one delinquency bucket into the next. Roll rates as
of year-end show that the proportion of loans rolling into
subsequent buckets has remained constant. In determining the
allowance for loan and lease losses for residential mortgage
loans, given the current economic trends in Puerto Rico, for
purposes of forecasting the future behavior of the portfolio,
Doral Financial determined that it should only use the
roll-rates of relatively recent months, which show a more
aggressive deteriorating trend than those in older periods.
Using the older historical performance would yield lower
probabilities of default that may not
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reflect recent macroeconomic trends. Severity of loss is
calculated based on historical results from foreclosure and
ultimate disposition of collateral. Historical results are
adjusted for the Companys expectation of housing prices.
Severity assumptions for the residential portfolio range between
3% and 40% depending on the different loan types and
loan-to-value ratios, and up to 75% for second mortgages.
Construction and land, commercial real estate and commercial
and industrial. The ALLL for performing
construction and land, commercial real estate and commercial and
industrial is estimated considering either the probability of
the loan defaulting in the next twelve months and the estimated
loss incurred in the event of default or the loan quality
assigned to each loan and the estimated expected loss associated
with that loan grade. The probability of a loan defaulting is
based upon Doral Financials experience with its current
portfolio. The loss grade is assigned based upon
managements review of the specific facts and circumstances
associated with a particular credit. The loss incurred upon
default is based upon Dorals actual experience in
resolving defaulted loans.
Construction and land, commercial real estate and commercial and
industrial loans with principal balances greater than
$1.0 million that are not performing, or when management
estimates it may not collect all contractual principal and
interest, are considered impaired and are measured for
impairment individually.
Loans are considered impaired when, based on current information
and events it is probable that the borrower will not be able to
fulfill its obligation according to the contractual terms of the
loan agreement. Due to the current economic environment and
managements perceived increase in risk in the commercial
loan portfolio, during the third quarter of 2010 management
individually reviewed for impairment all commercial loans over
$50,000 that were over 90 days past due to better estimate
the amount the Company expects to receive. During the fourth
quarter of 2010, management individually reviewed all commercial
real estate loans over $500,000 that were over 90 days past
due, 25% of all commercial loans between $50,000 and $500,000
and over 90 days past due, as well as all new loans
classified as substandard during the quarter. In future periods,
and while managements assessment of the inherent credit
risk in the commercial portfolio continues to be high, the
Company will continue to evaluate on a quarterly basis 25% of
all commercial loans over 90 days past due and between
$50,000 and $500,000 so that in any one year period it would
have individually evaluated for impairment 100% of all
substandard commercial loans between $50,000 and $500,000, as
well as all substandard commercial real estate loans over
$500,000 and all substandard commercial and construction loans
over $1.0 million.
The impairment loss, if any, on each individual loan identified
as impaired is generally measured based on the present value of
expected cash flows discounted at the loans effective
interest rate. As a practical expedient, impairment may be
measured based on the loans observable market price, or
the fair value of the collateral, net of disposition costs, if
the loan is collateral dependent. If foreclosure is probable,
accounting guidance requires the measurement of impairment to be
based on the fair value of the collateral, net of disposition
costs. Since current appraisals were not available on all
properties at quarter end, management determined its loss
reserve estimates for these loans by estimating the fair value
of the collateral. In doing so, management considered a number
of factors including the general change in price levels as
indicated by appraisals received compared to earlier appraisals
of the same property, the price at which individual units could
be sold in the current market, the period of time over which the
units would be sold, the estimated cost to complete the units,
the risks associated with completing and selling the units, the
required rate of return on investment a potential acquirer may
have and current market interest rates in the Puerto Rico market.
Consumer. The ALLL for consumer loans is
estimated based upon the historical charge-off rate using Doral
Financials historical experience. The ALLL is supplemented
by Dorals policy to charge-off all amounts in excess of
the collateral value when the loan principal or interest is
120 days or more days past due.
TDRs. In accordance with accounting guidance,
loans determined to be TDRs are impaired and for purposes of
estimating the ALLL must be individually evaluated for
impairment. For residential mortgage loans determined to be
TDRs, on a monthly basis, the Company pools TDRs with similar
characteristics and performs an impairment analysis of
discounted cash flows. If a pool yields a present value below
the recorded investment in the pool of loans, an impairment is
recognized by a charge to the provision for loan and lease
losses and a credit to the allowance for loan and lease losses.
For loss mitigated loans without a concession in
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the interest rate, the Company performs an impairment analysis
of discounted cash flows giving consideration to the probability
of default and loss given foreclosure on those estimated cash
flows, and records an impairment by charging the provision for
loan and lease losses with a corresponding credit to the ALLL.
Generally, the percentage of the allowance for loan and lease
losses to non-performing loans will not remain constant due to
the nature of Doral Financials loan portfolios, which are
primarily collateralized by real estate. The collateral for each
non-performing mortgage loan is analyzed to determine potential
loss exposure, and, in conjunction with other factors, this loss
exposure contributes to the overall assessment of the adequacy
of the allowance for loan and lease losses. On an ongoing basis,
management monitors the loan portfolio and evaluates the
adequacy of the allowance for loan and lease losses. In
determining the adequacy of the allowance, management considers
such factors as default probabilities, internal risk ratings
(based on borrowers financial stability, external credit
ratings, management strength, earnings and operating
environment), probable loss and recovery rates, and the degree
of risk inherent in the loan portfolios. Allocated general
reserves are supplemented by a macroeconomic or emerging risk
reserve. This portion of the total allowance for loan and lease
losses reflects managements evaluation of conditions that
are not directly reflected in the loss factors used in the
determination of the allowance. The conditions evaluated in
connection with the macroeconomic and emerging risk allowance
include national and local economic trends, industry conditions
within the portfolios, recent loan portfolio performance, loan
growth, changes in underwriting criteria and the regulatory and
public policy environment.
Loans considered by management to be uncollectible are charged
to the allowance for loan and lease losses. Recoveries on loans
previously charged-off are credited to the allowance. Provisions
for loan and lease losses are charged to expenses and credited
to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the
loan portfolio.
The Company also engages in the restructuring
and/or
modifications of the debt of borrowers, who are delinquent due
to economic or legal reasons, if the Company determines that it
is in the best interest for both the Company and the borrower to
do so. In some cases, due to the nature of the borrowers
financial condition, the restructure or loan modification fits
the definition of Troubled Debt Restructuring (TDR).
Such restructures are identified as TDRs and accounted for as
impaired loans.
Estimated
Recourse Obligation
In the past, the Company sold mortgage loans and MBS subject to
recourse provisions. Pursuant to these recourse arrangements,
the Company agreed to retain or share the credit risk with the
purchaser of such mortgage loans for a specified period or up to
a certain percentage of the total amount in loans sold. The
Company estimates the fair value of the retained recourse
obligation or any liability incurred at the time of sale and
includes such obligation with the net proceeds from the sale,
resulting in a lower gain on sale recognition. Doral estimates
the fair value of its recourse obligation based on historical
losses from foreclosure and disposition of mortgage loans
adjusted for expectations of changes in portfolio behavior and
market environment.
Income
Taxes
The Company recognizes deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and
liabilities based on current tax laws. To the extent tax laws
change, deferred tax assets and liabilities are adjusted, as
necessary, in the period that the tax change is enacted. The
Company recognizes income tax benefits when the realization of
such benefits is probable. A valuation allowance is recognized
for any deferred tax asset which, based on managements
evaluation, it is more likely than not (a likelihood of more
than 50%) that some portion or all of the deferred tax asset
will not be realized. Significant management judgment is
required in determining the provision for income taxes and, in
particular, any valuation allowance recorded against deferred
tax assets. In assessing the realization of deferred tax assets,
the Company considers the expected reversal of its deferred tax
assets and liabilities, projected future taxable income,
cumulative losses in recent years and tax planning strategies.
The determination of a valuation allowance on deferred tax
assets requires judgment based on
73
weight of all available evidence and considering the relative
impact of negative and positive evidence. These estimates are
projected through the life of the related deferred tax assets
based on assumptions that we believe to be reasonable and
consistent with current operating results. Changes in future
operating results not currently forecasted may have a
significant impact on the realization of deferred tax assets.
The Company classifies all interest and penalties related to tax
uncertainties as income tax expense.
Income tax benefit or expense includes (i) deferred tax
expense or benefit, which represents the net change in the
deferred tax assets or liability balance during the year plus
any change in the valuation allowance, if any; and
(ii) current tax expense.
RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND
2008
Net
Interest Income
Net interest income is the excess of interest earned by Doral
Financial on its interest-earning assets over the interest
incurred on its interest-bearing liabilities. Doral
Financials net interest income is subject to interest rate
risk due to the repricing and maturity mismatch in the
Companys assets and liabilities. Generally, Doral
Financials assets have a longer maturity and a later
repricing date than its liabilities, which results in lower net
interest income in periods of rising short-term interest rates
and higher net interest income in periods of declining
short-term interest rates. Refer to Risk Management
below for additional information on the Companys exposure
to interest rate risk.
Net interest income for the years 2010, 2009 and 2008, was
$160.6 million, $167.6 million and
$177.5 million, respectively.
2010 compared to 2009. Total interest income
for the years ended December 31, 2010 and 2009 was
$401.5 million and $458.3 million, respectively, a
decrease of $56.7 million, or 12.4%. Significant variances
impacting interest income for the year ended December 31,
2010, when compared to the corresponding 2009 period, are as
follows:
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A reduction of $2.8 million in interest income on loans due
to:
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A reduction in interest on mortgage loans of $9.4 million
driven by: (i) reversal of interest income on loans
entering non-accrual of approximately $12.0 million;
(ii) reversal of interest income due to loss mitigation on
loans in early delinquency stages, together with the impact of
yield concessions on these loans of approximately
$3.8 million; and (iii) partially offset by the impact
of loans leaving non-accrual due to collection efforts and loss
mitigation transactions on non-performing loans of approximately
$6.4 million.
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A reduction in interest on construction and land loans of
$3.3 million as a result of lower average construction and
land loans related to the sale of a construction loan portfolio
to a third party and run-off of the portfolio.
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A reduction of $3.1 million in interest income on consumer
loans due primarily to charge-offs and run-off of the portfolio.
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Partially offset by an increase of $13.0 million in
interest income on commercial loans primarily driven by
increases in the U.S. syndicated loan portfolio.
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A decrease of $45.8 million in interest income on MBS
primarily due to a reduction of $900.1 million in the
average balance of MBS during 2010 resulting from the sale of
non-agency CMOs and other MBS during the second and third
quarters of 2010. Total MBS sales amounted to
$2.2 billion during 2010, partially offset by purchases of
$1.6 billion primarily of shorter duration as part of the
interest rate risk management strategies. The average interest
rate on MBS decreased 57 basis points for the year ended
December 31, 2010 compared to the same period in 2009.
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A reduction of $8.7 million in interest income on
investment securities was primarily due to a reduction in the
average balance of investment securities of $262.2 million
during 2010. The average interest rate on investment securities
decreased by 108 basis points during 2010.
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Total interest expense for the years ended December 31,
2010 and 2009 was $240.9 million and $290.6 million,
respectively, a decrease of approximately $49.7 million, or
17.1%. Significant variances impacting interest expense for the
year ended December 31, 2010, when compared to the
corresponding 2009 period, are as follows:
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A decrease of $14.3 million in interest expense on deposits
driven by the rollover of maturing brokered CDs at lower current
market rates as well as shifts in the composition of the
Companys retail deposits. The average balance of interest
bearing deposits increased $494.3 million during 2010,
while the cost of deposits decreased 67 basis points for
the same period. These shifts were driven by the Companys
pricing strategy and campaigns to expand its deposit base as a
result of bank failures in P.R. during the second quarter of
2010.
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A decrease of $18.1 million in the interest expense on
securities sold under agreements to repurchase was driven by a
decrease of $248.5 million in the average balance of
repurchase agreements during 2010 and a general decline in
interest rates that also resulted in a reduction of
53 basis points in the average interest cost during 2010.
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A reduction of $15.8 million in interest expense on
advances from FHLB resulted from the decrease in the average
balance of advances from FHLB of $421.7 million and
partially offset by an increase of 8 basis points in
average cost during 2010.
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A decrease of $1.2 million in interest expense on other
short-term borrowings. There were no borrowings outstanding at
any month end during 2010.
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A decrease of $3.1 million in interest expense on loans
payable directly related to a reduction of $33.2 million in
the average balance of loans payable as a result of the regular
repayment of borrowings. The average cost on loans payable
during 2010 decreased by 69 basis points compared to the
corresponding 2009 period as a result of the general decline in
interest rates, which reflects the re-pricing nature of most of
the Companys loans payable, which are floating rate notes
indexed to the
3-month
LIBOR.
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An increase of $2.8 million in interest expense on notes
payable related to the increase of $114.6 million in
average balance of notes payable resulting from a
$250.0 million debt issued by Doral CLO I, Ltd. in
July 2010 at a rate of
3-month
LIBOR plus 1.85%.
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2009 compared to 2008. Total interest income
for the years ended December 31, 2009 and 2008 was
$458.3 million and $524.7 million, respectively, a
decrease of approximately $66.4 million, or 13%.
Significant variances impacting interest income for the year
ended December 31, 2009, when compared to the corresponding
2008 period, are as follows:
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A reduction of $21.2 million in interest income on loans
primarily related to the lower interest rate environment and an
increase in non-performing loans in the Companys loan
portfolio. The average interest rate on loans decreased
50 basis points for the year ended December 31, 2009
compared to the same period in 2008, while non-performing loans
increased by $125.6 million during 2009.
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An increase of $2.1 million in interest income on
mortgage-backed securities resulted from the net effect and
timing of the sale of approximately $2.0 billion of
securities and the purchase of approximately $2.3 billion
of securities during the year for the purpose of increasing
interest margin in the first six months and reducing the
Companys interest rate exposure in the latter part of the
year. These transactions resulted in an increase in the average
balance of mortgage-backed securities of $768.0 million.
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A decrease of $1.0 million in interest income on IOs was
mainly driven by a decrease of $1.3 million in the average
balance of IOs during 2009 due to the portfolio run-off.
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A reduction of $37.4 million in interest income on
investment securities was primarily due to a reduction in the
average balance of investment securities of $711.1 million
as a result of sales, calls and the settlement of the position
with Lehman during 2008 the full impact of which was reflected
in 2009. The average rate of investment securities decreased
127 basis points during 2009.
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A decrease of $8.9 million on interest income of other
interest-earning assets resulted from a net decrease of
$76.1 million in the average balance of other
interest-earning assets resulting from the sale of these
instruments to finance the purchase of securities. The average
rate of other interest-earning assets decreased by
146 basis points during 2009.
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Total interest expense for the years ended December 31,
2009 and 2008 was $290.6 million and $347.2 million,
respectively, a decrease of approximately $56.6 million, or
16%. Significant variances impacting interest expense for the
year ended December 31, 2009, when compared to the
corresponding 2008 period, are as follows:
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A decrease of $31.6 million in interest expense on deposits
driven by the rollover of maturing brokered CDs at lower current
market rates even though the Company lengthened maturities, as
well as shifts in the composition of the Companys retail
deposits and the general decline in interest rates. A reduction
of $41.7 million in the average balance of deposits during
2009, combined with the decrease in the interest expense thereon
resulted in a decrease in the average cost of deposits during
2009 of 75 basis points compared to the corresponding 2008
period.
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A decrease of $9.8 million in the interest expense on
securities sold under agreements to repurchase was mainly driven
by the general decline in interest rates that resulted in a
reduction of 35 basis points in the average interest cost
during 2009.
|
|
|
|
A reduction of $6.7 million in interest expense on advances
from FHLB resulted primarily from the general decline in
interest rates that allowed the Companys to maintain its
balance of advances at lower fixed rates. While the average
balance of advances from FHLB decreased $73.9 million
during 2009, the average cost decreased by 23 basis points
for the year ended December 31, 2009.
|
|
|
|
An increase of $1.0 million in interest expense on other
short-term borrowings is directly related to the increase of
$0.4 billion in the average balance of other short-term
borrowings for the year ended December 31, 2009, when
compared to 2008 corresponding period. The higher average
balance of other short-term borrowings is related to the
Companys focus on the repositioning of borrowings to lower
cost instruments such as the auction of term funds to depository
institutions granted by the FED under the Term Auction Facility
(TAF).
|
|
|
|
A decrease of $9.0 million in interest expense on loans
payable directly related to a reduction of $27.2 million in
the average balance of loans payable as a result of the regular
repayment of borrowings. The average cost on loans payable
during 2009 decreased by 216 basis points compared to the
corresponding 2008 period as a result of the general decline in
interest rates, which reflects the re-pricing nature of most of
the Companys loans payable, which are floating rate notes
indexed to the
3-month
LIBOR.
|
The following table presents Doral Financials average
balance sheet for the years indicated, the total dollar amount
of interest income from its average interest-earning assets and
the related yields, as well as the interest expense on its
average interest-bearing liabilities, expressed in both dollars
and rates, and the net interest margin and spread. The table
does not reflect any effect of income taxes. Average balances
are based on average daily balances.
76
Table
A Average Balance Sheet and Summary of Net Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans(1)(2)
|
|
$
|
5,894,546
|
|
|
$
|
318,576
|
|
|
|
5.40
|
%
|
|
$
|
5,680,428
|
|
|
$
|
321,384
|
|
|
|
5.66
|
%
|
|
$
|
5,566,644
|
|
|
$
|
342,631
|
|
|
|
6.16
|
%
|
Mortgage-backed securities
|
|
|
2,135,646
|
|
|
|
68,219
|
|
|
|
3.19
|
%
|
|
|
3,035,780
|
|
|
|
114,032
|
|
|
|
3.76
|
%
|
|
|
2,267,801
|
|
|
|
111,940
|
|
|
|
4.94
|
%
|
Interest-only strips (IOs)
|
|
|
45,414
|
|
|
|
6,186
|
|
|
|
13.62
|
%
|
|
|
48,873
|
|
|
|
6,142
|
|
|
|
12.57
|
%
|
|
|
50,167
|
|
|
|
7,162
|
|
|
|
14.28
|
%
|
Investment securities
|
|
|
34,553
|
|
|
|
1,566
|
|
|
|
4.53
|
%
|
|
|
296,793
|
|
|
|
10,234
|
|
|
|
3.45
|
%
|
|
|
1,007,845
|
|
|
|
47,602
|
|
|
|
4.72
|
%
|
Other interest-earning assets
|
|
|
655,690
|
|
|
|
6,974
|
|
|
|
1.06
|
%
|
|
|
454,071
|
|
|
|
6,473
|
|
|
|
1.43
|
%
|
|
|
530,157
|
|
|
|
15,339
|
|
|
|
2.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets/interest income
|
|
|
8,765,849
|
|
|
$
|
401,521
|
|
|
|
4.58
|
%
|
|
|
9,515,945
|
|
|
$
|
458,265
|
|
|
|
4.82
|
%
|
|
|
9,422,614
|
|
|
$
|
524,674
|
|
|
|
5.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
712,094
|
|
|
|
|
|
|
|
|
|
|
|
550,360
|
|
|
|
|
|
|
|
|
|
|
|
840,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,477,943
|
|
|
|
|
|
|
|
|
|
|
$
|
10,066,305
|
|
|
|
|
|
|
|
|
|
|
$
|
10,263,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,455,855
|
|
|
$
|
110,838
|
|
|
|
2.49
|
%
|
|
$
|
3,961,603
|
|
|
$
|
125,133
|
|
|
|
3.16
|
%
|
|
$
|
4,003,331
|
|
|
$
|
156,730
|
|
|
|
3.91
|
%
|
Repurchase agreements
|
|
|
1,645,805
|
|
|
|
52,654
|
|
|
|
3.20
|
%
|
|
|
1,894,329
|
|
|
|
70,712
|
|
|
|
3.73
|
%
|
|
|
1,974,732
|
|
|
|
80,527
|
|
|
|
4.08
|
%
|
Advances from FHLB
|
|
|
1,174,411
|
|
|
|
47,155
|
|
|
|
4.02
|
%
|
|
|
1,596,087
|
|
|
|
62,948
|
|
|
|
3.94
|
%
|
|
|
1,669,975
|
|
|
|
69,643
|
|
|
|
4.17
|
%
|
Other short-term borrowings
|
|
|
5,027
|
|
|
|
15
|
|
|
|
0.30
|
%
|
|
|
459,887
|
|
|
|
1,212
|
|
|
|
0.26
|
%
|
|
|
37,652
|
|
|
|
233
|
|
|
|
0.62
|
%
|
Loans payable
|
|
|
320,313
|
|
|
|
6,742
|
|
|
|
2.10
|
%
|
|
|
353,556
|
|
|
|
9,881
|
|
|
|
2.79
|
%
|
|
|
380,772
|
|
|
|
18,865
|
|
|
|
4.95
|
%
|
Notes payable
|
|
|
388,738
|
|
|
|
23,513
|
|
|
|
6.05
|
%
|
|
|
274,160
|
|
|
|
20,752
|
|
|
|
7.57
|
%
|
|
|
279,104
|
|
|
|
21,195
|
|
|
|
7.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities/interest expense
|
|
|
7,990,149
|
|
|
$
|
240,917
|
|
|
|
3.02
|
%
|
|
|
8,539,622
|
|
|
$
|
290,638
|
|
|
|
3.40
|
%
|
|
|
8,345,566
|
|
|
$
|
347,193
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
569,041
|
|
|
|
|
|
|
|
|
|
|
|
660,019
|
|
|
|
|
|
|
|
|
|
|
|
676,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,559,190
|
|
|
|
|
|
|
|
|
|
|
|
9,199,641
|
|
|
|
|
|
|
|
|
|
|
|
9,022,089
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
918,753
|
|
|
|
|
|
|
|
|
|
|
|
866,664
|
|
|
|
|
|
|
|
|
|
|
|
1,241,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,477,943
|
|
|
|
|
|
|
|
|
|
|
$
|
10,066,305
|
|
|
|
|
|
|
|
|
|
|
$
|
10,263,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
775,700
|
|
|
|
|
|
|
|
|
|
|
$
|
976,323
|
|
|
|
|
|
|
|
|
|
|
$
|
1,077,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a non-taxable equivalent basis
|
|
|
|
|
|
$
|
160,604
|
|
|
|
|
|
|
|
|
|
|
$
|
167,627
|
|
|
|
|
|
|
|
|
|
|
$
|
177,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
spread(3)
|
|
|
|
|
|
|
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
1.42
|
%
|
|
|
|
|
|
|
|
|
|
|
1.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
margin(4)
|
|
|
|
|
|
|
|
|
|
|
1.83
|
%
|
|
|
|
|
|
|
|
|
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
|
|
1.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
ratio(5)
|
|
|
|
|
|
|
|
|
|
|
109.71
|
%
|
|
|
|
|
|
|
|
|
|
|
111.43
|
%
|
|
|
|
|
|
|
|
|
|
|
112.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Average loan balances include the
average balance of non-accruing loans, on which interest income
is recognized when collected. Also includes the average balance
of GNMA defaulted loans for which the Company has an
unconditional buy-back option.
|
|
(2)
|
|
Interest income on loans includes
$0.6 million, $1.1 million and $1.3 million for
2010, 2009 and 2008, respectively, of income from prepayment
penalties related to the Companys loan portfolio.
|
|
(3)
|
|
Interest rate spread represents the
difference between Doral Financials weighted-average yield
on interest-earning assets and the weighted-average rate on
interest-bearing liabilities.
|
|
(4)
|
|
Interest rate margin represents net
interest income on an annualized basis as a percentage of
average interest-earning assets.
|
|
(5)
|
|
Net interest-earning assets ratio
represents average interest-earning assets as a percentage of
average interest-bearing liabilities.
|
77
The following table describes the extent to which changes in
interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected Doral
Financials interest income and interest expense during the
years indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on
changes attributable to (i) changes in volume (change in
volume multiplied by prior year rate); (ii) changes in rate
(change in rate multiplied by current year volume); and
(iii) total change in rate and volume. The combined effect
of changes in both rate and volume has been allocated in
proportion to the absolute dollar amounts of the changes due to
rate and volume.
Table
B Net Interest Income Variance
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared to 2009
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease) Due To:
|
|
|
Increase (Decrease) Due To:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Interest Income Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
11,572
|
|
|
$
|
(14,380
|
)
|
|
$
|
(2,808
|
)
|
|
$
|
5,362
|
|
|
$
|
(26,609
|
)
|
|
$
|
(21,247
|
)
|
Mortgage-backed securities
|
|
|
(36,227
|
)
|
|
|
(9,586
|
)
|
|
|
(45,813
|
)
|
|
|
32,511
|
|
|
|
(30,419
|
)
|
|
|
2,092
|
|
Interest-only strips
|
|
|
(457
|
)
|
|
|
501
|
|
|
|
44
|
|
|
|
(257
|
)
|
|
|
(763
|
)
|
|
|
(1,020
|
)
|
Investment securities
|
|
|
(12,232
|
)
|
|
|
3,564
|
|
|
|
(8,668
|
)
|
|
|
(29,834
|
)
|
|
|
(7,534
|
)
|
|
|
(37,368
|
)
|
Other interest-earning assets
|
|
|
2,346
|
|
|
|
(1,845
|
)
|
|
|
501
|
|
|
|
(2,620
|
)
|
|
|
(6,246
|
)
|
|
|
(8,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income Variance
|
|
$
|
(34,998
|
)
|
|
$
|
(21,746
|
)
|
|
$
|
(56,744
|
)
|
|
$
|
5,162
|
|
|
$
|
(71,571
|
)
|
|
$
|
(66,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
11,199
|
|
|
$
|
(25,494
|
)
|
|
$
|
(14,295
|
)
|
|
$
|
10,992
|
|
|
$
|
(42,589
|
)
|
|
$
|
(31,597
|
)
|
Repurchase agreements
|
|
|
(12,666
|
)
|
|
|
(5,392
|
)
|
|
|
(18,058
|
)
|
|
|
(2,879
|
)
|
|
|
(6,936
|
)
|
|
|
(9,815
|
)
|
Advances from FHLB
|
|
|
(20,431
|
)
|
|
|
4,638
|
|
|
|
(15,793
|
)
|
|
|
(3,555
|
)
|
|
|
(3,140
|
)
|
|
|
(6,695
|
)
|
Other short-term borrowings
|
|
|
(1,349
|
)
|
|
|
152
|
|
|
|
(1,197
|
)
|
|
|
1,233
|
|
|
|
(254
|
)
|
|
|
979
|
|
Loans payable
|
|
|
(1,565
|
)
|
|
|
(1,574
|
)
|
|
|
(3,139
|
)
|
|
|
2,321
|
|
|
|
(11,305
|
)
|
|
|
(8,984
|
)
|
Notes payable
|
|
|
6,882
|
|
|
|
(4,121
|
)
|
|
|
2,761
|
|
|
|
(207
|
)
|
|
|
(236
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense Variance
|
|
$
|
(17,930
|
)
|
|
$
|
(31,791
|
)
|
|
$
|
(49,721
|
)
|
|
$
|
7,905
|
|
|
$
|
(64,460
|
)
|
|
$
|
(56,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Variance
|
|
$
|
(17,068
|
)
|
|
$
|
10,045
|
|
|
$
|
(7,023
|
)
|
|
$
|
(2,743
|
)
|
|
$
|
(7,111
|
)
|
|
$
|
(9,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets decreased from $9.5 billion
for the year ended December 31, 2009 to $8.8 billion
for the corresponding 2010 period, while average
interest-bearing liabilities also decreased from
$8.5 billion to $8.0 billion, respectively. The sales
of MBS and other debt securities during the second and third
quarters of 2010 and the purchase of investments of shorter
duration, as well as the shifts in the composition of average
interest bearing liabilities from higher cost borrowing to less
expensive sources of financing, such as new money market
accounts with a cost of less than 0.4%, is part of the execution
of the Company strategy to de-lever the balance sheet. The
repositioning of the balance sheet during 2010, and other
management actions, resulted in a 7 basis point improvement
in net interest margin from 1.76% for the year ended
December 31, 2009 to 1.83% for the corresponding 2010
period.
Average interest-earning assets increased from $9.4 billion
for the year ended December 31, 2008 to $9.5 billion
for the corresponding 2009 period. This increase combined with a
decline in net interest income of $9.9 million during 2009,
resulted in a contraction of the net interest margin from 1.88%
for the year ended December 31, 2008 to 1.76% in the
corresponding 2009 period.
Provision
for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings
to bring the total allowance for loan and lease losses to a
level considered appropriate by management considering all
losses inherent in the portfolio and based on Doral
Financials historical loss experience, current delinquency
rates, known and inherent risks
78
in the loan portfolio, individual assessment of significant
impaired loans, the estimated value of the underlying collateral
or discounted expected cash flows, and an assessment of current
economic conditions and emerging risks. While management
believes that the current allowance for loan and lease losses is
adequate, future additions to the allowance could be necessary
if economic conditions change or if credit losses increase
substantially from those estimated by Doral Financial in
determining the allowance. Unanticipated increases in the
allowance for loan and lease losses could materially affect
Doral Financials net income in future periods.
2010 compared to 2009. Doral Financials
provision for loan and lease losses for the year ended
December 31, 2010 increased by $45.3 million, or
84.4%, to $99.0 million compared to $53.7 million for
2009. The higher provision for loan and lease losses in 2010 was
driven by increases in the provision for residential, commercial
real estate and construction and land portfolios. Please refer
to the discussions under Credit Risk for further analysis
of the allowance for loan and lease losses and non-performing
assets and related ratios.
The provision for loan and lease losses for the residential
mortgage portfolio increased by $12.3 million, or 52.9%,
from $23.2 million for 2009 to $35.5 million for the
year ended December 31, 2010. The higher provision for
residential mortgage loans was driven by the level of loan
modifications considered TDRs and for which a temporary interest
reduction was granted. These TDRs are measured individually for
impairment based on the discounted cash flow method. The use of
the discounted cash flow method resulted in higher levels of
allowance when compared with the general reserve, depending on
the level of concession granted. Net charge-offs on residential
mortgage loans increased due to the implementation at the
beginning of 2010 of the Companys real estate valuation
policy under which the Company obtains assessments of collateral
value for residential mortgage loans over 180 days past due
and any outstanding balance in excess of the value of the
property less cost to sell is classified as loss and written
down by charging the allowance for loan and lease losses. The
increase in the provision for loan losses on residential
mortgage loans was driven by: (i) an increase of
$6.8 million due to TDRs individually evaluated for
impairment; (ii) an increase of $3.0 million related to the
impact of net charge offs on the allowance;
(iii) $6.3 million due to transfers of foreclosed
loans to OREO; and this was partially offset by
$3.8 million due to delinquency improvement.
The provision for loan and lease losses for the commercial real
estate portfolio increased by $25.5 million for the year
ended December 31, 2010, when compared to the corresponding
2009 period due to (i) a $4.5 million provision
related to a reduction in the threshold for individually
evaluated impaired loans from $1.0 million to $50,000,
(ii) an $8.4 million provision due to the adverse
classification of a participation interest in a current paying
loan of $37.7 million for which a charge-off over allowance
was recorded during the year, (iii) an $8.2 million
additional provision on loans individually measured for
impairment, (iv) a $1.0 million provision due to TDRs
during the year which are individually evaluated for impairment,
and (v) a $2.5 million provision as loans rolled to
delinquency.
The provision for loan and lease losses on the construction and
land loan portfolio increased $10.7 million during 2010
primarily due to the sale of a construction portfolio to a third
party during the third quarter of 2010 that resulted in
additional provisions of $12.7 million, this was partially
offset by the release of $2 million in reserve as one
project loan was worked-out.
The provisions for the other consumer loan portfolio and the
commercial and industrial loan portfolio reflected decreases of
$2.3 million and $0.8 million, respectively in 2010
compared to 2009. The decrease in the provision for the consumer
loan portfolio was due to lower delinquency and the runoff of
the portfolio. For commercial and industrial loans the reduction
is also the result of reduction in the Puerto Rico portfolio.
The provision for loan and lease losses was also impacted by the
effect of charge-offs related to foreclosed loans, higher loss
mitigation volume and an increase in severities (in the
determination of the provision) due to strategic decision to
accelerate OREO dispositions. The provision for loan and lease
losses was offset by net charge-offs of $116.1 million for
the year ended December 31, 2010 which included
$35.8 million related to the sale of certain construction
loans, $8.8 million related to a classified participation
interest as well as charge-offs of previously reserved balances
and the implementation of the Companys real estate
valuation policy.
79
The sector of the economy most affecting Doral Financial,
directly and indirectly, is the sale of new home construction in
Puerto Rico. The market absorption on new construction homes
continued at a low level in 2010. The slowdown in new
construction has resulted in lost jobs, which has further
increased mortgage and commercial loan delinquencies as the
overall level of economic activity declines. The Company expects
that absorption will continue to be at low levels due to the
current economic environment although a significant improvement
was detected during the last quarter of the year. In September
2010, the Governor of Puerto Rico signed into law Act.
No. 132 of 2010, which established various housing, tax and
other incentives to stimulate the sale of new and existing
housing units. The tax and other incentives, which include
reductions relating to capital gains, property taxes and
property recording fees and stamps, will be effective until
June 30, 2011.
2009 compared to 2008. Doral Financials
provision for loan and lease losses for the year ended
December 31, 2009 totaled $53.7 million, compared to
$48.9 million for the corresponding 2008 period, an
increase of $4.8 million, or 10%. For 2009, the provision
for all portfolios increased except for the provision for the
commercial real estate loan portfolio which is the portfolio
where a higher provision was established at the end of 2008. The
level of the provision in 2009 was largely driven by higher
delinquencies (primarily in the construction, residential
mortgage and commercial loan portfolios) during the period and
continued deterioration in the Puerto Rico economy.
Mortgage lending is the Companys principal line of
business and has historically reflected low levels of losses.
Nevertheless, due to current economic conditions in Puerto Rico,
which have resulted in higher non-performing loans and loss
severities in the residential mortgage loan portfolio, the
Company increased its allowance and provision for loan and lease
losses for this portfolio during 2009.
Perhaps the sector of the economy most affecting Doral
Financial, directly and indirectly, is the sale of new home
construction in Puerto Rico. For the year ended
December 31, 2009, the market absorption of new
construction homes decreased significantly, principally due to
the termination, late in the fourth quarter of 2008, of the tax
incentive for new and existing home purchases provided by Law
197. This circumstance required modifications in absorption
estimates, resulting in higher loan loss provisions.
Furthermore, the slowdown in new construction has resulted in
lost jobs, which has further increased mortgage and commercial
loan delinquencies as the overall level of economic activity
declines. The Company expects that absorption will continue to
be at low levels due to the current economic environment.
In optimizing its recovery of non-performing construction loans,
as of December 31, 2009, management decided to foreclose
approximately 20 non-performing residential development
properties with an outstanding balance of approximately
$125.8 million in order to accelerate sales of the
individual units. Most of these projects were in a mature stage
of the development with approximately 85% complete or close to
completion. As foreclosure was probable, accounting guidance
required the measurement of impairment to be based on the fair
value of the collateral. Since current appraisals were not
available on all these properties at year end, management
determined its loss reserve estimates for these loans by
estimating the fair value of the collateral. In doing so,
management considered a number of factors including the price at
which individual units could be sold in the current market, the
period of time over which the units would be sold, the estimated
cost to complete the units, the risks associated with completing
and selling the units, the required rate of return on investment
a potential acquirer may have and current market interest rates
in the Puerto Rico market. Management continues to evaluate the
best course of action to optimize loan recoveries on all
non-performing properties, and will regularly assess all
projects in choosing its course of action.
The provisions for loan and lease losses were partially offset
by net charge-offs of $44.9 million, the net of which
resulted in an increase in the allowance for loan and lease
losses of $8.8 million for the year ended December 31,
2009.
Non-interest
(loss) income
A summary of non-interest (loss) income for the years ended
December 31, 2010, 2009 and 2008 is provided below.
80
Table
C Non-interest (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
(In thousands)
|
|
|
Net other-than-temporary impairment losses
|
|
$
|
(13,961
|
)
|
|
$
|
(27,577
|
)
|
|
$
|
(920
|
)
|
|
$
|
13,616
|
|
|
$
|
(26,657
|
)
|
Net gain on mortgage loan sales and fees
|
|
|
8,614
|
|
|
|
9,746
|
|
|
|
13,112
|
|
|
|
(1,132
|
)
|
|
|
(3,366
|
)
|
Net gain on sale of securities held for trading
|
|
|
11,761
|
|
|
|
4,117
|
|
|
|
724
|
|
|
|
7,644
|
|
|
|
3,393
|
|
Gain on IO valuation
|
|
|
8,811
|
|
|
|
2,780
|
|
|
|
5,649
|
|
|
|
6,031
|
|
|
|
(2,869
|
)
|
Gain (loss) on MSR economic hedge
|
|
|
7,476
|
|
|
|
(8,678
|
)
|
|
|
27,551
|
|
|
|
16,154
|
|
|
|
(36,229
|
)
|
Loss on derivatives
|
|
|
(2,611
|
)
|
|
|
(1,594
|
)
|
|
|
(3,943
|
)
|
|
|
(1,017
|
)
|
|
|
2,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on trading activities
|
|
|
25,437
|
|
|
|
(3,375
|
)
|
|
|
29,981
|
|
|
|
28,812
|
|
|
|
(33,356
|
)
|
Net (loss) gain on investment securities
|
|
|
(93,713
|
)
|
|
|
34,916
|
|
|
|
(3,979
|
)
|
|
|
(128,629
|
)
|
|
|
38,895
|
|
Loss on early repayment of debt
|
|
|
(7,749
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,749
|
)
|
|
|
|
|
Servicing income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
|
27,961
|
|
|
|
29,179
|
|
|
|
31,572
|
|
|
|
(1,218
|
)
|
|
|
(2,393
|
)
|
Late charges
|
|
|
10,110
|
|
|
|
8,482
|
|
|
|
9,058
|
|
|
|
1,628
|
|
|
|
(576
|
)
|
Prepayment penalties
|
|
|
774
|
|
|
|
341
|
|
|
|
417
|
|
|
|
433
|
|
|
|
(76
|
)
|
Other servicing fees
|
|
|
912
|
|
|
|
533
|
|
|
|
628
|
|
|
|
379
|
|
|
|
(95
|
)
|
Interest loss on serial notes and others
|
|
|
(6,764
|
)
|
|
|
(6,067
|
)
|
|
|
(6,733
|
)
|
|
|
(697
|
)
|
|
|
666
|
|
Mark-to-market adjustment of servicing assets
|
|
|
(12,087
|
)
|
|
|
(3,131
|
)
|
|
|
(42,642
|
)
|
|
|
(8,956
|
)
|
|
|
39,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing income (loss)
|
|
|
20,906
|
|
|
|
29,337
|
|
|
|
(7,700
|
)
|
|
|
(8,431
|
)
|
|
|
37,037
|
|
Commissions, fees and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail banking fees
|
|
|
28,595
|
|
|
|
29,088
|
|
|
|
28,060
|
|
|
|
(493
|
)
|
|
|
1,028
|
|
Insurance agency commissions
|
|
|
13,306
|
|
|
|
12,024
|
|
|
|
12,801
|
|
|
|
1,282
|
|
|
|
(777
|
)
|
Other income
|
|
|
4,489
|
|
|
|
3,042
|
|
|
|
8,174
|
|
|
|
1,447
|
|
|
|
(5,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions, fees and other income
|
|
|
46,390
|
|
|
|
44,154
|
|
|
|
49,035
|
|
|
|
2,236
|
|
|
|
(4,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest (loss) income
|
|
$
|
(14,076
|
)
|
|
$
|
87,201
|
|
|
$
|
79,529
|
|
|
$
|
(101,277
|
)
|
|
$
|
7,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 compared to 2009. Significant variances
in non-interest income for the year ended December 31,
2010, when compared to the corresponding 2009 period, are as
follow:
|
|
|
|
|
During 2010 OTTI losses were recognized on eight of the
Companys non-agency CMOs totaling $14.0 million for
the year ended December 31, 2010. Five of the eight OTTI
securities resulted in the recognition of an OTTI loss of
$13.3 million during the first quarter of 2010. These five
securities were sold during the second quarter of 2010. Three
securities from the P.R. non-agency CMO portfolio with an
amortized cost of $11.1 million as of December 31,
2010 reflected an OTTI loss of $0.7 million. Refer to
Note 8 in the accompanying Notes to the Consolidated
Financial Statements for additional information on OTTI.
|
81
|
|
|
|
|
A decrease of $1.1 million in net gain on mortgage loan
sales and fees due to higher loan basis during 2010. During 2009
average loan basis was approximately 98.8%, while the average
loan basis during 2010 was close to par.
|
|
|
|
An increase of $28.8 million on net gain on trading
activities resulted from:
|
|
|
|
|
|
A gain on sale of GNMA and FNMA securities consisting of loans
originated by the Company of $11.8 million as a result of
higher MBS coupon prices during 2010.
|
|
|
|
A gain on the IO valuation of $8.8 million related to
decreases in the market interest rates.
|
|
|
|
A gain on MSR economic hedge of $7.5 million compared to a
loss of $8.7 million in 2009, primarily related to a change
in the hedging strategy during the second quarter of 2009 from
the use of U.S. Treasuries to forward contracts and to the
decrease in forecasted prepayment speeds.
|
|
|
|
|
|
A net loss on investment securities of $93.7 million
resulted from a loss of $136.7 million during the second
quarter of 2010, from the sale of certain non-agency CMOs with
an amortized cost basis of $378.0 million, offset in part
by the sale of certain agency securities in the first and third
quarters of 2010 that generated net gains of $26.4 million
and $17.1 million, respectively, together with a net loss
on an early repayment debt of $7.7 million.
|
|
|
|
A reduction of $8.4 million in servicing income during 2010
driven by a decrease in value of the mortgage servicing assets
due to changes in valuation inputs or assumptions and a
reduction in loan balances.
|
|
|
|
An increase in other income of $2.2 million related to a
gain of $3.0 million on redemption of shares of VISA, Inc.
|
2009 compared to 2008. Significant variances
in non-interest income for the year ended December 31,
2009, when compared to the corresponding 2008 period, are as
follow:
|
|
|
|
|
During 2009 OTTI losses were recognized on seven of the
Companys non-agency CMOs, representing an aggregate
amortized cost of $246.7 million as of December 31,
2009 and recognized a credit loss of $27.6 million on these
securities for the year ended December 31, 2009. Three of
these securities were P.R. non-agency CMOs with an
amortized cost of $11.6 million and a recognized credit
loss of $1.2 million, and the additional four securities
that reflected OTTI were U.S. non-agency CMOs with an
amortized cost of $235.1 million and a recognized credit
loss of $26.4 million.
|
|
|
|
A decrease in net gain on mortgage loan sales and fees was due
to lower origination fees in 2009 of approximately
$3.0 million compared to 2008.
|
|
|
|
The net loss on trading activities was driven principally by a
loss of $13.8 million related to the U.S. Treasuries
that were serving as an economic hedge on the Companys
capitalized MSR during the first half of 2009 as the spreads
between declining mortgage rates and the U.S. Treasury
curve compressed as a result of the U.S. Federal Reserve
Bank Monetary Policy implemented at the end of 2008 designed to
promote mortgage loan originations and reduce mortgage loan
interest rates. This loss was partially offset by an improvement
on the economic hedge on the MSRs due to a change in the hedging
strategy during the second quarter of 2009 from the use of
U.S. Treasuries to forward contracts and to the decrease in
forecasted prepayment speeds.
|
|
|
|
Net gain on investment securities of $34.9 million resulted
from the sale of approximately $2.0 billion of
mortgage-backed securities, primarily CMO floaters, and other
debt securities during 2009 as a result of the execution of the
Companys decision to obtain higher yielding securities in
the second quarter and shorten security duration in the fourth
quarter of 2009.
|
|
|
|
An improvement in the mark-to-market adjustment of mortgage
servicing assets of $39.5 million was principally related
to the decrease in mortgage rates triggering higher prepayment
speed assumptions and reduced MSR valuations in the 2008
calculation combined with more stable and slower prepayment
speed assumptions used in the 2009 calculation consistent with
observed trends in benchmark
|
82
|
|
|
|
|
prepayment speeds and recent trends in the Puerto Rico mortgage
origination and prepayment experience.
|
|
|
|
|
|
A decrease in other income of $5.9 million due to a lower
gain on redemption of shares of VISA, Inc. in 2009 and to lower
income associated with the sale of certain units of a
residential housing project which the Company took possession of
in 2005 of $1.3 million.
|
Non-interest
expense
A summary of non-interest expense for the years ended
December 31, 2010, 2009 and 2008 is provided below.
Table
D Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
(In thousands)
|
|
|
Compensation and employee benefits
|
|
$
|
75,080
|
|
|
$
|
68,724
|
|
|
$
|
70,562
|
|
|
$
|
6,356
|
|
|
$
|
(1,838
|
)
|
Professional services
|
|
|
53,902
|
|
|
|
31,582
|
|
|
|
24,156
|
|
|
|
22,320
|
|
|
|
7,426
|
|
FDIC insurance expense
|
|
|
19,833
|
|
|
|
18,238
|
|
|
|
4,654
|
|
|
|
1,595
|
|
|
|
13,584
|
|
Occupancy expenses
|
|
|
17,658
|
|
|
|
15,232
|
|
|
|
18,341
|
|
|
|
2,426
|
|
|
|
(3,109
|
)
|
Communication expenses
|
|
|
17,019
|
|
|
|
16,661
|
|
|
|
17,672
|
|
|
|
358
|
|
|
|
(1,011
|
)
|
EDP expenses
|
|
|
14,197
|
|
|
|
13,727
|
|
|
|
11,146
|
|
|
|
470
|
|
|
|
2,581
|
|
Depreciation and amortization
|
|
|
12,689
|
|
|
|
12,811
|
|
|
|
16,013
|
|
|
|
(122
|
)
|
|
|
(3,202
|
)
|
Taxes, other than payroll and income taxes
|
|
|
11,177
|
|
|
|
10,051
|
|
|
|
9,880
|
|
|
|
1,126
|
|
|
|
171
|
|
Advertising
|
|
|
8,917
|
|
|
|
6,633
|
|
|
|
8,519
|
|
|
|
2,284
|
|
|
|
(1,886
|
)
|
Corporate insurance
|
|
|
5,664
|
|
|
|
4,662
|
|
|
|
4,586
|
|
|
|
1,002
|
|
|
|
76
|
|
Office expenses
|
|
|
5,490
|
|
|
|
5,303
|
|
|
|
6,099
|
|
|
|
187
|
|
|
|
(796
|
)
|
Recourse provision (recovery)
|
|
|
3,939
|
|
|
|
3,809
|
|
|
|
(965
|
)
|
|
|
130
|
|
|
|
4,774
|
|
Other
|
|
|
25,929
|
|
|
|
21,811
|
|
|
|
27,307
|
|
|
|
4,118
|
|
|
|
(5,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,494
|
|
|
|
229,244
|
|
|
|
217,970
|
|
|
|
42,250
|
|
|
|
11,274
|
|
Other reserves and OREO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Lehman Brothers, Inc.
|
|
|
12,359
|
|
|
|
|
|
|
|
21,600
|
|
|
|
12,359
|
|
|
|
(21,600
|
)
|
Other real estate owned (OREO) lower of cost or
market adjustments
|
|
|
31,581
|
|
|
|
13,309
|
|
|
|
2,114
|
|
|
|
18,272
|
|
|
|
11,195
|
|
Loss (gain) on sales of OREO
|
|
|
4,921
|
|
|
|
(502
|
)
|
|
|
(1,650
|
)
|
|
|
5,423
|
|
|
|
1,148
|
|
OREO other related expenses
|
|
|
4,209
|
|
|
|
1,735
|
|
|
|
378
|
|
|
|
2,474
|
|
|
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,070
|
|
|
|
14,542
|
|
|
|
22,442
|
|
|
|
38,528
|
|
|
|
(7,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
324,564
|
|
|
$
|
243,786
|
|
|
$
|
240,412
|
|
|
$
|
80,778
|
|
|
$
|
3,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 compared to 2009. Non-interest expense
increased $80.8 million for the year ended
December 31, 2010 compared to the corresponding 2009
period. Approximately, $57.6 million of the non-interest
expense increase resulted from costs incurred to collect,
restructure or modify certain loans, to recognize decreases in
estimated values, or recognize the costs of estimated Doral
credit related obligations. These credit related costs were
incurred to support the Companys efforts to reduce its
non-performing loans and improve the quality of the
Companys balance sheet. The credit related expenses are
included in Compensation and employee benefits,
Professional services, Other and
Other reserves and OREO and are described in more
detail below.
|
|
|
|
|
An increase of $6.4 million in compensation and employee
benefits was due to: (i) higher salary expenses of
$1.0 million, (ii) higher benefits of
$3.7 million and (iii) lower deferral of compensation
|
83
|
|
|
|
|
costs related to loan origination of $2.3 million. The
higher salary expense of $1.0 million was the result of
higher expenses for temporary personnel of $3.1 million
mainly related to collection efforts and other temporary
projects, offset by lower severance expense of $3.8 million
and higher salaries of $1.7 million related to incremental
workforce during 2010. The increase in benefits of
$3.7 million was driven by retention bonuses and restricted
stock compensation granted to certain officers of the Company of
$3.3 million and $1.4 million, respectively, partially
offset by lower performance bonuses of $1.0 million. The
decrease in deferral of compensation costs related to loan
originations was due to lower loan originations during 2010.
|
|
|
|
|
|
An increase in professional services of $22.3 million
driven by:
|
|
|
|
|
|
An increase of $2.1 million in defense litigation costs of
former company officers, as certain matters went to trial in
2010.
|
|
|
|
An increase of $4.1 million in legal expenses to support
corporate litigation (approximately $2.3 million) and
collection efforts (approximately $1.8 million).
|
|
|
|
An increase of $16.1 million in other professional services
primarily related to non-recurring transactions during 2010:
(i) approximately $0.9 million of expenses incurred on
the CLO transaction and (ii) higher servicing costs related
to the construction and large commercial loan portfolios of
$8.8 million. In addition, there were higher expenses of
approximately $6.9 million for other transactions, such as
expense related to bidding for FDIC assisted transactions of
approximately $5.1 million, the sale of construction and
other loans of $1.0 million, expenses related to the 2010
preferred stock exchange of $0.5 million, and the
dissolution of Doral Holdings of $0.3 million.
|
|
|
|
|
|
An increase of $1.6 million in FDIC insurance expense due
to an increase in rates and assessment bases compared to 2009.
|
|
|
|
An increase of $2.4 million in occupancy expenses due to an
increase in utilities expense of $1.0 million due to higher
fees and higher energy costs in Puerto Rico during 2010. There
was a $0.4 million impairment charge on a property related
to residential housing project that the Company has possession
of, an increase in rent expense of $0.6 million related to
new facilities in the U.S. for branch openings in New York
and Florida as well as expanded administrative facilities as
well as an increase in building repairs and maintenance of
$0.6 million.
|
|
|
|
An increase of $1.1 million in taxes, other than payroll
and income taxes due to higher real property tax assessment in
Puerto Rico during 2010 that drove $0.5 million of the
increase and higher volume of business in 2010 resulting in an
increase of $0.6 million.
|
|
|
|
An increase of $2.3 million in advertising expenses related
to campaigns to gain market share in deposits and mortgage
origination subsequent to the local market bank failures and
asset acquisitions in April.
|
|
|
|
An increase of $1.0 million in corporate insurance expense
due to higher premiums in 2010, a consequence of bank failures
in Puerto Rico.
|
|
|
|
An increase in credit related expenses of approximately
$57.6 million was composed of the following items in
Other and Other reserves and OREO:
|
|
|
|
|
|
Other expenses increased $4.1 million compared to 2009 due
to higher foreclosure and other repossessed asset expenses of
$2.1 million, a one-time expense of $1.1 million
related to representations and warranties and other operating
losses of $1.1 million.
|
|
|
|
An additional $10.8 million reserve for the Companys
claim on Lehman Brothers, Inc. established during the second
quarter of 2010. The receivable related to this claim was sold
during the fourth quarter of 2010, recognizing an additional
loss of $1.5 million.
|
|
|
|
An increase in total OREO and other related expense of
$26.2 million primarily related to the recognition of an
additional provision of $17.0 million to account for the
effect of managements strategic decision to reduce pricing
in order to accelerate OREO sales, adjustments driven by lower
|
84
|
|
|
|
|
values of certain of Dorals OREO properties, higher levels
of repossessed units and higher expenses to maintain the
properties in saleable conditions. Also, a loss on sales of OREO
of $5.0 million was recognized during 2010.
|
The following item are credit related expenses
included in the Compensation and employee benefits
and Professional services captions above:
|
|
|
|
|
The increase in compensation and employee benefits explained
above includes an increase of approximately $3.0 million
related to additional cost in collection efforts.
|
|
|
|
The increase in professional services explained above includes
approximately $11.3 million related to legal and
professional expenses for collections and workout efforts on the
Companys portfolio.
|
2009 compared to 2008. Significant variances
in non-interest expenses for the year ended December 31,
2009, when compared to the corresponding 2008 period, are as
follow:
|
|
|
|
|
A decrease of $1.8 million in compensation and employee
benefits was driven by reduction in workforce during 2009,
partially offset by one-time severance expenses. The number of
full-time equivalent employees decreased by 252 to 1,154 in 2009
from 1,406 in 2008.
|
|
|
|
A decrease in advertising expenses of $1.9 million resulted
from the cost control measures implemented by the Company since
2008. Also, during 2008 advertising expenses included some
additional expenses related to the Companys refreshed
branding program initiated late in 2007.
|
|
|
|
An increase of $7.4 million in professional services
expenses was driven by amounts advanced to cover legal expenses
of the Companys former officers, for the management of
legacy portfolios and expenses associated with the preferred
stock exchanges.
|
|
|
|
An increase of $2.6 million in EDP expenses was primarily
related to certain initiatives to optimize and update the
Companys banking and mortgage platforms and to an increase
in the Companys outsourced services.
|
|
|
|
A decrease of $3.1 million in occupancy expenses partially
driven by decreases in utilities expenses resulting from the
Company implementation of cost control measures and controls
established to reduce energy consumption together with lower
fuel costs. Also, this decrease in occupancy expenses was
related to a non-recurring impairment charge of
$1.4 million made during the third quarter of 2008 on a
residential housing project which the Company took possession of
in 2005.
|
|
|
|
A decrease of $3.2 million in depreciation expenses related
to intangibles, software and building improvements fully
depreciated or amortized during 2009.
|
|
|
|
An increase of $13.6 million in the FDIC insurance expense
primarily related to (i) $4.2 million of the FDIC
special assessment expense during the second quarter of 2009 and
(ii) an increase of $7.8 million during the second
half of 2009 resulting from a final rule adopted by the FDIC in
May 2009, effective June 30, 2009 that caused a significant
increase in rates and assessment bases.
|
|
|
|
An increase of $13.7 million in OREO losses and other
related expenses as a result of significant appraisal
adjustments driven by a devaluation of OREO properties in Puerto
Rico made during the second half of 2009, higher levels of
repossessed units and higher expenses to maintain the properties
in saleable condition.
|
|
|
|
A significant decrease in other expenses resulted from a
provision of $21.6 million recognized during 2008 related
to the LBI transaction mentioned above.
|
Income
Taxes
The recognition of an income tax expense of $14.9 million
for the year ended December 31, 2010 resulted from a
current tax expense of $7.4 million and a deferred income
tax expense of $7.5 million. The current income tax expense
was related to U.S. source income. The deferred income tax
expense was related
85
to the recognition of additional deferred tax assets, primarily
NOLs, net of amortization of existing DTAs and net of an
increase in the valuation allowance.
As of December 31, 2010, the Company had two Puerto Rico
entities which were in a cumulative loss position. For purposes
of assessing the realization of the DTAs, the cumulative taxable
loss position for these two entities is considered significant
negative evidence that has caused management to conclude that
the Company will not be able to fully realize the deferred tax
assets related to these two entities in the future. Accordingly,
as of December 31, 2010 and 2009, the Company determined
that it was more likely than not that $462.7 million and
$385.9 million, respectively, of its gross deferred tax
asset would not be realized and maintained a valuation allowance
for those amounts.
For Puerto Rico taxable entities with positive core earnings, a
valuation allowance on deferred tax assets was not recorded
since they are expected to continue to be profitable. At
December 31, 2010, the net deferred tax asset associated
with these two companies was $9.0 million, compared to
$14.4 million at December 31, 2009. In addition,
approximately $94.4 million of the IO tax asset would be
realized through these entities. In managements opinion,
for these companies, the positive evidence of profitable core
earnings outweighs any negative evidence.
The valuation allowance also includes $1.3 million and
$3.0 million related to deferred taxes on unrealized losses
on cash flow hedges as of December 31, 2010 and 2009,
respectively.
For the year ended December 31, 2009, income tax benefit of
$21.5 million, resulted from a current tax benefit of
$11.5 million and a deferred tax benefit of
$10.0 million. The current tax benefit is primarily related
to the release of unrecognized tax benefits due to the
expiration of the statute of limitations on certain tax
positions net of the recognition of certain unrecognized tax
benefits during the year. This net benefit was partially offset
by the recognition of tax expense related to intercompany
transactions in the federal tax jurisdiction which had not been
previously recognized net of current tax benefit related to the
Companys U.S. affiliates. The deferred tax benefit is
primarily related to the effect of the Company entering into an
agreement with the Puerto Rico Treasury Department during the
third quarter of 2009 amending the previous agreement regarding
amortization of certain prepaid taxes, net of the amortization
of existing deferred tax assets.
Management does not establish a valuation allowance on the
deferred tax assets generated on the unrealized gains or losses
of its securities available for sale because the Company does
not intend to sell the securities before recovery of value, and
based on available evidence it is not more likely than not that
the Company will decide or be required to sell the securities
before the recovery of its amortized cost basis. Management has
therefore determined that a valuation allowance on deferred tax
assets generated on the unrealized losses of its securities
available for sale is not necessary at this time.
Failure to achieve sufficient projected taxable income in the
entities where a valuation allowance on deferred tax assets has
not been established, might affect the ultimate realization of
the net deferred tax asset.
On January 31, 2011, the Governor signed into law the
Internal Revenue Code of 2011 (2011 Code) making the
PR Code ineffective, for the most part, for years commenced
after December 31, 2010. Under the provisions of the 2011
Code, the maximum statutory corporate income tax rate is 30% for
years commenced after December 31, 2010 and ending before
January 1, 2014; if the Government meets its income
generation and expense control goals, for years commenced after
December 31, 2013, the maximum corporate tax rate will be
25%. The 2011 Code, however, eliminated the special 5% surtax on
corporations for tax year 2011. In general, the 2011 Code
maintains the increase in carry forward periods for net
operating losses generated between 2005 and 2011 from 7 to
10 years as provided for in Act 171; maintains the concept
of the alternative minimum tax although it changed the way it is
computed; and specifies what types of auditors report will
be acceptable when audited financial statements are required to
be filed with the income tax return. Notwithstanding, a
corporation may be subject to the provisions of the PR Code if
it so elects it by the time it files its income tax return for
the first year commenced after December 31, 2010 and ending
before January 1, 2012. Once the election is made, it will
be effective for such year and the next 4 succeeding years.
86
Management assesses the realization of its deferred tax assets
at each reporting period. To the extent that earnings improve
and the deferred tax assets become realizable, the Company may
be able to reduce the valuation allowance through earnings.
Refer to Note 28 of the accompanying Consolidated Financial
Statements for additional information related to the
Companys income taxes.
OPERATING
SEGMENTS
Doral Financial manages its business in three operating
segments: mortgage banking activities, banking (including thrift
operations), and insurance agency activities. The Companys
segment reporting is organized by legal entity and aggregated by
line of business. Legal entities that do not meet the threshold
for separate disclosure are aggregated with other legal entities
with similar lines of business. Management made this
determination based on operating decisions particular to each
business line and because each one targets different customers
and requires different strategies. The majority of the
Companys operations are conducted in Puerto Rico. The
Company also operates in the mainland United States, principally
in the New York City metropolitan area and since the third
quarter of 2010 in the northwest area of Florida.
In the past, the Company managed a fourth operating segment,
institutional securities operations, but effective on
December 31, 2009, Doral Securities was merged with and
into its holding company, Doral Financial.
Banking
The banking segment includes Doral Financials banking
operations in Puerto Rico, currently operating through 34 retail
bank branches, and in the mainland United States, principally in
the New York City metropolitan area and in the northwest area of
Florida through 6 branches. Doral Financial accepts deposits
from the general public and institutions, obtains borrowings,
originates and invests in loans, and invests in mortgage-backed
securities as well as in other investment securities and offers
traditional banking services. Net loss for the banking segment
amounted to $261.9 million during 2010, compared to a net
loss of $32.3 million during 2009 and $123.4 million
during 2008, respectively.
This segment also includes the operations conducted through
Doral Bank PRs subsidiaries, Doral Money, which engages in
commercial and construction lending in the New York City
metropolitan area, and CB, LLC, a Puerto Rico limited liability
company organized in connection with the receipt, in lieu of
foreclosure, of real property securing an interim construction
loan. During the third quarter of 2009, Doral Money organized a
middle market syndicated lending unit that is engaged in
purchasing participations in senior credit facilities in the
U.S. syndicated leverage loan market.
On July 8, 2010, the Company entered into a CLO arrangement
with a third party in which up to $450.0 million of
U.S. mainland based commercial loans are pledged to
collateralize AAA rated debt of $250.0 million paying three
month LIBOR plus 1.85 percent issued by Doral CLO I,
Ltd. Doral CLO I. Ltd. is a variable interest entity created to
hold the commercial loans and issue the previously noted debt
and $200.0 million of subordinated notes to the Company
whereby the Company receives any excess proceeds after the
payment of the senior debt interest and other fees and charges
specified in the indenture agreement. The Company also serves as
collateral manager of the assets of Doral CLO I. Ltd. The
Company has concluded that it is the primary beneficiary, and
the Company will consolidate Doral CLO I. Ltd., as a subsidiary
of Doral Bank PR.
On July 1, 2008, Doral International, Inc., which was a
subsidiary of Doral Bank PR licensed as an international banking
entity under the IBC Act, was merged with and into Doral Bank PR
in a transaction structured as a tax-free reorganization. On
December 16, 2008, Doral Investment was organized to become
a new subsidiary of Doral Bank PR. On February 2, 2010,
Doral Investment was granted license to operate as an
international banking entity under the IBC Act. Doral Investment
remained inactive as of December 31, 2010.
87
2010 compared to 2009. Net interest income for
the banking segment was $146.9 million for 2010, compared
to $149.3 million for 2009. The decrease in net interest
income was principally driven by a reduction of
$48.9 million in interest income during 2010, partially
offset by a reduction of $46.4 million in interest expense
for the same period. The reduction in interest income was
principally related to (i) an increase of $2.6 million
resulted from an increase in interest income of commercial loans
due to increases during 2010 in the U.S. syndicated loan
portfolio, partially offset by yield concessions on loans loss
mitigation activities, levels of non-performing loans and
run-offs on portfolios such as construction and consumer;
(ii) a decrease of $43.5 million in interest on MBS
impacted by a reduction in the average balance of MBS of
$857.5 million during 2010 resulting from the sale of
non-agency CMOs and other MBS during the second and third
quarters of 2010; and (iii) a decrease of $8.3 million
in interest on investment securities due to a reduction in the
average balance of investment securities of $222.7 million
related to sales, calls
and/or
maturities.
The decrease in interest income was partially offset by a
decrease in interest expense of $46.4 million for the year
ended December 31, 2010, when compared to the corresponding
2009 period. The decrease in interest expense was driven by
(i) a reduction of $14.6 million in interest expense
on deposits driven by the rollover of maturing brokered CDs at
lower current market rates, as well as shifts in the composition
of the Companys retail deposits; (ii) a reduction of
$18.1 million in interest expense on securities sold under
agreements to repurchase driven by a decrease of
$248.2 million in the average balance of repurchase
agreements and a general decline in interest rates; (iii) a
decrease of $15.8 million in interest on advances from FHLB
resulted primarily from the decline in the average balance of
advances from FHLB of $421.7 during 2010; (iv) a decrease
of $1.2 million in interest expense on other short-term
borrowings, because there were no outstanding borrowings at any
month end during 2010; and (vi) an increase of
$3.2 million in interest expense on notes payable resulting
from $250.0 million of new debt issued by Doral CLO I. Ltd.
in July 2010 at a rate of
3-month
LIBOR plus 1.85%.
Average interest-earning assets decreased from $8.8 billion
for the year ended December 31, 2009 to $8.2 billion
for the corresponding 2010 period, while the average
interest-bearing liabilities also decreased from
$8.0 billion to $7.4 billion, respectively. The sales
of MBS and other debt securities during the second and third
quarters of 2010 and the purchase of investments of shorter
duration, as well as the shifts in the composition of average
interest bearing liabilities from higher cost borrowing to less
expensive sources of financing, such as money market accounts
with cost of less than 0.4%, is part of the execution of the
Company strategy to de-lever the balance sheet. The
repositioning of the balance sheet during 2010, and other
management actions, resulted in a 9 basis point improvement
in net interest margin from 1.70% for the year ended
December 31, 2009 to 1.79% for the corresponding 2010
period.
Non-interest loss for the banking segment was $44.7 million
for 2010, compared to a non-interest income of
$62.9 million for 2009. The decrease in non-interest income
of $107.6 million was driven by (i) an OTTI loss of
$13.3 million on five of the Companys non-agency
CMOs; (ii) a net loss on investment securities of
$93.7 million resulted from a loss of $136.7 million
during the second quarter of 2010, from the sale of certain
non-agency CMOs with an amortized cost basis of
$378.0 million, offset in part by the sale of certain
agency securities in the first and third quarters of 2010 that
generated net gains of $26.4 million and
$17.1 million, respectively, together with a net loss of an
early repayment debt of $7.7 million; (iii) a
reduction in servicing income of $8.9 million primarily
driven by a decrease in the value of the mortgage servicing
assets due to changes in valuation inputs or assumptions and a
reduction in loan balances; partially offset by (iv) a gain
of $16.6 million in trading activities primarily driven by
a gain of $11.8 million on sale of securities and a gain of
$7.5 million on the MSR economic hedge; and (v) an
increase of $1.0 million in commissions, fees and other
income driven by a gain of $3.0 million on redemption of
shares of VISA, Inc.
Non-interest expense for the banking segment was
$261.0 million for 2010, compared to $192.3 million
for 2009. The increase in non-interest expense of
$68.7 million was mainly driven by (i) an increase of
$20.0 million in professional services related to
non-recurring transactions during 2010 and also to legal
expenses to support corporate litigation and collection efforts;
(ii) a $16.2 million increase in OREO and other
related expenses primarily related to the recognition of
additional provision to account for the effect of
managements strategic decision to reduce pricing in order
to accelerate OREO sales as well as other expenses to maintain
properties in saleable conditions; (iii) a
$9.0 million increase in compensation and benefit expenses
88
primarily driven by increases in workforce of regular and
temporary employees; (iii) $6.6 million related to a
reserve for the Companys claim on LBI established during
the second quarter of 2010 and an additional $1.1 million
related to the loss recognized as a result of the sale of such
receivable during the fourth quarter of 2010; (iv) an
increase of $3.8 million in occupancy expenses driven by
increases in utilities and rent expenses; and
(v) additional increases in other expenses, such as
$1.7 million increase in FDIC insurance expense, and
$1.6 million in foreclosure expenses, among others.
2009 compared to 2008. Net interest income for
the banking segment was $149.3 million for 2009, compared
to $158.0 million for 2008. The decrease in net interest
income was principally driven by a reduction of
$48.7 million in interest income during 2009, partially
offset by a reduction of $40.0 million in interest expense
for the same period. The decrease in interest income was driven
by a reduction in interest income on investment securities of
$32.7 million that resulted from a reduction in the average
balance of investment securities of $600.1 million as a
result of sales, calls and the settlement of the position with
Lehman during 2008, the full impact of which was reflected in
2009. The reduction in interest expense was driven by a decrease
of $32.5 million in interest expense on deposits that
resulted from the rollover of maturing brokered CDs at lower
current market rates even though the Company lengthened
maturities, as well as shifts in the composition of the
Companys retail deposits and the general decline in
interest rates during 2009.
Total average balance of interest-earning assets increased by
$0.3 billion during 2009, from $8.5 billion for the
year ended December 31, 2008 to $8.8 billion for the
corresponding 2009 period. The increase in the average balance
of interest-earning assets together with the increase in the
average balance of interest-bearing liabilities of
$0.3 billion during 2009 and the corresponding decrease in
net interest income of $8.7 million resulted in a decrease
of 17 basis points in the net interest margin, from 1.87%
during 2008 to 1.70% during 2009.
Non-interest income for the banking segment was
$62.9 million for 2009, compared to $56.4 million for
2008. The increase in non-interest income of $6.5 million
resulted mainly by (i) an increase of $36.5 million in
servicing income during 2009 driven by an improvement of
$39.5 million in the mark-to-market adjustment of the
mortgage servicing assets; (ii) an increase of
$38.1 million in gain on investment securities that
resulted from the sale of $2.0 billion of principally MBS
during 2009; partially offset by (iii) an OTTI loss of
$26.4 million in the Companys investment securities
portfolio; and (iv) by a reduction of $30.3 million in
trading activities related to a loss on the MSR economic hedge
of $36.2 million when compared to 2008, due to a loss of
$13.8 million related to the U.S. Treasuries that were
serving as an economic hedge on the Companys capitalized
MSR during 2008 and the first four months of 2009.
Non-interest expense for the banking segment was
$192.3 million for 2009, compared to $180.5 million
for 2008. The increase in non-interest expense of
$11.8 million was mainly driven by (i) an increase of
$4.1 million in professional services related to the
management of legacy portfolios; (ii) a $2.5 million
increase in EDP expenses related to certain initiatives to
optimize and update the Companys banking platforms;
(iii) an increase of $11.2 million in other expenses
mainly related to an increase of $13.6 million in the FDIC
insurance expense during 2009; partially offset by (iv) a
decrease in compensation and employee benefits of
$4.7 million, associated to the reduction in workforce
during 2009.
Mortgage
Banking
The Companys mortgage origination business is conducted by
Doral Mortgage, a wholly-owned subsidiary of Doral Bank PR. The
Companys mortgage servicing business is operated by Doral
Bank PR. Substantially all new loan origination and investment
activities at the holding company level were terminated.
2010 compared to 2009. Net interest income for
the mortgage banking segment was $7.5 million for 2010,
compared to $14.7 million for 2009. The decrease in net
interest income was principally driven by a reduction of
$10.8 million in the interest income during 2010, partially
offset by a reduction of $3.6 million in interest expense
for the same period. The decrease in interest income was driven
principally by (i) a reduction in interest income of loans
of $8.0 million primarily resulted from the transfer during
the second quarter of 2010 of $25.2 million of performing
loans to Doral Bank PR as part of a capital contribution; and
(ii) a
89
reduction of $2.3 million in interest income of MBS related
to a decrease in the average balance of MBS of
$42.7 million during 2010 due to securities sold during
2009 and not replaced during 2010. The reduction in interest
expense during 2010 was driven by a decrease of
$3.1 million in the interest expense of loans payable
resulting from the general decline in interest rates, which
reflects the re-pricing nature of most of the Companys
loans payable, which are floating rate notes indexed to the
3-month
LIBOR.
Total average balance of interest-earning assets decreased by
$0.2 billion during 2010, from $0.8 billion for the
year ended December 31, 2009 to $0.6 billion for the
corresponding 2010 period. The decrease in the average balance
of interest-earning assets during 2010 and the corresponding
decrease in net interest income of $7.2 million resulted in
a decrease of 55 basis points in the net interest margin,
from 1.84% during 2009 to 1.29% during 2010.
Non-interest income for the mortgage banking segment was
$45.0 million for 2010, compared to $46.1 million for
2009. The decrease in non-interest income of $1.1 million
resulted mainly due to an increase of $6.0 million in net
gain on trading activities driven by an increase in the IO
valuation. This increase in non-interest income was partially
offset by a decrease of $6.1 million related to lower
dividends paid by Doral Insurance to its parent company, Doral
Financial. During 2009, Doral Insurance paid $18.0 million
in dividends to Doral Financial, compared to $11.9 million
during 2010.
Non-interest expense for the mortgage banking segment was
$69.6 million for 2010, compared to $56.4 million for
2009. The increase in non-interest expense of $13.2 million
during 2010 was mainly driven by (i) $4.2 million
related to a reserve for the Companys claim on LBI
established during the second quarter of 2010 and an additional
$445,000 related to the loss recognized as a result of the sale
of such receivable during the fourth quarter of 2010; and
(ii) an increase of $9.9 million in OREO and other
related expenses related to the recognition of additional
provision to account for the effect of managements
strategic decision to reduce pricing in order to accelerate OREO
sales as well as other expenses to maintain properties in
saleable conditions.
2009 compared to 2008. Net interest income for
the mortgage banking segment was $14.7 million for 2009,
compared to $17.4 million for 2008. The decrease in net
interest income was principally driven by a reduction of
$20.2 million in the interest income during 2009, partially
offset by a reduction of $17.5 million in interest expense
for the same period. The decrease in interest income was driven
principally by a reduction in interest income of loans of
$9.9 million that resulted from the lower interest rate
environment and the increase in non-performing loans in the
Companys loan portfolio. The average interest rate on
loans decreased 40 basis points for the year ended
December 31, 2009 compared to the same period in 2008. The
reduction in interest expense was driven by a decrease of
$9.0 million in interest expense on loans payable driven
primarily by a reduction in rates during 2009 and to a reduction
of $8.0 million in interest expense on securities sold
under repurchase agreements as a result of the Company not
entering in these agreements for the mortgage banking segment
during 2009.
Total average balance of interest-earning assets decreased by
$0.3 billion during 2009, from $1.1 billion for the
year ended December 31, 2008 to $0.8 billion for the
corresponding 2009 period. The decrease in the average balance
of interest-earning assets together with the decrease in the
average balance of interest-bearing liabilities of
$0.2 billion during 2009 and the corresponding decrease in
net interest income of $2.7 million resulted in an increase
of 26 basis points in the net interest margin, from 1.58%
during 2008 to 1.84% during 2009.
Non-interest income for the mortgage banking segment was
$46.1 million for 2009, compared to $35.5 million for
2008. The increase in non-interest income of $10.6 million
resulted mainly by an increase of $18.0 million in other
income during 2009 related to dividends paid by Doral Insurance
to its parent company, partially offset by a reduction of
$3.1 million in trading activities that resulted from lower
gains in the value of IOs.
Non-interest expense for the mortgage banking segment was
$56.4 million for 2009, compared to $65.4 million for
2008. The decrease in non-interest expense of $9.0 million
during 2009 was mainly driven by the elimination of charges made
in 2008, such as a loss of $3.4 million related to the
elimination of tax
90
credits granted to customers under Law 197 and a reduction of
$11.6 million related to the provisions for sales of
delinquent loans and for other receivables.
Insurance
Agency
Doral Financial operates its insurance agency activities through
its wholly-owned subsidiary Doral Insurance Agency. Doral
Insurance Agencys principal insurance products are hazard,
title and flood insurance, which are sold primarily to Doral
Financials mortgage customers. Doral Insurance Agency also
offers a diversified range of insurance products such as auto,
life, home protector and disability, among others. Net income
for this segment amounted to $6.3 million,
$8.0 million and $6.3 million for years ended
December 31, 2010, 2009 and 2008, respectively. The
decrease in net income during 2010 was principally related to an
increase of $2.8 million in deferred income tax provision
resulting from the use of its NOLs (refer to Note 28 of the
Consolidated Financial Statements for additional information).
For the year ended December 31, 2010, insurance fees and
commissions amounted to $13.3 million, compared to
$12.0 million in 2009 and $12.8 million in 2008.
Institutional
Securities Operations
In the past, the Company operated an institutional securities
business through Doral Securities. During the third quarter of
2007, Doral Securities voluntarily withdrew its license as a
broker-dealer with the SEC and its membership with the FINRA.
Doral Securities operations were limited during 2008 to
acting as a co-investment manager to a local fixed-income
investment company. Doral Securities provided notice to the
investment company in December 2008 of its intent to assign its
rights and obligations under the investment advisory agreement
to Doral Bank PR. The assignment was completed in January 2009
and Doral Securities did not conduct any other operations in
2009. During the third quarter of 2009, this investment advisory
agreement was terminated by the investment company. Effective on
December 31, 2009, Doral Securities was merged with and
into its holding company, Doral Financial.
Net loss for this segment amounted to approximately $141,000 for
the year ended December 31, 2008.
BALANCE
SHEET AND OPERATING DATA ANALYSIS
Loan
Production
Loan production includes loans internally originated by Doral
Financial as well as residential mortgage loans purchased from
third parties with the related servicing rights. Purchases of
mortgage loans from third parties were $99.9 million,
$126.0 million and $182.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
91
The following table sets forth the number and dollar amount of
Doral Financials loan production for the periods indicated:
Table
E Loan Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except for
|
|
|
|
average initial loan balance)
|
|
|
FHA/VA mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
1,785
|
|
|
|
2,589
|
|
|
|
2,727
|
|
Volume of loans
|
|
$
|
245,129
|
|
|
$
|
344,579
|
|
|
$
|
349,238
|
|
Percent of total volume
|
|
|
17
|
%
|
|
|
30
|
%
|
|
|
26
|
%
|
Average initial loan balance
|
|
$
|
137,327
|
|
|
$
|
133,093
|
|
|
$
|
128,067
|
|
Conventional conforming mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
1,244
|
|
|
|
921
|
|
|
|
806
|
|
Volume of loans
|
|
$
|
158,619
|
|
|
$
|
115,265
|
|
|
$
|
95,828
|
|
Percent of total volume
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
7
|
%
|
Average initial loan balance
|
|
$
|
127,507
|
|
|
$
|
125,152
|
|
|
$
|
118,893
|
|
Conventional non-conforming mortgage
loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
1,738
|
|
|
|
2,246
|
|
|
|
4,044
|
|
Volume of loans
|
|
$
|
269,587
|
|
|
$
|
353,620
|
|
|
$
|
514,163
|
|
Percent of total volume
|
|
|
19
|
%
|
|
|
31
|
%
|
|
|
39
|
%
|
Average initial loan balance
|
|
$
|
155,113
|
|
|
$
|
157,444
|
|
|
$
|
127,142
|
|
Construction development
loans(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
28
|
|
|
|
6
|
|
|
|
24
|
|
Volume of loans
|
|
$
|
138,467
|
|
|
$
|
4,719
|
|
|
$
|
82,880
|
|
Percent of total volume
|
|
|
10
|
%
|
|
|
|
%
|
|
|
6
|
%
|
Average initial loan balance
|
|
$
|
4,945,250
|
|
|
$
|
786,575
|
|
|
$
|
3,453,333
|
|
Disbursement under existing construction development loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume of loans
|
|
$
|
14,422
|
|
|
$
|
44,328
|
|
|
$
|
87,309
|
|
Percent of total volume
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
7
|
%
|
Commercial
loans(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
244
|
|
|
|
128
|
|
|
|
200
|
|
Volume of loans
|
|
$
|
557,786
|
|
|
$
|
271,020
|
|
|
$
|
130,048
|
|
Percent of total volume
|
|
|
39
|
%
|
|
|
24
|
%
|
|
|
10
|
%
|
Average initial loan balance
|
|
$
|
2,286,008
|
|
|
$
|
2,117,344
|
|
|
$
|
650,237
|
|
Consumer
loans(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
705
|
|
|
|
684
|
|
|
|
7,631
|
|
Volume of loans
|
|
$
|
3,983
|
|
|
$
|
5,012
|
|
|
$
|
61,455
|
|
Percent of total volume
|
|
|
|
%
|
|
|
|
%
|
|
|
5
|
%
|
Average initial loan balance
|
|
$
|
5,650
|
|
|
$
|
7,327
|
|
|
$
|
8,053
|
|
Other(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
37
|
|
|
|
1
|
|
|
|
3
|
|
Volume of loans
|
|
$
|
51,340
|
|
|
$
|
9,200
|
|
|
$
|
6,600
|
|
Percent of total volume
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
|
%
|
Average initial loan balance
|
|
$
|
1,387,568
|
|
|
$
|
9,200,000
|
|
|
$
|
2,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
5,781
|
|
|
|
6,575
|
|
|
|
15,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume of loans
|
|
$
|
1,439,333
|
|
|
$
|
1,147,743
|
|
|
$
|
1,327,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $1.4 million,
$2.5 million and $29.2 million in second mortgages for
the years ended December 31, 2010, 2009 and 2008,
respectively.
|
|
(2) |
|
For the year ended
December 31, 2010, includes $96.9 million related to a
single construction loan.
|
|
(3) |
|
Commercial and consumer lines of
credit are included in the loan production according to the
credit limit approved.
|
|
(4) |
|
Consists of multifamily loans.
|
92
The increase of $291.6 million, or 25.4%, in loan
production for the year ended December 31, 2010, when
compared to the corresponding 2009 period, was primarily due to
an increase in commercial loans related to loan production
generated by the Companys U.S. based middle market
syndicated lending unit which is engaged in purchasing
participation interest in senior credit facilities in the
syndicated loan market. Syndicated loans originated during 2010
amounted to $494.1 million, representing 34.3% of total
loan production. The U.S. based middle market syndicated
lending strategy is to acquire $5.0 million to
$15.0 million participation interests in U.S. mainland
companies that are first underwritten by money center or
regional banks, and re-underwritten by the Companys
U.S. based syndicated lending unit. Also, the loan
production during 2010 was impacted by an increase in the
construction portfolio due to a single construction loan
amounting to $96.9 million and to $41.6 million in
construction production from U.S. subsidiaries.
The decrease in Doral Financials originated residential
mortgage loans is due to a number of factors including
continuing challenging economic conditions in Puerto Rico,
competition from other financial institutions, and changes in
laws and regulations.
Total loan production for 2009 decreased by $179.8 million,
or 14%, when compared to the 2008 corresponding period. The
reduction in loan production was impacted by (i) a decrease
of $123.6 million, or 11% in loans originated by the
Company during 2009, and (ii) a decrease of
$56.2 million, or 31%, associated to production purchased
from third parties. The decrease in Doral Financials loan
production for the year ended December 31, 2009 resulted
from significant decreases in residential mortgage and
construction lending activity in Puerto Rico, partially offset
by an increase in the commercial production related to
participation in syndicated loans in the U.S. mainland.
A substantial portion of Doral Financials total
residential mortgage loan originations has consistently been
composed of refinancing transactions. For the years ended
December 31, 2010, 2009, and 2008, refinancing transactions
represented approximately 85%, 82% and 53%, respectively, of the
total dollar volume of internally originated mortgage loans.
Doral Financials future results could be adversely
affected by a significant increase in mortgage interest rates
that may reduce refinancing activity. However, the Company
believes that refinancing activity in Puerto Rico is less
sensitive to interest rate changes than in the mainland United
States because a significant number of refinance loans in the
Puerto Rico mortgage market are made for debt consolidation
purposes rather than interest savings due to lower rates.
Loan
Origination Channels
In Puerto Rico, Doral Financial relies primarily on Doral Bank
PRs extensive branch network to originate loans. It
supplements these originations with wholesale purchases from
other financial institutions. Purchases generally consist of
conventional mortgage loans. Doral Financial also originates
consumer, commercial, construction and land loans primarily
through its banking subsidiaries. Due to worsening economic
conditions in Puerto Rico, new lending activity in Puerto Rico
has been limited since 2008.
93
The following table sets forth the sources of Doral
Financials loans production as a percentage of total loan
originations for the years indicated:
Table
F Loan Origination Sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Puerto Rico
|
|
US
|
|
Total
|
|
Puerto Rico
|
|
US
|
|
Total
|
|
Total
|
|
Residential
|
|
|
41
|
%
|
|
|
|
%
|
|
|
41
|
%
|
|
|
60
|
%
|
|
|
|
%
|
|
|
60
|
%
|
|
|
58
|
%
|
Wholesale(1)
|
|
|
6
|
%
|
|
|
1
|
%
|
|
|
7
|
%
|
|
|
11
|
%
|
|
|
|
%
|
|
|
11
|
%
|
|
|
14
|
%
|
Housing
Developments(2)
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
11
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
13
|
%
|
Commercial and industrial
|
|
|
|
%
|
|
|
36
|
%
|
|
|
36
|
%
|
|
|
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
6
|
%
|
Other(3)
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
55
|
%
|
|
|
45
|
%
|
|
|
100
|
%
|
|
|
74
|
%
|
|
|
26
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refers to purchases of mortgage
loans from other financial institutions and mortgage lenders.
|
|
(2) |
|
Includes new construction
development loans and the disbursement of existing construction
development loans.
|
|
(3) |
|
Refers to commercial real estate,
consumer and multifamily loans originated through the banking
subsidiaries.
|
The increase in U.S. loan originations during 2010 and 2009
is related to originations of the new syndicated lending unit.
These loans are participations in larger loans and are
originated though large commercial banks.
Mortgage
Loan Servicing
Doral Financials principal source of servicing rights has
traditionally been sales of loans from its internal loan
production. However, Doral Financial also purchases mortgage
loans. Doral Financial intends to continue growing its
mortgage-servicing portfolio primarily by internal loan
originations, but may also continue to seek and consider
attractive opportunities for wholesale purchases of loans with
the related servicing rights and bulk purchases of servicing
rights from third parties.
The following table sets forth certain information regarding the
total mortgage loan-servicing portfolio of Doral Financial for
the periods indicated:
Table
G Loans serviced for third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except for
|
|
|
|
average size of loans serviced)
|
|
|
Composition of Portfolio Serviced for Third Parties at Period
End:
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
$
|
2,369,044
|
|
|
$
|
2,283,667
|
|
|
$
|
2,267,782
|
|
FHLMC/FNMA
|
|
|
2,842,663
|
|
|
|
3,084,078
|
|
|
|
3,451,334
|
|
Other conventional mortgage
loans(1)(2)
|
|
|
2,996,353
|
|
|
|
3,287,868
|
|
|
|
3,741,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio serviced for third parties
|
|
$
|
8,208,060
|
|
|
$
|
8,655,613
|
|
|
$
|
9,460,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity of Portfolio Serviced for Third Parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning servicing portfolio
|
|
$
|
8,655,613
|
|
|
$
|
9,460,350
|
|
|
$
|
10,072,538
|
|
Additions to servicing portfolio
|
|
|
475,224
|
|
|
|
465,935
|
|
|
|
428,792
|
|
Servicing released due to repurchases
|
|
|
(102,815
|
)
|
|
|
(178,727
|
)
|
|
|
(63,964
|
)
|
MSRs sales
|
|
|
(24,045
|
)
|
|
|
(7,111
|
)
|
|
|
|
|
Run-off(3)
|
|
|
(795,917
|
)
|
|
|
(1,084,834
|
)
|
|
|
(977,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending servicing portfolio
|
|
$
|
8,208,060
|
|
|
$
|
8,655,613
|
|
|
$
|
9,460,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except for
|
|
|
|
average size of loans serviced)
|
|
|
Selected Data Regarding Mortgage Loans Serviced for Third
Parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
98,404
|
|
|
|
103,214
|
|
|
|
112,150
|
|
Weighted-average interest rate
|
|
|
6.19
|
%
|
|
|
6.31
|
%
|
|
|
6.41
|
%
|
Weighted-average remaining maturity (months)
|
|
|
239
|
|
|
|
242
|
|
|
|
246
|
|
Weighted-average gross servicing fee rate
|
|
|
0.40
|
%
|
|
|
0.39
|
%
|
|
|
0.39
|
%
|
Average servicing
portfolio(4)
|
|
$
|
8,330,994
|
|
|
$
|
8,976,464
|
|
|
$
|
9,645,932
|
|
Principal prepayments
|
|
$
|
422,522
|
|
|
$
|
715,981
|
|
|
$
|
632,694
|
|
Constant prepayment rate
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
Average size of loans
|
|
$
|
83,412
|
|
|
$
|
83,861
|
|
|
$
|
84,354
|
|
Servicing assets, net
|
|
$
|
114,342
|
|
|
$
|
118,493
|
|
|
$
|
114,396
|
|
Mortgage-servicing
advances(5)
|
|
$
|
51,462
|
|
|
$
|
19,592
|
|
|
$
|
18,309
|
|
Delinquent Mortgage Loans and Pending Foreclosures at Period
End:
|
|
|
|
|
|
|
|
|
|
|
|
|
60-89 days
past due
|
|
|
2.64
|
%
|
|
|
2.45
|
%
|
|
|
2.08
|
%
|
90 days or more past due
|
|
|
5.48
|
%
|
|
|
4.54
|
%
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies excluding foreclosures
|
|
|
8.12
|
%
|
|
|
6.99
|
%
|
|
|
5.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosures pending
|
|
|
3.36
|
%
|
|
|
2.99
|
%
|
|
|
2.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $4.4 billion,
$4.4 billion and $4.2 billion of mortgage loans owned
by Doral Financial at December 31, 2010, 2009 and 2008,
respectively.
|
|
(2) |
|
Includes portfolios of
$139.6 million, $154.2 million and $177.0 million
at December 31, 2010, 2009 and 2008, respectively, of
delinquent FHA/VA and conventional mortgage loans sold to third
parties.
|
|
(3) |
|
Run-off refers to regular
amortization of loans, prepayments and foreclosures.
|
|
(4) |
|
Excludes the average balance of
mortgage loans owned by Doral Financial of $4.4 billion,
$4.3 billion and $3.9 billion at December 31,
2010, 2009 and 2008, respectively.
|
|
(5) |
|
Includes reserves for possible
losses on P&I advances of $9.0 million,
$8.8 million and $9.7 million as of December 31,
2010, 2009 and 2008, respectively.
|
The main component of Doral Financials servicing income is
loan servicing fees, which depend on the type of mortgage loan
being serviced. The servicing fees on residential mortgage loans
generally range from 0.25% to 0.50% of the outstanding principal
balance of the serviced loan.
Most of the mortgage loans in Doral Financials servicing
portfolio are secured by single (one-to-four) family residences
located in Puerto Rico. At December 31, 2010, 2009 and 2008
less than one percent of Doral Financials
mortgage-servicing portfolio was related to mortgages secured by
real property located on the U.S.
The amount of principal prepayments on mortgage loans serviced
for third parties by Doral Financial was $0.4 billion,
$0.7 billion and $0.6 billion for the years ended
December 31, 2010, 2009 and 2008, respectively. Total
delinquencies excluding foreclosures increased from 6.99% to
8.12% from 2009 to 2010 as a result of the economic recession
and general deterioration of the mortgage sector, while pending
foreclosures increased from 2.99% to 3.36%, respectively. The
Company does not expect significant losses related to these
delinquencies since it has established a reserve for loans under
recourse agreements, and for other non recourse loans has not
experienced significant losses in the past.
As part of its servicing responsibilities, in some servicing
agreements, Doral Financial is required to advance the scheduled
payments of principal or interest whether or not collected from
the underlying borrower. While Doral Financial generally
recovers funds advanced pursuant to these arrangements within
30 days, it must absorb the cost of funding the advances
during the time the advance is outstanding. In the past, Doral
95
Financial sold pools of delinquent FHA and VA and conventional
mortgage loans. Under these arrangements, Doral Financial is
required to advance the scheduled payments whether or not
collected from the underlying borrower. While Doral Financial
expects to recover a significant portion of the amounts advanced
through foreclosure or, in the case of FHA and VA loans, under
the applicable FHA and VA insurance and guarantee programs, the
amounts advanced tend to be greater than normal arrangements
because of the large number of delinquent loans.
Loans
Held for Sale
Loans held for sale are carried at the lower of net cost or
market value on an aggregate portfolio basis. The amount by
which cost exceeds market value, if any, is accounted for as a
loss through a valuation allowance. Changes in the valuation
allowance are included in the determination of income in the
period in which those changes occur and are reported under net
gain on mortgage loan sales and fees in the Consolidated
Statements of Operations. Given traditional consumer preferences
in Puerto Rico, substantially all of Doral Financials
residential loans held for sale are fixed-rate loans. Please
refer to Note 10 of the Consolidated Financial Statements
accompanying this Annual Report on
Form 10-K
for additional information regarding Doral Financials
portfolio of loans held for sale.
As of December 31, 2010, loans held for sale amounted to
$319.3 million, of which approximately $291.5 million
consisted of residential mortgage loans.
GNMA programs allow financial institutions to buy back
individual delinquent mortgage loans that meet certain criteria
from the securitized loan pool for which the Company provides
servicing. At the Companys option and without GNMA prior
authorization, Doral Financial may repurchase such delinquent
loans for an amount equal to 100% of the loans remaining
principal balance. This buy-back option is considered a
conditional option until the delinquency criteria are met, at
which time the option becomes unconditional (but not an
obligation). When the loans backing a GNMA security are
initially securitized, the Company treats the transaction as a
sale for accounting purposes and the loans are removed from the
balance sheet because the conditional nature of the buy-back
option means that the Company does not maintain effective
control over the loans. When individual loans later meet
GNMAs specified delinquency criteria and are eligible for
repurchase, Doral Financial is deemed to have regained effective
control over these loans. In such case, for financial reporting
purposes, the delinquent GNMA loans are brought back into the
Companys portfolio of loans held for sale, regardless of
whether the Company intends to exercise the buy-back option. An
offsetting liability is also recorded. As of December 31,
2010, the portfolio of loans held for sale includes
$153.4 million related to GNMA defaulted loans, compared to
$128.6 million and $165.6 million as of
December 31, 2009 and 2008, respectively.
During 2010, the Company repurchased $68.2 million of GNMA
defaulted loans, which were classified as loans held for
investment, compared to $127.9 million during 2009.
Loans
Held for Investment
Doral Financial originates mortgage loans secured by
income-producing residential and commercial properties,
construction and land loans, certain residential mortgage loans
and other commercial and consumer loans that are held for
investment and classified as loans receivable. Loans receivable
are originated primarily through Doral Financials banking
subsidiaries. A significant portion of Doral Financials
loans receivable consists of loans made to entities or
individuals located in Puerto Rico. During 2009, Doral Financial
started a syndicated lending unit operating out of one of its
New York subsidiaries. This unit is engaged in purchasing senior
credit facilities in the syndicated leverage loan market.
The maximum aggregate amount in unsecured loans that Doral Bank
PR could make to a single borrower under Puerto Rico banking
regulations as of December 31, 2010, was approximately
$101.6 million. Puerto Rico banking regulations permit
larger loans to a single borrower to the extent secured by
qualifying collateral. The maximum aggregate amount in loans
that Doral Bank NY could make to a single borrower under the OTS
banking regulations as of December 31, 2010, was
$2.2 million. Doral Financials largest aggregated
indebtedness to a single borrower or a group of related
borrowers as of December 31, 2010 was $97.7 million.
96
The following table set forth certain information regarding
Doral Financials loans receivable:
Table
H Loans receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
3,451,895
|
|
|
$
|
108,641
|
|
|
$
|
3,560,536
|
|
|
$
|
3,598,995
|
|
|
$
|
59,706
|
|
|
$
|
3,658,701
|
|
|
$
|
3,579,091
|
|
|
$
|
3,285,112
|
|
|
$
|
1,760,138
|
|
FHA/VA guaranteed residential mortgage
|
|
|
187,473
|
|
|
|
|
|
|
|
187,473
|
|
|
|
168,569
|
|
|
|
|
|
|
|
168,569
|
|
|
|
41,159
|
|
|
|
37,066
|
|
|
|
1,660
|
|
Personal
|
|
|
15,003
|
|
|
|
|
|
|
|
15,003
|
|
|
|
25,164
|
|
|
|
|
|
|
|
25,164
|
|
|
|
37,844
|
|
|
|
44,810
|
|
|
|
37,896
|
|
Revolving lines of credit
|
|
|
17,810
|
|
|
|
|
|
|
|
17,810
|
|
|
|
22,062
|
|
|
|
|
|
|
|
22,062
|
|
|
|
25,520
|
|
|
|
26,940
|
|
|
|
28,229
|
|
Credit cards
|
|
|
17,719
|
|
|
|
|
|
|
|
17,719
|
|
|
|
22,725
|
|
|
|
|
|
|
|
22,725
|
|
|
|
25,914
|
|
|
|
18,977
|
|
|
|
20,086
|
|
Lease financing receivables
|
|
|
4,807
|
|
|
|
|
|
|
|
4,807
|
|
|
|
12,702
|
|
|
|
|
|
|
|
12,702
|
|
|
|
20,939
|
|
|
|
29,471
|
|
|
|
37,306
|
|
Loans on savings deposits
|
|
|
2,860
|
|
|
|
|
|
|
|
2,860
|
|
|
|
3,249
|
|
|
|
|
|
|
|
3,249
|
|
|
|
5,240
|
|
|
|
11,037
|
|
|
|
16,811
|
|
Other consumer
|
|
|
962
|
|
|
|
26
|
|
|
|
988
|
|
|
|
628
|
|
|
|
1
|
|
|
|
629
|
|
|
|
790
|
|
|
|
358
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3,698,529
|
|
|
|
108,667
|
|
|
|
3,807,196
|
|
|
|
3,854,094
|
|
|
|
59,707
|
|
|
|
3,913,801
|
|
|
|
3,736,497
|
|
|
|
3,453,771
|
|
|
|
1,902,876
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
629,043
|
|
|
|
59,903
|
|
|
|
688,946
|
|
|
|
684,781
|
|
|
|
54,057
|
|
|
|
738,838
|
|
|
|
755,430
|
|
|
|
766,279
|
|
|
|
538,876
|
|
Commercial and industrial
|
|
|
36,639
|
|
|
|
597,056
|
|
|
|
633,695
|
|
|
|
53,752
|
|
|
|
257,506
|
|
|
|
311,258
|
|
|
|
136,241
|
|
|
|
126,466
|
|
|
|
159,068
|
|
Construction and land
|
|
|
349,899
|
|
|
|
108,835
|
|
|
|
458,734
|
|
|
|
447,990
|
|
|
|
103,921
|
|
|
|
551,911
|
|
|
|
623,545
|
|
|
|
704,417
|
|
|
|
856,350
|
|
Total commercial
|
|
|
1,015,581
|
|
|
|
765,794
|
|
|
|
1,781,375
|
|
|
|
1,186,523
|
|
|
|
415,484
|
|
|
|
1,602,007
|
|
|
|
1,515,216
|
|
|
|
1,597,162
|
|
|
|
1,554,294
|
|
Loans receivable, gross
|
|
|
4,714,110
|
|
|
|
874,461
|
|
|
|
5,588,571
|
|
|
|
5,040,617
|
|
|
|
475,191
|
|
|
|
5,515,808
|
|
|
|
5,251,713
|
|
|
|
5,050,933
|
|
|
|
3,457,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(117,821
|
)
|
|
|
(5,831
|
)
|
|
|
(123,652
|
)
|
|
|
(136,878
|
)
|
|
|
(3,896
|
)
|
|
|
(140,774
|
)
|
|
|
(132,020
|
)
|
|
|
(124,733
|
)
|
|
|
(67,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
4,596,289
|
|
|
$
|
868,630
|
|
|
$
|
5,464,919
|
|
|
$
|
4,903,739
|
|
|
$
|
471,295
|
|
|
$
|
5,375,034
|
|
|
$
|
5,119,693
|
|
|
$
|
4,926,200
|
|
|
$
|
3,389,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain information as of
December 31, 2010, regarding Doral Financials loans
receivable portfolio based on the remaining contractual
maturity. Expected maturities may differ from contractual
maturities because of prepayments and other market factors.
Loans having no stated maturity are reported as due in one year
or less.
Table
I Loans receivable by contractual
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
1 year
|
|
|
1 to 5
|
|
|
Over 5
|
|
|
|
|
|
|
or less
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
53,345
|
|
|
$
|
189,891
|
|
|
$
|
3,527,016
|
|
|
$
|
3,770,252
|
|
Lease financing receivables
|
|
|
1,765
|
|
|
|
3,349
|
|
|
|
|
|
|
|
5,114
|
|
Consumer other
|
|
|
37,068
|
|
|
|
16,268
|
|
|
|
1,090
|
|
|
|
54,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
92,178
|
|
|
|
209,508
|
|
|
|
3,528,106
|
|
|
|
3,829,792
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
248,174
|
|
|
|
266,262
|
|
|
|
175,367
|
|
|
|
689,803
|
|
Commercial and industrial
|
|
|
76,245
|
|
|
|
236,301
|
|
|
|
321,094
|
|
|
|
633,640
|
|
Construction and land
|
|
|
260,847
|
|
|
|
82,790
|
|
|
|
115,897
|
|
|
|
459,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
585,266
|
|
|
|
585,353
|
|
|
|
612,358
|
|
|
|
1,782,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross
|
|
$
|
677,444
|
|
|
$
|
794,861
|
|
|
$
|
4,140,464
|
|
|
$
|
5,612,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled contractual amortization of loans receivable does not
reflect the expected life of Doral Financials loans
receivable portfolio. The average life of these loans is
substantially less than their contractual terms because of
prepayments and, with respect to conventional mortgage loans,
due-on-sale
clauses, which
97
give Doral Financial the right to declare a conventional
mortgage loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject
to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and,
conversely, decrease when current mortgage loan rates are lower
than rates on existing mortgage loans. Under the latter
circumstance, the weighted-average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
The following table sets forth the dollar amount of total loans
receivable at December 31, 2010, as shown in the preceding
table, which have fixed interest rates or which have floating or
adjustable interest rates that have a contractual maturity of
more than one year.
Table
J Loans receivable by fixed and floating or
adjustable rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
Floating or
|
|
|
|
|
|
|
1 Year
|
|
|
|
|
|
Adjustable
|
|
|
|
|
|
|
or less
|
|
|
Fixed Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
53,345
|
|
|
$
|
3,716,907
|
|
|
$
|
|
|
|
$
|
3,770,252
|
|
Lease financing receivables
|
|
|
1,765
|
|
|
|
3,349
|
|
|
|
|
|
|
|
5,114
|
|
Consumer other
|
|
|
37,068
|
|
|
|
17,358
|
|
|
|
|
|
|
|
54,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
92,178
|
|
|
|
3,737,614
|
|
|
|
|
|
|
|
3,829,792
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
248,174
|
|
|
|
421,070
|
|
|
|
20,559
|
|
|
|
689,803
|
|
Construction and land loans
|
|
|
260,847
|
|
|
|
158,760
|
|
|
|
39,927
|
|
|
|
459,534
|
|
Commercial non-real estate
|
|
|
76,245
|
|
|
|
36,273
|
|
|
|
521,122
|
|
|
|
633,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
585,266
|
|
|
|
616,103
|
|
|
|
581,608
|
|
|
|
1,782,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross
|
|
$
|
677,444
|
|
|
$
|
4,353,717
|
|
|
$
|
581,608
|
|
|
$
|
5,612,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financials banking subsidiaries originate floating
or adjustable and fixed interest-rate loans. Unlike its
portfolio of residential mortgage loans, which is comprised
almost entirely of fixed rate mortgage loans, a significant
portion of Doral Financials construction and land, and
other commercial loans classified as loans receivable carry
adjustable rates. At December 31, 2010, 2009 and 2008,
approximately 16%, 13% and 13%, respectively, of Doral
Financials gross loans receivable were adjustable rate
loans. The increase in the percentage of adjustable rate loans
from 2009 to 2010 was due to the increase in the syndicated loan
portfolio. The adjustable rate construction and land and
commercial loans have interest rate adjustment limitations and
are generally tied to the prime rate, and often provide for a
maximum and minimum rate beyond which the applicable interest
rate will not fluctuate. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral
Financial pays on the different funding sources used to finance
these loans. Please refer to Note 10 of the consolidated
financial statements accompanying this Annual Report on
Form 10-K
for additional information regarding Doral Financials
portfolio of loans receivable.
Investment
and Trading Activities
As part of its mortgage securitization activities, Doral
Financial is involved in the purchase and sale of
mortgage-backed securities. At December 31, 2010, Doral
Financial, principally through its banking subsidiaries, held
securities for trading with a fair market value of
$45.0 million.
Securities held for trading are reflected on Doral
Financials consolidated statement of financial condition
at their fair market value with resulting gains or losses
included in current period earnings as part of net gain (loss)
on trading activities. See Critical Accounting
Policies Valuation of Trading Securities and
Derivatives above for additional information on how Doral
Financial determines the fair values of its trading securities.
98
Securities held for trading also includes derivatives that serve
as economic hedges on the Companys MSRs and secondary
market activities.
As part of its strategy to diversify its revenue sources and
maximize net interest income, Doral Financial also invests in
securities that are classified as available for sale. As of
December 31, 2010, Doral Financial, principally through its
banking subsidiaries, held $1.5 billion of investment
securities that were classified as available for sale and
reported at fair value based on quoted or evaluated market
prices, with unrealized gains or losses included in
stockholders equity and reported as accumulated other
comprehensive income (AOCI), net of income tax
expense in Doral Financials consolidated statement of
financial condition. At December 31, 2010, Doral Financial
had unrealized gains in AOCI of $7.4 million, compared to
unrealized losses of $103.9 million at December 31,
2009 related to its available for sale portfolio.
The securities held by the Company are principally
mortgage-backed securities or securities backed by a
U.S. government sponsored agencies and therefore, principal
and interest on the securities are deemed recoverable. Doral
Financials investment portfolio consists primarily of AAA
rated debt securities, except for the Non-Agency Collateralized
Mortgage Obligations (CMO) as well as a few other
positions.
During 2010, the Company sold approximately $2.3 billion of
investment securities, and also purchased $1.6 billion of
shorter duration securities. These actions are part of the
execution of the Company strategy to de-lever and reposition the
balance sheet. For the year ended December 31, 2010, the
Company recognized losses on sale of investment securities of
$93.7 million as a result of the sale on certain non-agency
securities at a loss of $136.7 million, offset by the sale
of mortgage-backed securities and other debt securities at a
gain of $43.0 million as part of Dorals strategic
balance sheet restructuring efforts.
The Company performs an assessment of OTTI whenever the fair
value of an investment security is less than its amortized cost
basis at the balance sheet date. Amortized cost basis includes
adjustments made to the cost of a security for accretion,
amortization, collection of cash, previous OTTI recognized into
earnings (less any cumulative effect adjustments) and fair value
hedge accounting adjustments. OTTI is considered to have
occurred under the following circumstances:
|
|
|
|
|
If the Company intends to sell the investment security and its
fair value is less than its amortized cost.
|
|
|
|
If, based on available evidence, it is more likely than not that
the Company will decide or be required to sell the investment
security before the recovery of its amortized cost basis.
|
|
|
|
If the Company does not expect to recover the entire amortized
cost basis of the investment security. This occurs when the
present value of cash flows expected to be collected is less
than the amortized cost basis of the security. In determining
whether a credit loss exists, the Company uses its best estimate
of the present value of cash flows expected to be collected from
the investment security. Cash flows expected to be collected are
estimated based on a careful assessment of all available
information. The difference between the present value of the
cash flows expected to be collected and the amortized cost basis
represents the amount of credit loss.
|
The Company evaluates its individual available for sale
investment securities for OTTI on at least a quarterly basis. As
part of this process, the Company considers its intent to sell
each investment security and whether it is more likely than not
that it will be required to sell the security before its
anticipated recovery. If either of these conditions is met, the
Company recognizes an OTTI charge to earnings equal to the
entire difference between the securitys amortized cost
basis and its fair value at the balance sheet date. For
securities that meet neither of these conditions, an analysis is
performed to determine if any of these securities are at risk
for OTTI. To determine which securities are at risk for OTTI and
should be quantitatively evaluated utilizing a detailed cash
flow analysis, the Company evaluates certain indicators which
consider various characteristics of each security including, but
not limited to, the following: the credit rating and related
outlook or status of the securities; the creditworthiness of the
issuers of the securities; the value and type of underlying
collateral; the duration and level of the unrealized loss; any
credit enhancements; and other collateral-related
characteristics such as the ratio of credit enhancements to
expected credit losses. The relative importance of this
information varies based on the facts and circumstances
surrounding each security, as well as the economic environment
at the time of assessment. The negative difference between the
estimate of the
99
present value of the cash flows expected to be collected and the
amortized cost basis is considered to be a credit loss.
As a result of its review of the portfolio as of
December 31, 2010, the Company performed a detailed cash
flow analysis of certain securities in unrealized loss positions
to assess whether they were OTTI. The Company uses a third party
provider to generate cash flow forecasts of each security
reviewed based on a combination of management and market driven
assumptions and securitization terms, including remaining
payment terms of the security, prepayment speeds, the estimated
amount of loans to become seriously delinquent over the life of
the security, the estimated life-time severity rate, estimated
losses over the life of the security, loan characteristics, the
level of subordination within the security structure, expected
housing price changes and interest rate assumptions.
During 2010, it was determined that eight securities reflected
OTTI. The characteristics of these securities that led to the
OTTI conclusion included: (i) the cumulative level and
estimated future delinquency levels; (ii) the effect of
severely delinquent loans on forecasted defaults; (iii) the
cumulative severity and expected severity in resolving the
defaulted loans; and (iv) the current subordination of the
securities that resulted in the present value of the forecast
cash flows being less than the cost basis of the security.
Management estimated that credit losses of $14.0 million
were incurred on these securities for the year ended
December 31, 2010.
Five of the eight OTTI securities were subordinated interests in
a securitization structure collateralized by option adjustable
rate mortgage (ARM) loans and resulted in the
recognition of an OTTI loss of $13.3 million in the first
quarter of 2010. On April 23, 2010, the Company sold the
entire portfolio of U.S. non-agency CMOs, including the five
securities that were OTTI, and recognized a loss of
$136.7 million, of which $129.7 million had previously
been reflected in other comprehensive income (loss).
Non-Agency CMOs include subordinated tranches of 2006
securitizations of Doral originated mortgage loans primarily
composed of 2003 and 2004 vintages. Doral purchased these CMOs
at a discounted price of 61% of par value, anticipating a
partial loss of principal and interest value. These original
three securities have an amortized cost of $11.1 million as
of December 31, 2010 including an OTTI loss of
$0.7 million due to credit. Higher default and loss
assumptions driven by higher delinquencies in Puerto Rico,
primarily due to the impact of inflationary pressures on the
consumer, the high rate of unemployment and general recessionary
condition on the Island, has resulted in higher default and loss
estimates on the P.R. Non-Agency CMOs. The higher default and
loss estimates have resulted in lower bond prices and higher
levels of unrealized losses on the bonds. It is possible that
future loss assumptions could change and cause future OTTI
charges in these securities.
As of December 31, 2010 and 2009, the Company did not
intend to sell the remaining securities which were evaluated for
OTTI and concluded it was not more likely than not that it would
be required to sell these securities before the anticipated
recovery of each securitys remaining amortized cost basis.
Therefore, the difference between the amortized cost basis and
the market value of the securities is recorded in accumulated
other comprehensive income.
For the remainder of the Companys securities portfolio
that have experienced decreases in the fair value, the decline
is considered to be temporary as the Company expects to recover
the entire amortized cost basis on the securities and neither
intends to sell these securities nor is it more likely than not
that it will be required to sell these securities.
In subsequent periods the Company will account for the
securities judged to be OTTI as if the securities had been
purchased at the previous amortized cost less the credit related
OTTI. Once a credit loss is recognized, the investment will be
adjusted to a new amortized cost basis equal to the previous
amortized cost basis less the amount recognized in earnings. For
the investment securities for which OTTI was recognized in
earnings, the difference between the new amortized cost basis
and the cash flows expected to be collected will be accreted as
interest income.
100
The following table summarizes Doral Financials securities
holdings as of December 31, 2010.
Table
K Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Held for
|
|
|
Available
|
|
|
Investment
|
|
|
|
Trading
|
|
|
for Sale
|
|
|
Securities
|
|
|
|
(In thousands)
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
|
|
$
|
|
|
|
$
|
1,142,973
|
|
|
$
|
1,142,973
|
|
CMO government sponsored agencies
|
|
|
|
|
|
|
312,831
|
|
|
|
312,831
|
|
Non-agency CMOs
|
|
|
766
|
|
|
|
7,192
|
|
|
|
7,958
|
|
Variable rate IOs
|
|
|
44,018
|
|
|
|
|
|
|
|
44,018
|
|
Fixed rate IOs
|
|
|
232
|
|
|
|
|
|
|
|
232
|
|
Obligations U.S. government sponsored agencies
|
|
|
|
|
|
|
34,992
|
|
|
|
34,992
|
|
Derivatives
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
Other
|
|
|
|
|
|
|
7,077
|
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,029
|
|
|
$
|
1,505,065
|
|
|
$
|
1,550,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information regarding the composition of Doral
Financials investment securities, please refer to
Notes 6, 7 and 8 to the accompanying consolidated financial
statements.
LIQUIDITY
AND CAPITAL RESOURCES
Doral Financial has an ongoing need for capital to finance its
lending, servicing and investing activities. Doral
Financials cash requirements arise mainly from loan
originations and purchases, purchases and holding of securities,
repayment of debt upon maturity, payment of operating and
interest expenses, servicing advances and loan repurchases
pursuant to recourse or warranty obligations. Sources of funds
include deposits, advances from FHLB and other borrowings,
proceeds from the sale of loans, and of certain available for
sale investment securities and other assets, payment from loans
held on the balance sheet, and cash income from assets owned,
including payments from owned mortgage servicing rights and
interest only strips. The Companys Asset and Liability
Committee (ALCO) establishes and monitors liquidity
guidelines to ensure the Companys ability to meet these
needs. Doral Financial currently has and anticipates that it
will continue to have adequate liquidity, financing arrangements
and capital resources to finance its operations in the ordinary
course of business.
Liquidity
of the Holding Company
The holding companys principal uses of funds are the
payment of its obligations, primarily the payment of principal
and interest on its debt obligations. The holding company no
longer directly funds any mortgage banking activities. Beyond
the amount of unencumbered liquid assets at the holding company,
the principal sources of funds for the holding company are
principal and interest payments on the portfolio of loans,
securities retained on its balance sheet and dividends from its
subsidiaries, including Doral Bank PR, Doral Bank US and Doral
Insurance Agency. The existing cease and desist order applicable
to the holding company requires prior regulatory approval for
the payment of any dividends from Doral Bank PR to the holding
company. In addition, various federal and Puerto Rico statutes
and regulations limit the amount of dividends that the
Companys banking and other subsidiaries may pay without
regulatory approval. No restrictions exist on the dividends
available from Doral Insurance Agency, other than those
generally applicable under the Puerto Rico corporation law.
Doral Financial has not paid dividends on the Companys
common stock since April 2006.
On March 20, 2009, the Company announced that in order to
preserve capital the Board of Directors approved the suspension
of the payment of dividends on all of its outstanding series of
cumulative and non-cumulative preferred stock. The suspension of
dividends is effective and commenced with the dividends for
101
the month of April 2009 for Doral Financials noncumulative
preferred stock and the dividends for the second quarter of 2009
for Doral Financials cumulative preferred stock.
Liquidity is managed at the holding company level that owns the
banking and non-banking subsidiaries. It is also managed at the
level of the banking and non-banking subsidiaries.
The following items have impacted the Companys liquidity,
funding activities and strategies during 2010 and 2009:
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changes in short-term borrowings and deposits in the normal
course of business;
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repayment of certain long-term callable certificate of deposits;
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sales of securities;
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early repayment of debt;
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adoption of an initiative to lengthen the brokered certificates
term to structurally reduce interest rate sensitivity;
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the sale of the Companys exposure to LBI;
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capital contributions to Doral Bank;
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suspension of payment of dividends on outstanding preferred
stock;
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prepayment of FDIC insurance assessments for the years
2010-2012;
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repurchase of GNMA defaulted loans in 2010 and 2009;
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inducement on preferred stock conversions;
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capital raise of $171.0 million in the second quarter of
2010;
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efforts to increase retail deposits in the wake of failed Puerto
Rico banks; and
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On July 8, 2010, the Company entered into a collateralized
loan arrangement in which $450.0 million of U.S. based
commercial loans are funded $250.0 million by a third party
paying
3-month
LIBOR plus 1.85%, and $200.0 million by Doral. The entity
holding the loans is consolidated by Doral and the third party
financing is reported as a note payable. The third party funding
provides an additional source of liquidity for the
Companys U.S. operations.
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The following sections provide further information on the
Companys major funding activities and needs. Also, refer
to the consolidated statements of cash flows in the accompanying
Consolidated Financial Statements for further information.
Liquidity
of the Banking Subsidiaries
Doral Financials liquidity and capital position at the
holding company differ from the liquidity and capital positions
of the Companys banking subsidiaries. Doral
Financials banking subsidiaries rely primarily on
deposits, including brokered deposits, borrowings under advances
from FHLB and repurchase agreements secured by pledges of their
mortgage loans, mortgage-backed securities and other borrowings.
The banking subsidiaries have significant investments in loans
and investment securities, which together with the owned
mortgage servicing rights, serve as a source of cash from
interest and principal received from loan customers. To date,
these sources of liquidity for Doral Financials banking
subsidiaries have not been materially adversely impacted by the
current challenging liquidity conditions in the
U.S. mortgage and credit markets.
Cash
Sources and Uses
Doral Financials sources of cash as of December 31,
2010 include retail and commercial deposits, borrowings under
advances from FHLB, repurchase financing agreements, principal
repayments and sales of loans and securities.
102
Management does not contemplate material uncertainties in the
rolling over of deposits, both retail and wholesale, and is not
engaged in capital expenditures that would materially affect the
capital and liquidity positions. In addition, the Companys
banking subsidiaries maintain borrowing facilities with the FHLB
and have a considerable amount of collateral that can be used to
raise funds under these facilities.
Doral Financials uses of cash as of December 31, 2010
include origination and purchase of loans, purchase of
investment securities, repayment of obligations as they become
due, dividend payments related to the preferred stock (which
were suspended by the Companys Board of Directors on March
2009 effective during the second quarter of 2009), and other
operational needs. The Company also is required to deposit cash
or qualifying securities to meet margin requirements. To the
extent that the value of securities previously pledged as
collateral declines because of changes in interest rates, a
liquidity crisis or any other factors, the Company will be
required to deposit additional cash or securities to meet its
margin requirements, thereby adversely affecting its liquidity.
Primary
Sources of Cash
The following table shows Doral Financials sources of
borrowings and the related average interest rates as of
December 31, 2010 and 2009:
Table
L Sources of
Borrowings
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As of December 31,
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2010
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2009
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Amount
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Average
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Amount
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Average
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Outstanding
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Rate
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Outstanding
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Rate
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(Dollars in thousands)
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Deposits
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$
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4,618,475
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2.18
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%
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$
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4,643,021
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2.24
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%
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Repurchase Agreements
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1,176,800
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3.10
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%
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2,145,262
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3.32
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%
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Advances from FHLB
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901,420
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3.49
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%
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1,606,920
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3.05
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%
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Other Short-Term Borrowings
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%
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110,000
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0.25
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%
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Loans Payable
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304,035
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6.46
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%
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337,036
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7.27
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%
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Notes Payable
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513,958
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4.91
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%
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270,838
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7.30
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%
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As of December 31, 2010, Doral Financials banking
subsidiaries held approximately $4.4 billion in
interest-bearing deposits at a weighted-average interest rate of
2.31%. For additional information on the Companys sources
of borrowings please refer to Notes 20 to 26 of the
accompanying consolidated financial statements.
103
The following table presents the average balance and the
annualized average rate paid on each deposit type for the
periods indicated:
Table
M Average Deposit Balance
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Year Ended December 31,
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2010
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2009
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2008
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Average
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Average
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Average
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Average
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Average
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Average
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Balance
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Rate
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Balance
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Rate
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Balance
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Rate
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(Dollars in thousands)
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Certificates of deposit
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$
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634,924
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2.48
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%
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$
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484,917
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3.34
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%
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$
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543,081
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4.17
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%
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Brokered certificates of deposits
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2,645,028
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2.89
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%
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2,374,207
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3.70
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%
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2,451,523
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4.51
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%
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Regular passbook savings
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380,534
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1.46
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%
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361,217
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1.69
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%
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332,032
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2.56
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%
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NOW accounts and other transaction accounts
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379,100
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1.31
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%
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350,300
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1.26
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%
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381,848
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1.57
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%
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Money market accounts
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416,269
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1.94
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%
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390,962
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2.71
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%
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294,847
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3.07
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%
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Total interest-bearing
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4,455,855
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2.49
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%
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3,961,603
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3.16
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%
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4,003,331
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3.91
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%
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Non-interest bearing
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249,991
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%
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244,606
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%
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254,566
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%
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Total deposits
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$
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4,705,846
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2.36
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%
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$
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4,206,209
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2.97
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%
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$
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4,257,897
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3.68
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%
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The following table sets forth the maturities of certificates of
deposit having principal amounts of $100,000 or more at
December 31, 2010.
Table
N Certificates of Deposit Maturities
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December 31, 2010
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(In thousands)
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Certificates of deposit maturing:
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Three months or less
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$
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307,538
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Over three through six months
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302,875
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Over six through twelve months
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531,667
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Over twelve months
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1,638,406
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Total
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$
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2,780,486
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The amounts in Table N, include $2.4 billion in brokered
deposits issued in denominations greater than $100,000 to
broker-dealers. As of December 31, 2010 and
December 31, 2009, all brokered deposits were within the
applicable FDIC insurance limit. On October 3, 2008,
President Bush signed the Emergency Economic Stabilization Act
of 2008 (EESA), which among other things temporarily
raised the basic limit on FDIC deposit insurance from $100,000
to $250,000. The temporary increase in the deposit insurance,
after an amendment adopted in May 20, 2009, was set to
expire on December 31, 2013. On July 21, 2010,
President Obama signed into law the Dodd-Frank Wall Street
Reform and Consumer Protection Act which, among other things,
made permanent the increase in the standard maximum deposit
insurance amount from $100,000 to $250,000.
As of December 31, 2010 and 2009, Doral Financials
retail banking subsidiaries had approximately $2.4 billion
and $2.7 billion in brokered deposits, respectively.
Brokered deposits are used by Doral Financials retail
banking subsidiaries as a source of long-term funds, and Doral
Financials retail banking subsidiaries have traditionally
been able to replace maturing brokered deposits. Brokered
deposits, however, are generally considered a less stable source
of funding than core deposits obtained through retail bank
branches. Brokered-deposit investors are generally very
sensitive to interest rates and will generally move funds from
one depository institution to another based on minor differences
in rates offered on deposits.
Doral Financials banking subsidiaries, as members of the
FHLB, have access to collateralized borrowings from the FHLB up
to a maximum of 30% of total assets. In addition, the FHLB makes
available additional borrowing capacity in the form of
repurchase agreements on qualifying high grade securities.
Advances and
104
reimbursement obligations with respect to letters of credit must
be secured by qualifying assets with a market value of 100% of
the advances or reimbursement obligations. As of
December 31, 2010, Doral Financials banking
subsidiaries had $0.9 billion in outstanding advances from
FHLB at a weighted-average interest rate cost of 3.49%. Please
refer to Note 23 to the consolidated financial statements
accompanying this Annual Report on
Form 10-K
for additional information regarding such advances.
Doral Financial also derives liquidity from the sale of mortgage
loans in the secondary mortgage markets. The
U.S. (including Puerto Rico) secondary mortgage market is
the most liquid in the world in large part because of the sale
or guarantee programs maintained by FHA, VA, HUD, FNMA and
FHLMC. To the extent these programs are curtailed or the
standard for insuring or selling loans under such programs is
materially increased, or, for any reason, Doral Financial were
to fail to qualify for such programs, Doral Financials
ability to sell mortgage loans and consequently its liquidity
would be materially adversely affected.
Other
Uses of Cash
Servicing agreements relating to the MBS programs of FNMA, FHLMC
and GNMA, and to mortgage loans sold to certain other investors,
require Doral Financial to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such
payments have not been received from the borrowers. While Doral
Financial generally recovers funds advanced pursuant to these
arrangements within 30 days, it must absorb the cost of
funding the advances during the time the advance is outstanding.
For the year ended December 31, 2010, the monthly average
amount of funds advanced by Doral Financial under such servicing
agreements was approximately $48.9 million, compared to
$34.8 million for the corresponding period of 2009. To the
extent the mortgage loans underlying Doral Financials
servicing portfolio experience increased delinquencies, Doral
Financial would be required to dedicate additional cash
resources to comply with its obligation to advance funds as well
as incur additional administrative costs related to increases in
collection efforts. In the past, Doral Financial sold pools of
delinquent FHA and VA and conventional mortgage loans. Under
these arrangements, Doral Financial is required to advance the
scheduled payments whether or not collected from the underlying
borrower. While Doral Financial expects to recover the amounts
advanced through foreclosure or, in the case of FHA/VA loans,
under the applicable FHA and VA insurance and guarantee
programs, the amounts advanced tend to be greater than normal
arrangements because of the delinquent status of the loans. As
of December 31, 2010 and 2009, the outstanding principal
balance of such delinquent loans was $139.6 million and
$154.2 million, respectively, and the aggregate monthly
amount of funds advanced by Doral Financial was
$12.1 million and $13.9 million, respectively.
When Doral Financial sells mortgage loans to third parties,
which serve as a source of cash, it also generally makes
customary representations and warranties regarding the
characteristics of the loans sold. To the extent the loans do
not meet specified characteristics investors are generally
entitled to cause Doral Financial to repurchase such loans.
In addition to its servicing and warranty obligations, in the
past Doral Financials loan sale activities have included
the sale of non-conforming mortgage loans subject to recourse
arrangements that generally require Doral Financial to
repurchase or substitute the loans if the loans are 90 days
or more past due or otherwise in default up to a specified
amount or limited to a period of time after the sale. To the
extent the delinquency ratios of the loans sold subject to
recourse are greater than anticipated and Doral Financial is
required to repurchase more loans than anticipated, Doral
Financials liquidity requirements would increase. Please
refer to Off-Balance Sheet Activities below for
additional information on these arrangements.
In the past, Doral Financial sold or securitized mortgage loans
with FNMA on a partial or full recourse basis. Doral
Financials contractual agreements with FNMA authorize FNMA
to require Doral Financial to post collateral in the form of
cash or marketable securities to secure such recourse obligation
to the extent Doral Financial does not maintain an investment
grade rating. As of December 31, 2010, Doral
Financials maximum recourse exposure with FNMA amounted to
$572.7 million and required the posting of a minimum of
$44.0 million in collateral to secure recourse obligations.
While deemed unlikely by Doral Financial, FNMA has the
contractual right to request collateral for the full amount of
Doral Financials recourse obligations. Any such request by
FNMA would have a material adverse effect on Doral
Financials liquidity and business. Please refer to
Note 31 of the accompanying consolidated financial
statements and Off-Balance Sheet Activities below
for additional information on these arrangements.
105
Under Doral Financials repurchase lines of credit and
derivative contracts, Doral Financial is required to deposit
cash or qualifying securities to meet margin requirements. To
the extent that the value of securities previously pledged as
collateral declines because of changes in interest rates or
other market conditions, Doral Financial will be required to
deposit additional cash or securities to meet its margin
requirements, thereby adversely affecting its liquidity.
Assets
and Liabilities
Doral Financials total assets were $8.6 billion at
December 31, 2010, compared to $10.2 billion at 2009.
Total assets at December 31, 2010, when compared to 2009
were affected by a decrease of $1.3 billion in the
Companys investment securities portfolio that resulted
from sales of mortgage-backed and other securities during the
year as part of the execution of the Companys strategy to
de-lever the balance sheet while continuing to shorten the
duration of the investment portfolio. Also, during the second
quarter of 2010, in connection with its efforts to bid for the
assets and liabilities of certain failed banks, the Company sold
$378.0 million of non-agency CMOs whose future performance
was considered risky. The decrease in assets from securities
sales was partially offset by an increase in net loans of
$88.2 million. Loan growth is primarily the result of
acquiring commercial and industrial loan participation interests
in loan syndications led by major U.S. banks, offset in
part by decreases in the Puerto Rico commercial real estate and
construction loan portfolios from loan sales, charge-offs and
collections.
Total liabilities were $7.8 billion at December 31,
2010, compared to $9.4 billion at December 31, 2009.
Total liabilities as of December 31, 2010 were principally
affected by a decrease in borrowings of $1.6 billion and a
decrease in deposits of $24.5 million.
Capital
Doral Financial reported total equity of $862.2 million at
December 31, 2010, compared to $875.0 million at
December 31, 2009. The Company reported accumulated other
comprehensive income (net of tax) (OCI) of
$4.2 million as of December 31, 2010, compared to
accumulated other comprehensive loss (net of tax) of
$111.5 million as of December 31, 2009. This
improvement in OCI was due to the sale of the non-agency
securities in 2010 as the loss was recognized in the period of
the sale, and the remaining portfolio of securities reflects net
unrealized gains.
On March 20, 2009, the Board of Directors of Doral
Financial announced that it had suspended the declaration and
payment of all dividends on all of Doral Financials
outstanding series of cumulative and non-cumulative preferred
stock. The suspension of dividends was effective and commenced
with the dividends for the month of April 2009 for Doral
Financials three outstanding series of non-cumulative
preferred stock, and the dividends for the second quarter of
2009 for Doral Financials one outstanding series of
cumulative preferred stock.
On May 7, 2009, the Company announced the commencement of
an offer to exchange a stated amount of its shares of common
stock and a cash payment in exchange for a limited number of its
shares of outstanding preferred stock. The offer to exchange
commenced on May 7, 2009 and expired on June 8, 2009.
Each of the series of outstanding preferred stock of Doral
Financial were eligible to participate in the exchange offer,
subject to all terms and conditions set forth in the Tender
Offer Statement that was filed with the SEC on May 7, 2009,
as amended. The transaction was settled on June 11, 2009.
Pursuant to the terms of the offer to exchange, the Company
issued 2,619,710 shares of common stock and paid
$3.7 million in cash in exchange for 298,986 shares of
convertible preferred stock; issued 493,058 shares of
common stock and paid $0.5 million in cash in exchange for
228,173 shares of Series A preferred stock; issued
234,929 shares of common stock and paid $0.2 million
in cash in exchange for 217,339 shares of Series B
preferred stock; and issued 606,195 shares of common stock
and paid $0.6 million in cash in exchange for
560,798 shares of Series C preferred stock. Overall,
$105.6 million liquidation preference of the Companys
preferred stock were validly tendered, not withdrawn and
exchanged upon the terms and subject to the conditions set forth
in the offer to exchange and the related letter of transmittal,
106
which then represented 18.4% of the aggregate liquidation
preference of its preferred shares. An aggregate of
1,305,296 shares of preferred stock were retired upon
receipt. As a result of the exchange offer, Doral issued an
aggregate of 3,953,892 shares of common stock and paid an
aggregate of $5.0 million in cash premium payments. After
settlement of the exchange offer, 1,266,827 shares of
Series A preferred stock, 1,782,661 shares of
Series B preferred stock, 3,579,202 shares of
Series C preferred stock, and 1,081,014 shares of
convertible preferred stock remained outstanding.
The exchange by holders of shares of the non-cumulative
preferred stock for shares of common stock and payment of a cash
premium resulted in the extinguishment and retirement of such
shares of non-cumulative preferred stock and an issuance of
common stock. The carrying (liquidation) value of each share of
non-cumulative preferred stock retired and the fair value of the
consideration exchanged (cash plus fair value of common stock)
was treated as an increase to retained earnings and income
available to common shareholders for earnings per share purposes
upon the cancellation of shares of non-cumulative preferred
stock acquired by the Company pursuant to the offer to exchange,
in accordance with guidance of ASC 260, Earnings per
Share.
The exchange by holders of convertible preferred stock for
common stock and a cash premium was accounted for as an induced
conversion. Common stock and additional
paid-in-capital
was increased by the carrying (liquidation) value of the amount
of convertible preferred stock exchanged. The fair value of
common stock issued and the cash premium in excess of the fair
value of securities issuable pursuant to the original exchange
terms was treated as a reduction to retained earnings and net
income available to common shareholders for earnings per share
purposes.
As a result of the exchange offer, Doral issued an aggregate of
3,953,892 shares of common stock and paid an aggregate of
$5.0 million in cash premium payments and recognized a
non-cash credit to retained earnings (with a corresponding
charge to additional paid in capital) of $9.4 million that
was added to net income available to common shareholders in
calculating earnings per share. This exchange resulted in an
increase in common equity of $100.6 million and a decrease
in preferred stock of $105.6 million, resulting in an
increase in book value per common share of $1.63.
On November 20, 2009, the Company filed an amendment to its
Registration Statement on
Form S-4
announcing a new offer to exchange a number of properly tendered
and accepted shares of its Cumulative Convertible Preferred
Stock for newly issued shares of its common stock. The offer to
exchange expired on December 9, 2009 and was settled on
December 14, 2009. Pursuant to the terms of the offer to
exchange, the Company issued 4,300,301 shares of common
stock in exchange for 208,854 shares of Convertible
Preferred Stock. This exchange resulted in an increase in common
equity and a corresponding decrease in preferred stock of
$52.2 million, as well as a non-cash charge to retained
earnings of $18.0 million (with a corresponding credit to
additional paid in capital) that was deducted from net income
available to common shareholders in calculating earnings per
share.
The effect of the two preferred stock exchanges in 2009 was to
increase common equity by $152.8 million, increase book
value per common share by $2.47, decrease preferred equity by
$157.8 million and decrease net income available to common
shareholders by $8.6 million.
On March 15, 2010, the Company filed a Registration
Statement on
Form S-4
announcing its offer to exchange a number of properly tendered
and accepted shares of its (i) 4.75% Perpetual Cumulative
Convertible Preferred Stock (Convertible Preferred Stock),
(ii) 7.00% Noncumulative Monthly Income Preferred Stock,
Series A (Series A preferred stock),
(iii) 8.35% Noncumulative Monthly Income Preferred Stock,
Series B (Series B preferred stock), and
(iv) 7.25% Noncumulative Monthly Income Preferred Stock,
Series C (Series C preferred stock), for
newly issued shares of its common stock. The offer to exchange
expired on March 19, 2010 and was settled on March 24,
2010. Pursuant to the terms of the offer to exchange, the
Company issued 1,207,268 shares of common stock in exchange
for 58,634 shares of Convertible Preferred Stock. This
exchange resulted in an increase in common equity and a
corresponding decrease in preferred stock of $14.7 million,
as well as a non-cash charge to retained earnings of
$5.1 million (with a corresponding credit to additional
paid in capital) that was deducted from net income (loss)
available to common shareholders in calculating earnings (loss)
per share. Pursuant to the terms of the offer to exchange, the
Company issued 1,304,636 shares of common stock in exchange
for 314,661 shares of Series A preferred stock; issued
107
928,984 shares of common stock in exchange for
450,967 shares of Series B preferred stock; and issued
1,778,178 shares of common stock in exchange for
863,197 shares of Series C preferred stock. Overall,
$63.3 million liquidation preference of the Companys
preferred stock were validly tendered, not withdrawn, and
exchanged upon the terms and subject to the conditions set forth
in the offer to exchange. An aggregate of 1,689,459 shares
of preferred stock were retired upon receipt. As a result of the
exchange offer, Doral Financial issued an aggregate of
5,219,066 shares of common stock. After settlement of the
exchange offer, 950,166 shares of Series A preferred
stock, 1,331,694 shares of Series B preferred stock,
2,716,005 shares of Series C preferred stock, and
813,526 shares of convertible preferred stock remained
outstanding.
On April 19, 2010, the Company announced that it had
entered into a definitive Stock Purchase Agreement with various
purchasers, including certain direct and indirect investors in
Doral Holdings, the Companys parent company, pursuant to a
private placement of Mandatorily Convertible Non-Cumulative
Non-Voting Preferred Stock, $1.00 par value and $1,000
liquidation preference per share. In the aggregate, as part of
the private placement, the Company raised $180.0 million of
new equity capital and issued 285,002 shares of Mandatorily
Convertible Non-Cumulative Non-Voting Preferred Stock for an
effective sale price of $3.00 per common share equivalent.
In connection with the Stock Purchase Agreement, the Company
also entered into a Cooperation Agreement with Doral Holdings,
Doral Holdings L.P. and Doral GP Ltd. pursuant to which Doral
Holdings made certain commitments including the commitment to
vote in favor of converting the Mandatorily Convertible Non
Cumulative Preferred Stock to common stock and registering the
shares issued pursuant to this capital raise and other
previously issued unregistered shares of common stock and to
dissolve Doral Holdings pursuant to certain terms and conditions.
During the third quarter of 2010, the Company converted
285,002 shares of Mandatorily Convertible Non-Voting
Preferred Stock into 60,000,386 shares of common stock. In
addition, during the third quarter of 2010, Doral Holdings LLC,
previously the controlling shareholder of Doral Financial,
distributed its shares in Doral Financial to its investors and
dissolved. The Company is no longer a controlled company as a
result of this conversion and the dissolution of Doral Holdings
LLC.
Off-balance
sheet activities
In the ordinary course of the business, Doral Financial makes
certain representations and warranties to purchasers and
insurers of mortgage loans at the time of the loan sales to
third parties regarding the characteristics of the loans sold,
and in certain circumstances, such as in the event of early or
first payment default. To the extent the loans do not meet
specified characteristics, if there is a breach of contract of a
representation or warranty or if there is an early payment
default, Doral Financial may be required to repurchase the
mortgage loan and bear any subsequent loss related to the loan.
For the years ended December 31, 2010 and 2009, repurchases
amounted to approximately $1.0 million and
$13.7 million, respectively. These repurchases were at fair
value and no significant losses were incurred.
In the past, in relation to its asset securitization and loan
sale activity, the Company sold pools of delinquent FHA, VA and
conventional mortgage loans on a servicing retained basis.
Following these transactions, the loans are not reflected on
Doral Financials Consolidated Statements of Financial
Condition. Under these arrangements, as part of its servicing
responsibilities, Doral Financial is required to advance the
scheduled payments of principal and interest regardless of
whether they are collected from the underlying borrower. While
Doral Financial expects to recover a significant portion of the
amounts advanced through foreclosure or, in the case of FHA and
VA loans, under the applicable FHA and VA insurance and
guarantee programs, the amounts advanced tend to be greater than
normal arrangements because of delinquent status of the loans.
As of December 31, 2010 and 2009, the outstanding principal
balance of such delinquent loans amounted to $139.6 million
and $154.2 million, respectively.
In addition, Doral Financials loan sale activities in the
past included certain mortgage loan sale and securitization
transactions subject to recourse arrangements that require Doral
Financial to repurchase or substitute the loan if the loans are
90-120 days
or more past due or otherwise in default. The Company is also
required to pay interest on delinquent loans in the form of
servicing advances. Under certain of these
108
arrangements, the recourse obligation is terminated upon
compliance with certain conditions, which generally involve:
(i) the lapse of time (normally from four to seven years),
(ii) the lapse of time combined with certain other
conditions such as the unpaid principal balance of the mortgage
loans falling below a specific percentage (normally less than
80%) of the appraised value of the underlying property or
(iii) the amount of loans repurchased pursuant to recourse
provisions reaching a specific percentage of the original
principal amount of loans sold (generally from 10% to 15%). As
of December 31, 2010 and 2009, the Companys records
reflected that the outstanding principal balance of loans sold
subject to full or partial recourse was $0.8 billion and
$0.9 billion, respectively. As of such dates, the
Companys records also reflected that the maximum
contractual exposure to Doral Financial if it were required to
repurchase all loans subject to recourse was $0.7 billion
and $0.8 billion, respectively. Doral Financials
contingent obligation with respect to such recourse provision is
not reflected on Doral Financials consolidated financial
statements, except for a liability of estimated losses from such
recourse agreements, which is included as part of Accrued
expenses and other liabilities. The Company discontinued
the practice of selling loans with recourse obligations in 2005.
Doral Financials current strategy is to sell loans on a
non-recourse basis, except recourse for certain early payment
defaults. For the years ended December 31, 2010 and 2009,
the Company repurchased at fair value $28.6 million and
$27.3 million, respectively, pursuant to recourse
provisions.
The Company estimates its liability for expected losses from
recourse obligations based on historical losses from foreclosure
and disposition of mortgage loans adjusted for expectations of
changes in portfolio behavior and market environment.
Doral Financial reserves for its exposure to recourse amounted
to $10.3 million and $9.4 million and the reserve for
other credit-enhanced transactions explained above amounted
$9.0 million and $8.8 million as of December 31,
2010 and 2009, respectively. For additional information
regarding sales of delinquent loans please refer to
Liquidity and Capital Resources above. The following
table shows the changes in the Companys liability of
estimated losses from recourse agreements, included in the
Statement of Financial Condition, for each of the periods shown:
Table
O Recourse Estimated Losses
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
9,440
|
|
|
$
|
8,849
|
|
Net charge-offs / termination
|
|
|
(3,115
|
)
|
|
|
(3,218
|
)
|
Provision for recourse liability
|
|
|
3,939
|
|
|
|
3,809
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
10,264
|
|
|
$
|
9,440
|
|
|
|
|
|
|
|
|
|
|
The Company enters into financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
may include commitments to extend credit and sell loans. These
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
statement of financial position.
The contractual amounts of these instruments reflect the extent
of involvement the Company has in particular classes of
financial instruments. The Companys exposure to credit
losses in the event of non-performance by the other party to the
financial instrument for commitments to extend credit or for
forward sales is represented by the contractual amount of these
instruments. Doral Financial uses the same credit policies in
making these commitments as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a
customer as long as the conditions established in the contract
are met. Commitments generally have fixed expiration dates or
other termination clauses. Generally, the Company does not enter
into interest rate lock agreements with borrowers.
The Company purchases mortgage loans and simultaneously enters
into a sale and securitization agreement with the same
counterparty during the period between trade and settlement date.
109
A letter of credit is an arrangement that represents an
obligation on the part of the Company to a designated third
party, contingent upon the failure of the Companys
customer to perform under the terms of the underlying contract
with a third party. The amount of the letter of credit
represents the maximum amount of credit risk in the event of
non-performance by these customers. Under the terms of a letter
of credit, an obligation arises only when the underlying event
fails to occur as intended, and the obligation is generally up
to a stipulated amount and with specified terms and conditions.
Letters of credit are used by the customer as a credit
enhancement and typically expire without having been drawn upon.
The Company evaluates each customers credit worthiness on
a
case-by-case
basis. The amount of collateral, if deemed necessary by the
Company upon extension of credit, is based on managements
credit evaluation of the counterparty.
Contractual
obligations and other commercial commitments
The tables below summarize Doral Financials contractual
obligations, on the basis of contractual maturity or first call
date, whichever is earlier, and other commercial commitments as
of December 31, 2010.
Table
P Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After 5
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Deposits
|
|
$
|
4,618,475
|
|
|
$
|
2,943,541
|
|
|
$
|
980,550
|
|
|
$
|
459,388
|
|
|
$
|
234,996
|
|
Repurchase
agreements(1)(2)
|
|
|
1,176,800
|
|
|
|
100,000
|
|
|
|
1,017,300
|
|
|
|
59,500
|
|
|
|
|
|
Advances from
FHLB(1)(2)
|
|
|
901,420
|
|
|
|
503,420
|
|
|
|
398,000
|
|
|
|
|
|
|
|
|
|
Loans
payable(3)
|
|
|
304,035
|
|
|
|
32,863
|
|
|
|
62,654
|
|
|
|
51,943
|
|
|
|
156,575
|
|
Notes payable
|
|
|
513,958
|
|
|
|
7,591
|
|
|
|
46,849
|
|
|
|
3,225
|
|
|
|
456,293
|
|
Other liabilities
|
|
|
117,377
|
|
|
|
117,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases
|
|
|
53,889
|
|
|
|
6,503
|
|
|
|
11,913
|
|
|
|
10,133
|
|
|
|
25,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
7,685,954
|
|
|
$
|
3,711,295
|
|
|
$
|
2,517,266
|
|
|
$
|
584,189
|
|
|
$
|
873,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts included in the table above
do not include interest.
|
|
(2) |
|
Includes $100.0 million of a
repurchase agreement with a fixed rate of 2.98% and
$80.0 million of advances from FHLB with a fixed rate of
5.04%, which the lenders have the right to call before
their contractual maturities. The repurchase agreement and the
advances from FHLB are included in the less-than-one year
category in the above table but have actual contractual
maturities ranging from March 2012 to February 2014. They are
included on the first call date basis because increases in
interest rates over the average rate of the Companys
borrowings may induce the lenders to exercise their right.
|
|
(3) |
|
Consist of secured borrowings with
local financial institutions, collateralized by residential
mortgage loans at variable interest rates tied to
3-month
LIBOR. These loans are not subject to scheduled payments, but
are required to be repaid according to the regular amortization
and prepayments of the underlying mortgage loans. For purposes
of the table above, the Company used a CPR of 9.0% to estimate
the repayments.
|
110
Table
Q Other Commercial Commitments
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Committed
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Commitments to extend credit
|
|
$
|
139,791
|
|
|
$
|
94,781
|
|
|
$
|
13,685
|
|
|
$
|
4,125
|
|
|
$
|
27,200
|
|
Commitments to sell loans
|
|
|
64,751
|
|
|
|
64,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial standby letters of credit
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum contractual recourse exposure
|
|
|
688,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
688,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
893,220
|
|
|
$
|
159,557
|
|
|
$
|
13,685
|
|
|
$
|
4,125
|
|
|
$
|
715,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Off-Balance Sheet
Activities above for additional information regarding
other commercial commitments of the Company.
|
RISK
MANAGEMENT
Doral Financials business is subject to four broad
categories of risks: interest rate risk, credit risk,
operational risk and liquidity risk. Doral Financial has
specific policies and procedures which have been designed to
identify, measure and manage risks to which the Company is
exposed.
Interest
Rate and Market Risk Management
Interest rate risk refers to the risk that changes in interest
rates may adversely affect the value of Doral Financials
assets and liabilities and its net interest income.
Doral Financials risk management policies are designed
with the goal of maximizing shareholder value with emphasis on
stability of net interest income and market value of equity.
These policies are also targeted to remain well capitalized,
preserve adequate liquidity, and meet various regulatory
requirements. The objectives of Doral Financials risk
management policies are pursued within the limits established by
the Board of Directors of the Company. The Board of Directors
has delegated the oversight of interest rate and liquidity risks
to its Risk Policy Committee.
Doral Financials Asset/Liability Management Committee
(ALCO) has been created under the authority of the
Board of Directors to manage the Companys interest rate,
market value of equity and liquidity risk. The ALCO is primarily
responsible for ensuring that Doral Financial operates within
the Companys established asset/liability management policy
guidelines and procedures. The ALCO reports directly to the Risk
Policy Committee of the Board of Directors.
The ALCO is responsible for:
|
|
|
|
|
developing the Companys asset/liability management and
liquidity strategy;
|
|
|
|
establishing and monitoring of interest rate, pricing and
liquidity risk limits to ensure compliance with the
Companys policies;
|
|
|
|
overseeing product pricing and volume objectives for banking and
treasury activities; and
|
|
|
|
overseeing the maintenance of management information systems
that supply relevant information for the ALCO to fulfill its
responsibilities as it relates to asset/liability management.
|
Risk
Identification Measurement and Control
Doral Financial manages interest rate exposure related to its
assets and liabilities on a consolidated basis. Changes in
interest rates can affect the volume of Doral Financials
mortgage loan originations, the net interest income earned on
Doral Financials portfolio of loans and securities, the
amount of gain on the sale of loans and the value of Doral
Financials servicing assets, loans, investment securities
and other retained interests.
111
As part of its interest rate risk management practices, Doral
Financial has implemented measures to identify the interest rate
risk associated with the Companys assets, liabilities and
off-balance sheet activities. The Company has also developed
policies and procedures to control and manage these risks and
continues to improve its interest rate risk management
practices. The Company currently manages its interest rate risk
by principally focusing on the following metrics: (i) net
interest income sensitivity; (ii) market value of equity
sensitivity; (iii) effective duration of equity; and
(iv) maturity/repricing gaps. Doral Financials
Asset/Liability Management Policies provide a limit structure
based on these four metrics. A single limit is defined for
effective duration of equity. Net interest income sensitivity
limits are set for instantaneous parallel rate shifts. Specific
parallel rate shifts defined for net interest income and market
value equity limits are -300 bps, -200 bps,
-100 bps, +100 bps, +200 bps, and +300 bps.
Net interest income sensitivity limits are established for
different time horizons. Additional limits are defined for
maturity/repricing mismatches, however management continues to
emphasize risk management and controls based on net interest
income and market value of equity sensitivity as these measures
incorporate the effect of existing asset/liability mismatches.
The explanations below provide a brief description of the
metrics used by the Company and the methodologies/assumptions
employed in the estimation of these metrics:
|
|
|
|
|
Net Interest Income Sensitivity. Refers to the
relationship between market interest rates and net interest
income due to the maturity mismatches and repricing
characteristics of Doral Financials interest-earning
assets, interest-bearing liabilities and off-balance sheet
positions. To measure net interest income exposure to changes in
market interest rates, the Company uses earnings simulation
techniques. These simulation techniques allow for the
forecasting of net interest income and expense under various
rate scenarios for the measurement of interest rate risk
exposures of Doral Financial. Primary scenarios include
instantaneous parallel and non-parallel rate shocks. Net
interest income sensitivity is measured for time horizons
ranging from twelve to sixty months and as such, serves as a
measure of short to medium term earnings risk. The basic
underlying assumptions used in net interest income simulations
are: (i) the Company maintains a static balance sheet;
(ii) full reinvestment of funds in similar
product/instruments with similar maturity and repricing
characteristics; (iii) spread assumed constant;
(iv) prepayment rates on mortgages and mortgage related
securities are modeled using multi-factor prepayment model;
(v) non-maturity deposit decay and price elasticity
assumptions are incorporated, and (vi) evaluation of
embedded options is also taken into consideration. To complement
and broaden the analysis of earnings at risk the Company also
performs earning simulations for longer time horizons.
|
|
|
|
Market Value of Equity Sensitivity. Used to
capture and measure the risks associated with longer-term
maturity and re-pricing mismatches. Doral Financial uses value
simulation techniques for all financial components of the
Statement of Financial Condition. Valuation techniques include
static cash flows analyses, stochastic models to qualify value
of embedded options and prepayment modeling. To complement and
broaden the risk analysis, the Company uses duration and
convexity analysis to measure the sensitivity of the market
value of equity to changes in interest rates. Duration measures
the linear change in market value of equity caused by changes in
interest rates, while, convexity measures the asymmetric changes
in market value of equity caused by changes in interest rates
due to the presence of options. The analysis of duration and
convexity combined provide a better understanding of the
sensitivity of the market value of equity to changes in interest
rates.
|
|
|
|
Effective Duration of Equity. The effective
duration of equity is a broad measure of the impact of interest
rate changes on Doral Financials economic capital. The
measure summarizes the net sensitivity of assets and
liabilities, adjusted for off-balance sheet positions.
|
Interest
Rate Risk Management Strategy
Doral Financials current interest rate management strategy
is implemented by the ALCO and is focused on reducing the
volatility of the Companys earnings as a result of changes
in interest rates and to protect the market value of equity.
While the current strategy will also use a combination of
derivatives and balance sheet management, more emphasis is
placed on balance sheet management.
112
Net Interest Income Risk. In order to protect
net interest income against interest rate risk, the ALCO employs
a number of tactics which are evaluated and adjusted in relation
to prevailing market conditions. Internal balance sheet
management practices are designed to reduce the re-pricing gaps
of the Companys assets and liabilities. However, the
Company will use derivatives, mainly interest rate swaps and
interest rate caps, as part of its interest rate risk management
activities. Interest rate swaps represent a mutual agreement to
exchange interest rate payments; one party pays fixed rate and
the other pays a floating rate. For net interest income
protection, Doral Financial typically enters into a fixed rate
payer-float receiver swaps to eliminate the variability of cash
flows associated with the floating rate debt obligations.
Market Value of Equity. Due to the composition
of Doral Financials assets and liabilities, the Company
has earnings exposure to rising interest rates. The Company
measures the market value of all rate sensitive assets,
liabilities and off-balance sheet positions; and the difference
between assets and liabilities, adjusted by off-balance sheet
positions, is termed market value of equity. The Company
measures how the market value of equity fluctuates with
different rate scenarios to measure risk exposure of economic
capital or market value of equity. Management uses duration
matching strategies to manage the fluctuations of market value
of equity within the long-term targets established by the Board
of Directors of the Company.
Duration Risk. Duration is a measure of the
impact (in magnitude and direction) of changes on interest rates
in the economic value of financial instruments. In order to
bring duration measures within the policy thresholds established
by the Company, management may use a combination of internal
liability management techniques and derivative instruments.
Derivatives such as interest rate swaps, treasury futures,
Eurodollar futures and forward contracts may be entered into as
part of the Companys risk management.
Convexity Risk. Convexity is a measure of how
much duration changes as interest rates change. For Doral
Financial, convexity risk primarily results from mortgage
prepayment risk. As part of managing convexity risk management
may use a combination of internal balance sheet management
instruments or derivatives, such as swaptions, caps, floors, put
or call options on interest rate indexes or related fixed income
underlying securities (i.e. Eurodollar, treasury notes).
Hedging related to Mortgage Banking
Activities. As part of Doral Financials
risk management of mortgage banking activities, such as
secondary market and servicing assets, the Company enters into
forward agreements to buy or sell MBS to protect the Company
against changes in interest rates that may impact the economic
value of servicing assets or the pricing of marketable loan
production.
Hedging the various sources of interest rate risks related to
mortgage banking activities is a complex process that requires
sophisticated modeling, continuous monitoring and active
management. While Doral Financial balances and manages the
various aspects relating to mortgage activities, there are
potential risks to earnings associated to them. The following
bullets summarize some of these potential risks:
|
|
|
|
|
The valuation of MSRs are recorded in earnings immediately
within the accounting period in which the changes in value
occur, whereas the impact of changes in interest rates are
reflected in originations with a time lag and effects on
servicing fee income occurs over time. Thus, even when mortgage
activities could be protected from adverse changes in interest
rates over a period of time (on a cumulative basis) they may
display large variations in income from period to period.
|
|
|
|
The degree to which the natural hedge associated to
mortgage banking (i.e. originating and servicing) offsets
changes in servicing asset valuations may be imperfect, as it
may vary over time.
|
|
|
|
Origination volumes, the valuation of servicing assets, economic
hedging activities and other related costs are impacted by
multiple factors, which include, changes in the mix of new
business, changes in the term structure of interest rates,
changes in mortgage spreads (mortgage basis) to other rate
benchmarks, and rate volatility, among others. Interrelation of
all these factors is hard to predict and, as such, the ability
to perfectly hedge their effects is limited.
|
113
Doral
Financials Risk Profile
Doral Financials goal is to manage market and interest
rate risk within targeted levels established and periodically
reviewed by the Board of Directors. Interest rate sensitivity
represents the relationship between market interet rates and the
net interest income due to existing maturity and repricing
imbalances between interest-earning assets and interest-bearing
liabilities. Interest rate sensitivity is also defined as the
relationship between market interest rates and the economic
value of equity (referred to market value of equity or
MVE). The interest risk profile of the Company is
measured in the context of net interest income, market value of
equity, maturity/repricing gaps and effective duration of equity.
The risk profile of the Company is managed by use of natural
offsets generated by the different components of the balance
sheet as a result of the normal course of business operations
and through active hedging activities by means of both
on-balance sheet and off-balance sheet transactions (i.e.
derivative instruments) to achieve targeted risk levels.
The Companys interest rate risk exposure may be asymmetric
due to the presence of embedded options in products and
transactions which allow clients and counterparties to modify
the maturity of loans, securities, deposits
and/or
borrowings. Examples of embedded options include the ability of
a mortgagee to prepay
his/her
mortgage or a counterparty exercising its puttable option on a
structured funding transaction. Assets and liabilities with
embedded options are evaluated taking into consideration the
presence of options to estimate their economic price elasticity
and also the effect of options in assessing maturity/repricing
characteristics of the Companys balance sheet. The
embedded optionality is primarily managed by purchasing or
selling options or by other active risk management strategies
involving the use of derivatives, including the forward sale of
MBS.
The Company measures interest rate risk and has specific targets
for various market rate scenarios. General assumptions for the
measurement of interest income sensitivity are: (i) rate
shifts are parallel and instantaneous throughout all benchmark
yield curves and rate indexes; (ii) behavioral assumptions
are driven by simulated market rates under each scenario (i.e.
prepayments, repricing of certain liabilities);
(iii) static balance sheet assumed with cash flows
reinvested at forecasted market rates (i.e. forward curve,
static spreads) in similar instruments. For net interest income
the Company monitors exposures and has established limits for
time horizons ranging from one up to three years, although for
risk management purposes earning exposures are forecasted for
longer time horizons.
The tables below show the risk profile of Doral Financial
(taking into account the derivatives set forth below) under
100-basis point parallel and instantaneous increases or
decreases of interest rates, as of December 31, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
Market Value of
|
|
Net Interest
|
As of December 31, 2010
|
|
Equity Risk
|
|
Income
Risk(1)
|
|
+ 100 BPS
|
|
|
(8.5
|
)%
|
|
|
(0.9
|
)%
|
100 BPS
|
|
|
4.7
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of
|
|
Net Interest
|
As of December 31, 2009
|
|
Equity Risk
|
|
Income
Risk(1)
|
|
+ 100 BPS
|
|
|
(9.4
|
)%
|
|
|
(3.4
|
)%
|
100 BPS
|
|
|
(2.4
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
(1)
|
|
Based on
12-month
forward change in net interest income.
|
The net interest income (NII) sensitivity measure to
a one hundred (100) basis point parallel and instantaneous
rate increase, based on a
12-month
horizon, changed from (3.4)% to (0.9)% when comparing
December 31, 2009 to 2010. The effect is driven by the
continued efforts to reduce maturity/repricing mismatches by
extending the maturity in certain wholesale liabilities, sale of
investments and the growth of variable rate syndicated loans.
114
As of December 31, 2010 the market value of equity
(MVE) showed lower sensitivity to rising interest
rates when compared to December 31, 2009. MVE sensitivity
to an increase of one hundred (100) basis points in market
rates changed from (9.4)% to (8.5)%. The Company has been
actively managing the balance sheet to maintain the interest
rate risk measures in line with targets mainly by the use of
on-balance sheet strategies. The sale of certain investment
securities, the capital raise, the continued focus on extending
maturity of wholesale funding, issuance of callable funding and
growth in variable rate assets, have all contributed to reducing
MVE exposure.
The following table shows the Companys investment
portfolio sensitivity to changes in interest rates. The table
below assumes parallel and instantaneous increases and decreases
of interest rates as of December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Change in Fair Value of Available for Sale Securities
|
|
Change in Interest Rates (Basis Points)
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
+200
|
|
$
|
(108,474
|
)
|
|
$
|
(164,043
|
)
|
+100
|
|
|
(47,474
|
)
|
|
|
(71,675
|
)
|
Base
|
|
|
|
|
|
|
|
|
−100
|
|
|
21,917
|
|
|
|
51,165
|
|
−200
|
|
|
34,416
|
|
|
|
103,334
|
|
Derivatives. As described above, Doral
Financial uses derivatives to manage its exposure to interest
rate risk caused by changes in interest rates. Derivatives are
generally either privately negotiated over-the-counter
(OTC) contracts or standard contracts transacted
through regulated exchanges. OTC contracts generally consist of
swaps, caps and collars, forwards and options. Exchange-traded
derivatives include futures and options.
The Company is subject to various interest rate cap agreements
to manage its interest rate exposure. Interest rate cap
agreements generally involve purchase of out of the money caps
to protect the Company from larger rate moves and to provide the
Company with positive convexity. Non-performance by the
counterparty exposes Doral Financial to interest rate risk. The
following table summarizes the Companys interest rate caps
outstanding at December 31, 2010.
Table
R Interest Rate Caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Amount
|
|
|
Maturity Date
|
|
Entitled Payment Conditions
|
|
Premium Paid
|
|
|
Value
|
|
(Dollars in thousands)
|
|
|
$
|
15,000
|
|
|
September 25, 2011
|
|
1-month LIBOR at 5.50%
|
|
$
|
134
|
|
|
$
|
|
|
|
15,000
|
|
|
September 25, 2012
|
|
1-month LIBOR at 6.00%
|
|
|
143
|
|
|
|
1
|
|
|
15,000
|
|
|
October 30, 2011
|
|
1-month LIBOR at 5.00%
|
|
|
172
|
|
|
|
|
|
|
15,000
|
|
|
October 30, 2012
|
|
1-month LIBOR at 5.50%
|
|
|
182
|
|
|
|
1
|
|
|
50,000
|
|
|
November 5, 2012
|
|
1-month LIBOR at 6.50%
|
|
|
228
|
|
|
|
3
|
|
|
50,000
|
|
|
November 5, 2012
|
|
1-month LIBOR at 5.50%
|
|
|
545
|
|
|
|
5
|
|
|
50,000
|
|
|
November 5, 2012
|
|
1-month LIBOR at 6.00%
|
|
|
350
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,000
|
|
|
|
|
|
|
$
|
1,754
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to various interest rate swap agreements
to manage its interest rate exposure. Interest rate swap
agreements generally involve the exchange of fixed and floating
rate interest payment obligations without the exchange of the
underlying principal. The Company principally uses interest rate
swaps to convert floating rate liabilities to fixed rate by
entering into pay fixed receive floating interest rate swaps.
115
Non-performance by the counterparty exposes Doral Financial to
interest rate risk. The following table summarizes the
Companys interest rate swaps outstanding at
December 31, 2010.
Table
S Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
Pay
|
|
|
|
|
Fair
|
|
Amount
|
|
|
Maturity Date
|
|
Fixed Rate
|
|
|
Receive Floating Rate
|
|
Value
|
|
(Dollars in thousands)
|
|
|
Cash Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
$
|
3,000
|
|
|
September 25, 2011
|
|
|
4.69
|
%
|
|
1-month LIBOR plus 0.02%
|
|
$
|
(99
|
)
|
|
6,000
|
|
|
October 30, 2011
|
|
|
4.51
|
%
|
|
1-month LIBOR plus 0.05%
|
|
|
(210
|
)
|
|
5,000
|
|
|
October 30, 2012
|
|
|
4.62
|
%
|
|
1-month LIBOR plus 0.05%
|
|
|
(363
|
)
|
|
15,000
|
|
|
November 28, 2011
|
|
|
4.55
|
%
|
|
1-month LIBOR plus 0.02%
|
|
|
(586
|
)
|
|
45,000
|
|
|
November 28, 2012
|
|
|
4.62
|
%
|
|
1-month LIBOR plus 0.02%
|
|
|
(3,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,000
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Derivatives. Doral Financial uses
derivatives to manage its market risk and generally accounts for
such instruments on a mark-to-market basis with gains or losses
charged to current operations as part of net gain (loss) on
trading activities as they occur. Contracts with positive fair
values are recorded as assets and contracts with negative fair
values as liabilities, after the application of netting
arrangements. Fair values of derivatives such as interest rate
futures contracts or options are determined by reference to
market prices. Fair values for derivatives purchased in the
over-the-counter market are determined by valuation models and
validated with prices provided by external sources. The notional
amounts of freestanding derivatives totaled $310.0 million
and $480.0 million as of December 31, 2010 and 2009,
respectively. Notional amounts indicate the volume of derivative
activity, but do not represent Doral Financials exposure
to market or credit risk. The decrease in the notional amount of
freestanding derivatives with respect to December 31, 2009
was due mainly to the rebalancing of economic hedges related to
management of risks associated to servicing assets and secondary
marketing activities.
Derivatives Hedge
Accounting. Doral Financial seeks to designate
derivatives under hedge accounting guidelines when it can
clearly identify an asset or liability that can be hedged
pursuant to the strict hedge accounting guidelines. The notional
amount of swaps treated under hedge accounting totaled
$74.0 million and $305.0 million as of
December 31, 2010 and 2009, respectively. The Company
typically uses interest rate swaps to convert floating rate
advances from FHLB to fixed rate by entering into pay fixed
receive floating swaps. In these cases, the Company matches all
of the terms in the advance from FHLB to the floating leg of the
interest rate swap. Since both transactions are symmetrically
opposite the effectiveness of the hedging relationship is high.
116
The following table summarizes the total derivatives positions
at December 31, 2010 and 2009, respectively, and their
different designations.
Table
T Derivative positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
74,000
|
|
|
$
|
(4,677
|
)
|
|
$
|
305,000
|
|
|
$
|
(10,691
|
)
|
|
|
|
|
Other Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
|
210,000
|
|
|
|
13
|
|
|
|
270,000
|
|
|
|
777
|
|
|
|
|
|
Forward contracts
|
|
|
100,000
|
|
|
|
(741
|
)
|
|
|
210,000
|
|
|
|
(1,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310,000
|
|
|
|
(728
|
)
|
|
|
480,000
|
|
|
|
(795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
384,000
|
|
|
$
|
(5,405
|
)
|
|
$
|
785,000
|
|
|
$
|
(11,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the fair values of Doral
Financials freestanding derivatives as well as the source
of the fair values.
Table
U Fair value reconciliation
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
|
(In thousands)
|
|
|
Fair value of contracts outstanding at the beginning of the
period
|
|
$
|
(795
|
)
|
Changes in fair values during the period
|
|
|
67
|
|
|
|
|
|
|
Fair value of contracts outstanding at the end of the period
|
|
$
|
(728
|
)
|
|
|
|
|
|
Table
V Sources of fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
Maturity in
|
|
|
Total
|
|
|
|
less than
|
|
|
Maturity
|
|
|
Maturity
|
|
|
excess of
|
|
|
Fair
|
|
As of December 31, 2010
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Prices actively quoted
|
|
$
|
(741
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(741
|
)
|
Prices provided by internal sources
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(741
|
)
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The use of derivatives involves market and credit risk. The
market risk of derivatives arises principally from the potential
for changes in the value of derivative contracts based on
changes in interest rates.
The credit risk of OTC derivatives arises from the potential of
counterparties to default on their contractual obligations. To
manage this credit risk, Doral Financial deals with
counterparties of good credit standing, enters into master
netting agreements whenever possible and monitors market on
pledged collateral to minimize credit exposure. Master netting
agreements incorporate rights of set-off that provide for the
net settlement of contracts with the same counterparty in the
event of default. As a result of the ratings downgrades
affecting Doral Financial, counterparties to derivative
contracts used for interest rate risk management purposes could
increase the applicable margin requirements under such
contracts, or could require the Company to terminate such
agreements.
117
Table
W Derivative counterparty credit
exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
|
|
|
Total Exposure
|
|
|
Negative
|
|
|
Total
|
|
|
Maturity
|
|
Rating(1)
|
|
Counterparties(2)
|
|
|
Notional
|
|
|
at Fair
Value(3)
|
|
|
Fair Values
|
|
|
Fair Value
|
|
|
in Years)
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA-
|
|
|
1
|
|
|
$
|
180,000
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
12
|
|
|
|
1.76
|
|
A+
|
|
|
1
|
|
|
|
104,000
|
|
|
|
1
|
|
|
|
(4,677
|
)
|
|
|
(4,676
|
)
|
|
|
1.47
|
|
A
|
|
|
2
|
|
|
|
100,000
|
|
|
|
95
|
|
|
|
(836
|
)
|
|
|
(741
|
)
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
4
|
|
|
$
|
384,000
|
|
|
$
|
108
|
|
|
$
|
(5,513
|
)
|
|
$
|
(5,405
|
)
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA-
|
|
|
1
|
|
|
$
|
215,000
|
|
|
$
|
719
|
|
|
$
|
|
|
|
$
|
719
|
|
|
|
2.45
|
|
A+
|
|
|
1
|
|
|
|
360,000
|
|
|
|
58
|
|
|
|
(10,691
|
)
|
|
|
(10,633
|
)
|
|
|
1.12
|
|
A
|
|
|
2
|
|
|
|
210,000
|
|
|
|
553
|
|
|
|
(2,125
|
)
|
|
|
(1,572
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
4
|
|
|
$
|
785,000
|
|
|
$
|
1,330
|
|
|
$
|
(12,816
|
)
|
|
$
|
(11,486
|
)
|
|
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the S&P Long-Term
Issuer Credit Ratings.
|
|
(2) |
|
Based on legal entities. Affiliated
legal entities are reported separately.
|
|
(3) |
|
For each counterparty, this amount
includes derivatives with a positive fair value including the
related accrued interest receivable/payable (net.)
|
Credit
Risk
Doral Financial is subject to credit risk, particularly with
respect to its investment securities and loans receivable. For a
discussion of credit risk on investment securities refer to
Note 8 of the accompanying financial statements.
Loans receivable are loans that Doral Financial holds for
investment and, therefore, the Company is at risk for the term
of the loans. Because most of Doral Financials loans are
made to borrowers located in Puerto Rico and secured by
properties located in Puerto Rico, the Company is subject to
credit risk tied to adverse economic, political or business
developments and natural hazards, such as hurricanes, that may
affect Puerto Rico. The Puerto Rico economy has been in a
recession since 2006. This has affected borrowers
disposable incomes and their ability to make payments when due,
causing an increase in delinquency and foreclosure rates. The
Company believes that these conditions will continue to affect
its credit quality. In addition, there is evidence that property
values have declined from their peak. This has reduced
borrowers capacity to refinance and increased the exposure
to loss upon default. This decline in prices and increases in
expected defaults are incorporated into the loss rates used for
calculating the Companys allowance for loan and lease
losses. Loans collateralized by land are under regulatory review
in the U.S. and its territories. As of December 31,
2010 land collateralized loans totalled to $143.6 million.
In addition, Doral has outstanding a few construction loans with
remnant land totaling $25.3 million. Should our estimated
land value change significantly, it may be necessary to record
additional provisions for loan losses or charge-offs that may be
material to the Companys Financial Statements. The Company
also has a growing portfolio of commercial, construction and
syndicated loans, geographically dominated by U.S. loans,
and performance of such loans is subject to the strength of the
U.S. economy.
With respect to mortgage loans originated for sale as part of
its mortgage banking business, Doral Financial is generally at
risk for any mortgage loan default from the time it originates
the mortgage loan until the time it sells the loan or packages
it into an MBS. For residential mortgage loans that are retained
as a loan investment, Doral retains the credit risk from the
time the loan is originated until the loan is paid. With respect
to FHA loans, Doral Financial is insured as to principal by the
HUD against foreclosure loss. VA loans are guaranteed within a
range of 25% to 50% of the principal amount of the loan subject
to a maximum, ranging from $22,500 to $50,750, in addition to
the mortgage collateral. Prior to 2006, the Company sold loans
on a
118
recourse basis as part of the ordinary course of business. As
part of such transactions, the Company committed to make
payments to remedy loan defaults or to repurchase defaulted
loans. Refer to Off-Balance Sheet Activities above
for additional information regarding recourse obligations. In
mid 2005, the Company discontinued the practice of selling
mortgage loans with recourse, except for recourse related to
early payment defaults.
The residential mortgage portfolio includes loans that, at some
point were repurchased pursuant to recourse obligations and, as
a result, have a higher credit risk. Repurchases of delinquent
loans from recourse obligations for the year ended
December 31, 2010 amounted to $28.6 million and
resulted in a loss of $3.9 million. When repurchased from
recourse obligations, loans are recorded at their market value,
which includes a discount for poor credit performance.
Doral Financial provided land acquisition, development, and
construction financing to developers of residential housing
projects and, as consequence, has credit risk exposure to this
sector. Construction loans extended to developers are typically
adjustable rate loans, indexed to the prime interest rate with
terms ranging generally from 12 to 36 months. Doral
Financial principally targeted developers of residential
construction for single-family primary-home occupancy. As a
result of the negative outlook for the Puerto Rico economy and
its adverse effect on the construction industry, in the fourth
quarter of 2007, the Company ceased financing new housing
projects in Puerto Rico. The recorded balance for the Puerto
Rico residential housing construction sector has decreased from
$275.3 million as of December 31, 2009, to
$181.5 million as of December 31, 2010. Management
expects that the amount of construction loans will continue to
decrease in future years.
For the year ended December 31, 2010, the construction and
land portfolio reflected lower delinquency when compared to
December 31, 2009 due to the sale of a portfolio of
construction loans and similar real estate owned property during
the third quarter of 2010 for $102.0 million to a third
party, that included $63.2 million of non-performing loans
as of June 30, 2010, net of $35.8 million of
charge-offs (approximately $108.5 million as of
December 31, 2009). Puerto Rico and the Company have
experienced low levels of new home absorption in recent years
due to the current economic environment. However, in September
2010, the Governor of PR signed into law Act No. 132 of
2010 which established various housing tax and other incentives
to stimulate the sale of new and existing housing units. The tax
and other incentives, which include incentives or reductions
relating to capital gains taxes, property taxes and property
recording fees and stamps, will be effect until June 30,
2011 and are expected to have a favorable impact in the current
economic environment and new home absorption in PR.
For the year ended December 31, 2010, the commercial real
estate portfolio experienced an increase in late stage
delinquency mainly attributed to adverse performance of the
small commercial portfolio related to the continued recessionary
conditions in Puerto Rico. Also, this portfolio was impacted by
the classification to non-performing loans of a current paying
loan of $37.7 million (net of a charge-off of
$8.8 million) during the third quarter of 2010. Management
has taken certain actions to mitigate the risk in the portfolio,
including retaining advisory services of third party providers
in order to work-out delinquent loans and prevent performing
loans from becoming delinquent.
Loan
Modifications and Troubled Debt Restructurings
(TDR)
With Puerto Rico unemployment of 15% many borrowers have
temporarily lost the means to pay their loan contractual
principal and interest obligations. As a result of the economic
hardships, a number of borrowers have defaulted on their debt
obligations, including residential mortgage and other consumer
loans. The lower level of income and economic activity has also
led to fewer new construction residential home sales, increased
commercial real estate vacancy, and lower business revenues,
which has led to increased defaults on commercial real estate,
construction and land loans. Doral management has concluded that
it is in the Companys best interest, and in the best
interest of the Puerto Rican economy and citizenry, if certain
defaulted loans are restructured in a manner that keeps
borrowers in their homes, or businesses operating, rather than
foreclosing on the loan collateral if it is concluded that the
borrowers payment difficulties are temporary and Doral
will in time collect the loan principal and agreed upon interest.
119
Doral has created a number of loan modification programs to help
borrowers stay in their homes and operate their businesses which
also optimizes borrower performance and returns to Doral. In
these cases, the restructure or loan modification fits the
definition of TDR. The programs are designed to provide
temporary relief and, if necessary, longer term financial relief
to the consumer loan customer and commercial borrower.
Dorals consumer loan loss mitigation program (including
consumer loan products and residential mortgage loans), grants a
concession for economic or legal reasons related to the
borrowers financial difficulties that Doral would not
otherwise consider. Dorals loss mitigation programs can
provide for one or a combination of the following:
(i) movement of unpaid principal and interest due to the
end of the loan, (ii) extension of the loan term for up to
ten years, (iii) deferral of principal payments for a
period of time (temporary interest only), and
(iv) reduction of interest rates either permanently
(feature discontinued in 2010) or for a period of up to two
years. No programs adopted by Doral provide for the forgiveness
of contractually due principal or interest. Deferred principal
and uncollected interest are added to the end of the loan term
at the time of the restructuring and deferred interest is not
recognized as income until collected. Doral wants to make these
programs available only to those borrowers who have defaulted,
or are likely to default, permanently on their loan and would
lose their homes in foreclosure action absent some lender
concession. However, Doral will move borrowers and properties to
foreclosure if the Company is not reasonably assured that the
borrower will be able to repay all contractual principal or
interest (which is not forgiven in part or whole in any current
or contemplated program).
In accordance with accounting guidance, loans determined to be
TDRs are impaired and for purposes of estimating the ALLL must
be individually evaluated for impairment. For residential
mortgage loans determined to be TDRs, on a monthly basis, the
Company pools TDRs with similar characteristics and performs an
impairment analysis of discounted cash flows. If a pool yields a
present value below the recorded investment in the pool of
loans, an impairment is recognized by a charge to the provision
for loan and lease losses and a credit to the allowance for loan
and lease losses. For loss mitigated loans without a concession
in the interest rate, the Company performs an impairment
analysis of discounted cash flows giving consideration to the
probability of default and loss given foreclosure on those
estimated cash flows, and records an impairment by charging the
provision for loan and lease losses with a corresponding credit
to the ALLL.
Regarding the commercial loan loss mitigation programs
(including commercial real estate, commercial and industrial,
construction and land loan portfolios), the determination is
made on a loan by loan basis at the time of restructuring as to
whether a concession was made for economic or legal reasons
related to the borrowers financial difficulty that Doral
would not otherwise consider. Concessions made for commercial
loans could include reductions in interest rates, extensions of
maturity, waiving of borrower covenants, or other contract
changes that would be considered a concession. Doral mitigates
loan defaults for its commercial loan portfolios loans through
its Collections function. The functions objective is to
minimize both early stage delinquencies and losses upon default
of larger credit relationships. The group utilizes existing
collections infrastructure of front-end dialers, doorknockers,
work-out agents and third-party consultants. In the case of
residential construction projects, the function uses a
third-party consultant to manage the projects in terms of
construction, marketing and sales.
Residential, other consumer or commercial loan modifications can
result in returning a loan to accrual status when the criteria
for returning a loan to performing status are met. Loan
modifications also increase Dorals interest income by
returning a non-performing loan to performing status, and cash
flows by providing for payments to be made by the borrower, and
decreases foreclosure and other real estate owned
(OREO) costs by decreasing the number of foreclosed
properties. Loan modifications can result in lower interest
income to Doral if executed on performing loans by deferring
previously recognized interest and by temporarily lowering the
interest rate on a loan. Doral continues to consider the
modified loan as a non-performing asset for purposes of
estimating its allowance for loan and lease losses until the
borrower has made at least six consecutive contractual payments
(or the equivalent in a lump sum). At such time the loan will be
treated as any other performing loan for purposes of estimating
the allowance for loan and lease losses.
Loan modifications that are considered troubled debt
restructurings completed as of December 31, 2010 and 2009
were as follows:
120
Table
X TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
90 Days and Over
|
|
|
|
|
|
90 Days and Over
|
|
|
|
TDRs
|
|
|
Delinquency
|
|
|
TDRs
|
|
|
Delinquency
|
|
|
|
(In thousands)
|
|
|
Consumer modifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
685,429
|
|
|
$
|
72,585
|
|
|
$
|
429,302
|
|
|
$
|
89,771
|
|
Other consumer
|
|
|
1,257
|
|
|
|
75
|
|
|
|
1,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
686,686
|
|
|
|
72,660
|
|
|
|
430,603
|
|
|
|
89,771
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
71,501
|
|
|
$
|
31,314
|
|
|
$
|
51,194
|
|
|
$
|
15,078
|
|
Commercial and industrial
|
|
|
5,568
|
|
|
|
71
|
|
|
|
2,482
|
|
|
|
|
|
Construction and land
|
|
|
78,847
|
|
|
|
36,438
|
|
|
|
109,895
|
|
|
|
98,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
155,916
|
|
|
|
67,823
|
|
|
|
163,571
|
|
|
|
113,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
842,602
|
|
|
$
|
140,483
|
|
|
$
|
594,174
|
|
|
$
|
203,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
Loans
Non-performing assets consist of loans in non-accrual status,
other real estate owned and other non-performing assets. Doral
discontinues interest income recognition and considers financial
assets non-performing when they are 90 days or more past
due, except for revolving lines of credit and credit cards which
are considered non-performing when they are 180 days or
more past due, FHA and VA loans which are considered
non-performing when they are 270 days past due, and certain
loans determined to be well collateralized so that ultimate
collection of principal and interest is not in question (current
loan and interest balance as a percentage of collateral value is
less than 60%). In addition, any financial asset for which
management estimates it will not collect contractual principal
or interest is considered non-performing when such judgment is
made. When income recognition is discontinued for a loan, all
accrued but unpaid interest to date is reversed against current
period income. Such interest, if collected in the future, is
credited to income in the period of the recovery, and the loan
returns to accrual status when it becomes current
and/or
collectability is reasonably assured. The Company also places in
non-accrual status all residential construction loans classified
as substandard whose sole source of payment is interest reserves
funded by Doral Financial. For the year ended December 31,
2010, Doral Financial would have recognized $36.6 million,
compared to $49.4 million and $43.7 million for the
corresponding 2009 and 2008 periods, in additional interest
income had all delinquent loans (except FHA/VA guaranteed loans)
been accounted for on an accrual basis. This amount includes
interest reversal on loans placed on non-accrual status during
the period.
For consumer loans (primarily residential mortgage), all of
Dorals loss mitigation tools require that the borrower
demonstrate the intent and ability to pay principal and interest
on the loan. Doral must receive at least three consecutive
monthly payments prior to qualifying the borrower for a loss
mitigation product. Dorals loan underwriters must be
reasonably assured of the borrowers future repayment and
performance from their review of the borrowers
circumstances, and when all the conditions are met, the customer
is approved for a loss mitigation product and placed on a
probation period. When the loan is returned to accrual status,
Doral monthly reviews the loan to ensure that payments are made
during the probationary period. If a payment is not made during
this probationary period the loan is immediately returned to
non-accrual status. Also, if a payment is missed during the
probationary period, the loan reverts to its original terms, and
collections/foreclosure procedures begin from the point at which
they stood prior to the restructure. Consumer loans not
delinquent 90 days or more that are eligible for loss
mitigation products are subject to the same requirements as the
delinquent consumer loans except the receipt of the three months
of payment in advance of the restructures is waived.
For commercial loan loss mitigation (which includes commercial
real estate, commercial and industrial, construction and land
loans), the loans are underwritten by the Collections function,
the intent and ability of the borrower to service the debt under
the revised terms is scrutinized, and if approved for the TDR,
the borrower is placed on a six month probationary period during
which the customer is required to make six consecutive payments
(or equivalent in a lump sum) before the loan is returned to
accrual status. Upon receiving six consecutive months
121
of payments, the commercial loan is returned to accrual status.
If the loan was in accrual status at the time of the TDR, the
loan is kept in accrual status if the ultimate collection of
principal and interest is not in question, and placed in a
probationary period. If a payment is missed during the
probationary period, the loan reverts to its original terms and
collections/foreclosure procedures begin from the point at which
they stood prior to the restructure.
The following table sets forth information with respect to Doral
Financials non-accrual loans, OREO and other NPAs as of
the dates indicated:
Table
Y Non-performing
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Non-performing consumer, excluding
FHA/VA(1)
|
Residential mortgage
|
|
$
|
278,675
|
|
|
$
|
2,166
|
|
|
$
|
280,841
|
|
|
$
|
397,596
|
|
|
$
|
102
|
|
|
$
|
397,698
|
|
|
$
|
346,250
|
|
|
$
|
259,410
|
|
|
$
|
171,801
|
|
Lease financing receivables
|
|
|
415
|
|
|
|
|
|
|
|
415
|
|
|
|
1,091
|
|
|
|
|
|
|
|
1,091
|
|
|
|
1,053
|
|
|
|
1,032
|
|
|
|
1,075
|
|
Other
consumer(2)
|
|
|
404
|
|
|
|
|
|
|
|
404
|
|
|
|
519
|
|
|
|
|
|
|
|
519
|
|
|
|
685
|
|
|
|
2,260
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing consumer, excluding FHA/VA
|
|
|
279,494
|
|
|
|
2,166
|
|
|
|
281,660
|
|
|
|
399,206
|
|
|
|
102
|
|
|
|
399,308
|
|
|
|
347,988
|
|
|
|
262,702
|
|
|
|
173,583
|
|
Non-performing commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
193,556
|
|
|
|
|
|
|
|
193,556
|
|
|
|
130,811
|
|
|
|
|
|
|
|
130,811
|
|
|
|
117,971
|
|
|
|
86,590
|
|
|
|
50,546
|
|
Construction and land
|
|
|
147,127
|
|
|
|
1,610
|
|
|
|
148,737
|
|
|
|
285,344
|
|
|
|
21,610
|
|
|
|
306,954
|
|
|
|
244,693
|
|
|
|
279,782
|
|
|
|
144,638
|
|
Commercial and industrial
|
|
|
2,522
|
|
|
|
|
|
|
|
2,522
|
|
|
|
933
|
|
|
|
|
|
|
|
933
|
|
|
|
1,751
|
|
|
|
2,053
|
|
|
|
4,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing commercial
|
|
|
343,205
|
|
|
|
1,610
|
|
|
|
344,815
|
|
|
|
417,088
|
|
|
|
21,610
|
|
|
|
438,698
|
|
|
|
364,415
|
|
|
|
368,425
|
|
|
|
199,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans, excluding FHA/VA
|
|
$
|
622,699
|
|
|
$
|
3,776
|
|
|
$
|
626,475
|
|
|
$
|
816,294
|
|
|
$
|
21,712
|
|
|
$
|
838,006
|
|
|
$
|
712,403
|
|
|
$
|
631,127
|
|
|
$
|
373,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO and repossessed units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
63,794
|
|
|
$
|
|
|
|
$
|
63,794
|
|
|
$
|
76,461
|
|
|
$
|
|
|
|
$
|
76,461
|
|
|
$
|
53,050
|
|
|
$
|
31,515
|
|
|
$
|
31,292
|
|
Commercial real estate
|
|
|
17,599
|
|
|
|
|
|
|
|
17,599
|
|
|
|
14,283
|
|
|
|
|
|
|
|
14,283
|
|
|
|
7,162
|
|
|
|
6,639
|
|
|
|
1,905
|
|
Construction and land
|
|
|
18,230
|
|
|
|
650
|
|
|
|
18,880
|
|
|
|
2,725
|
|
|
|
750
|
|
|
|
3,475
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
75
|
|
|
|
|
|
|
|
75
|
|
|
|
101
|
|
|
|
|
|
|
|
101
|
|
|
|
191
|
|
|
|
419
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OREO and repossessed units
|
|
$
|
99,698
|
|
|
$
|
650
|
|
|
$
|
100,348
|
|
|
$
|
93,570
|
|
|
$
|
750
|
|
|
$
|
94,320
|
|
|
$
|
61,531
|
|
|
$
|
38,573
|
|
|
$
|
33,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing FHA/VA guaranteed
residential(1)(3)(4)
|
|
$
|
121,305
|
|
|
$
|
|
|
|
$
|
121,305
|
|
|
$
|
10,273
|
|
|
$
|
|
|
|
$
|
10,273
|
|
|
$
|
5,271
|
|
|
$
|
2,142
|
|
|
$
|
997
|
|
Other non-performing assets
|
|
|
3,692
|
|
|
|
|
|
|
|
3,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing
assets(5)
|
|
$
|
847,394
|
|
|
$
|
4,426
|
|
|
$
|
851,820
|
|
|
$
|
920,137
|
|
|
$
|
22,462
|
|
|
$
|
942,599
|
|
|
$
|
779,205
|
|
|
$
|
671,842
|
|
|
$
|
408,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs as a percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
|
|
|
|
|
|
|
|
|
|
|
14.85
|
%
|
|
|
|
|
|
|
|
|
|
|
16.65
|
%
|
|
|
14.42
|
%
|
|
|
12.78
|
%
|
|
|
8.01
|
%
|
Total NPAs as a percentage of consolidated total assets
|
|
|
|
|
|
|
|
|
|
|
9.85
|
%
|
|
|
|
|
|
|
|
|
|
|
9.21
|
%
|
|
|
7.69
|
%
|
|
|
7.22
|
%
|
|
|
3.44
|
%
|
Total non-performing loans to total loans (excluding GNMA
defaulted loans and FHA/VA guaranteed loans)
|
|
|
|
|
|
|
|
|
|
|
11.29
|
%
|
|
|
|
|
|
|
|
|
|
|
15.19
|
%
|
|
|
13.19
|
%
|
|
|
11.93
|
%
|
|
|
7.31
|
%
|
Ratio of allowance for loan and lease losses to total
non-performing loans (excluding loans held for sale) at end of
period(5)
|
|
|
|
|
|
|
|
|
|
|
19.82
|
%
|
|
|
|
|
|
|
|
|
|
|
16.91
|
%
|
|
|
18.69
|
%
|
|
|
19.91
|
%
|
|
|
21.85
|
%
|
|
|
|
(1) |
|
FHA/VA delinquent loans are
separated from the non-performing loans that present substantial
credit risk to the Company in order to recognize the different
risk of loss presented by these assets.
|
|
(2) |
|
Includes delinquency related
personal, revolving lines of credit and other consumer loans.
|
|
(3) |
|
Does not include approximately
$112.8 million, $86.8 million, $120.4 million,
$87.6 million and $67.1 million of GNMA defaulted
loans over 90 days delinquent (for which the Company has
the option, but not an obligation, to buy back from the pools
serviced), included as part of the loans held for sale portfolio
as of December 31, 2010, 2009, 2008, 2007 and 2006,
respectively.
|
|
(4) |
|
In November 2009, the Company
evaluated its non-performing assets policy and placed in accrual
status all FHA loans until 270 days delinquent because the
principal balance of these loans is insured or guaranteed under
applicable FHA program and interest is, in most cases, fully
recovered in foreclosures proceedings. As a result of the change
in policy, total non-performing FHA guaranteed residential
mortgage loans exclude $31.5 million and
$105.5 million of FHA loans as of December 31, 2010
and 2009, respectively, that were 90 days or more past due.
|
|
(5) |
|
Excludes FHA and VA claims
amounting to $12.5 million, $15.6 million,
$17.0 million, $18.3 million and $11.5 million as
of December 31, 2010, 2009, 2008, 2007 and 2006,
respectively.
|
122
The following tables provide the non-performing loans activity
by portfolio for the periods indicated.
Table
Z Non-performing loans activity by
portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
Non-FHA/VA
|
|
|
Other
|
|
|
Total
|
|
|
Commercial Real
|
|
|
Construction and
|
|
|
Commercial and
|
|
|
Total
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
Consumer
|
|
|
Estate
|
|
|
Land
|
|
|
Industrial
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
397,698
|
|
|
$
|
1,610
|
|
|
$
|
399,308
|
|
|
$
|
130,811
|
|
|
$
|
306,954
|
|
|
$
|
933
|
|
|
$
|
438,698
|
|
|
$
|
838,006
|
|
Additions
|
|
|
121,580
|
|
|
|
4,403
|
|
|
|
125,983
|
|
|
|
110,758
|
|
|
|
136,920
|
|
|
|
5,685
|
|
|
|
253,363
|
|
|
|
379,346
|
|
Repurchases
|
|
|
9,549
|
|
|
|
|
|
|
|
9,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,549
|
|
Remediated/Cure
|
|
|
(172,409
|
)
|
|
|
(1,520
|
)
|
|
|
(173,929
|
)
|
|
|
(18,976
|
)
|
|
|
(154,019
|
)
|
|
|
(880
|
)
|
|
|
(173,875
|
)
|
|
|
(347,804
|
)
|
Foreclosed
|
|
|
(44,567
|
)
|
|
|
|
|
|
|
(44,567
|
)
|
|
|
(11,889
|
)
|
|
|
(26,309
|
)
|
|
|
(25
|
)
|
|
|
(38,223
|
)
|
|
|
(82,790
|
)
|
Write-downs
|
|
|
(31,010
|
)
|
|
|
(3,674
|
)
|
|
|
(34,684
|
)
|
|
|
(17,148
|
)
|
|
|
(55,432
|
)
|
|
|
(3,191
|
)
|
|
|
(75,771
|
)
|
|
|
(110,455
|
)
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,377
|
)
|
|
|
|
|
|
|
(59,377
|
)
|
|
|
(59,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
280,841
|
|
|
$
|
819
|
|
|
$
|
281,660
|
|
|
$
|
193,556
|
|
|
$
|
148,737
|
|
|
$
|
2,522
|
|
|
$
|
344,815
|
|
|
$
|
626,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Non-FHA/VA
|
|
|
Other
|
|
|
Total
|
|
|
Commercial Real
|
|
|
Construction and
|
|
|
Commercial and
|
|
|
Total
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
Consumer
|
|
|
Estate
|
|
|
Land
|
|
|
Industrial
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
346,250
|
|
|
$
|
1,738
|
|
|
$
|
347,988
|
|
|
$
|
117,971
|
|
|
$
|
244,693
|
|
|
$
|
1,751
|
|
|
$
|
364,415
|
|
|
$
|
712,403
|
|
Additions
|
|
|
178,658
|
|
|
|
3,737
|
|
|
|
182,395
|
|
|
|
67,973
|
|
|
|
121,177
|
|
|
|
6,356
|
|
|
|
195,506
|
|
|
|
377,901
|
|
Repurchases
|
|
|
17,663
|
|
|
|
|
|
|
|
17,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,663
|
|
Remediated/Cure
|
|
|
(97,025
|
)
|
|
|
(562
|
)
|
|
|
(97,587
|
)
|
|
|
(40,807
|
)
|
|
|
(35,944
|
)
|
|
|
(1,174
|
)
|
|
|
(77,925
|
)
|
|
|
(175,512
|
)
|
Foreclosed
|
|
|
(43,591
|
)
|
|
|
|
|
|
|
(43,591
|
)
|
|
|
(9,193
|
)
|
|
|
(1,926
|
)
|
|
|
|
|
|
|
(11,119
|
)
|
|
|
(54,710
|
)
|
Write-downs
|
|
|
(4,257
|
)
|
|
|
(3,303
|
)
|
|
|
(7,560
|
)
|
|
|
(5,133
|
)
|
|
|
(21,046
|
)
|
|
|
(6,000
|
)
|
|
|
(32,179
|
)
|
|
|
(39,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
397,698
|
|
|
$
|
1,610
|
|
|
$
|
399,308
|
|
|
$
|
130,811
|
|
|
$
|
306,954
|
|
|
$
|
933
|
|
|
$
|
438,698
|
|
|
$
|
838,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Non-FHA/VA
|
|
|
Other
|
|
|
Total
|
|
|
Commercial Real
|
|
|
Construction and
|
|
|
Commercial and
|
|
|
Total
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
Consumer
|
|
|
Estate
|
|
|
Land
|
|
|
Industrial
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
259,410
|
|
|
$
|
3,292
|
|
|
$
|
262,702
|
|
|
$
|
86,590
|
|
|
$
|
279,782
|
|
|
$
|
2,053
|
|
|
$
|
368,425
|
|
|
$
|
631,127
|
|
Additions
|
|
|
142,489
|
|
|
|
1,948
|
|
|
|
144,437
|
|
|
|
52,599
|
|
|
|
117,604
|
|
|
|
6,000
|
|
|
|
176,203
|
|
|
|
320,640
|
|
Repurchases
|
|
|
36,266
|
|
|
|
|
|
|
|
36,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,266
|
|
Remediated/Cure
|
|
|
(68,379
|
)
|
|
|
(3,173
|
)
|
|
|
(71,552
|
)
|
|
|
(21,218
|
)
|
|
|
(142,054
|
)
|
|
|
(1,653
|
)
|
|
|
(164,925
|
)
|
|
|
(236,477
|
)
|
Foreclosed
|
|
|
(18,887
|
)
|
|
|
|
|
|
|
(18,887
|
)
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
(20,015
|
)
|
Write-downs
|
|
|
(4,649
|
)
|
|
|
(329
|
)
|
|
|
(4,978
|
)
|
|
|
|
|
|
|
(9,511
|
)
|
|
|
(4,649
|
)
|
|
|
(14,160
|
)
|
|
|
(19,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
346,250
|
|
|
$
|
1,738
|
|
|
$
|
347,988
|
|
|
$
|
117,971
|
|
|
$
|
244,693
|
|
|
$
|
1,751
|
|
|
$
|
364,415
|
|
|
$
|
712,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets decreased by $90.8 million, or 9.6%,
during the year ended December 31, 2010, primarily as a
result of a decrease of $117.6 million in total
non-performing consumer loans excluding FHA/VA and a decrease of
$158.2 million in total construction and land loans,
partially offset by increases of $111.0 million in
non-performing FHA/VA guaranteed residential loans,
$62.7 million in commercial real estate loans,
$6.0 million in OREO and repossessed units and
$3.7 million in other non-performing assets. Non-performing
loans, excluding FHA/VA guaranteed residential loans decreased
$211.5 million, or 25.2%, to $626.5 million as of
December 31, 2010, compared to $838.0 million as of
December 31, 2009. This decrease resulted from a decline in
total non-performing consumer loans of $117.6 million and
in total non-performing commercial loans of $93.9 million.
Of the total non-performing consumer loans, non-performing
residential mortgage loans, excluding FHA/VA guaranteed loans,
decreased $116.9 million since December 31, 2009 due
123
primarily to loss mitigation and front-end collections efforts
as well as charge-offs. The decrease in non-performing
commercial loans was due primarily to the sale of a construction
portfolio to a third party during the third quarter of 2010 that
included approximately $108.5 million of non-performing
loans as of December 31, 2009. There were also certain loan
restructurings during 2010 which returned loans to performing
status and a reduction in non-performing U.S. construction
loans of $20.0 million as one large loan was worked out.
The decrease in non-performing construction and land loans was
partially offset by an increase in non-performing commercial
real estate loans of $62.7 million, or 48.0%, due to the
classification of a participation interest in a current paying
loan of $37.7 million (net of a charge-off of
$8.8 million in 2010) and deterioration in the
performance of the small commercial loan portfolio.
The net decrease in non-performing loans was offset by an
increase of $111.0 million in non-performing FHA/VA
guaranteed residential loans as a result of Dorals
decision to repurchase FHA insured loans from GNMA
securitizations in June 2010 and December 2009 as the
non-performance of Doral originated loans exceeded certain GNMA
standards. Approximately $54.8 million of the June 2010
repurchase were non-performing, in addition to December
repurchases which rolled into non-performing loans during 2010
of approximately $58.6 million. These loans, while
non-performing, retain their FHA insurance and present little
credit loss potential to Doral.
The increase in OREO and repossessed units of $6.0 million
resulted from increases of $15.4 million in construction
and land OREOs, as the Company foreclosed on a significant
residential development during the third quarter of 2010 and
$3.3 million in commercial OREOs due to foreclosure on
three large loans during 2010, partially offset by a
$12.7 million decrease in residential OREOs. The decrease
in residential OREOs is due to a $17.0 million provision
for OREO losses in the second quarter of 2010 as Doral undertook
efforts to ensure it was properly positioned to sell the
residential OREOs and looked to accelerate its OREO dispositions
and sales of properties during the year. During 2010, Doral sold
399 properties out of the OREO, 278 of these were sold in the
second half of the year due to the change in policy for
disposition and sales of properties. As a result of differences
in the mortgage foreclosure process between Puerto Rico and the
states of the United States, the Company does not expect to have
any of the documentation and notarization problems in the
mortgage foreclosure process that have been reported by other
financial institutions in the United States.
As of December 31, 2010, the Company reported a total of
$280.8 million of non-performing residential mortgage loans
excluding FHA/VA guaranteed loans, which represents 7.6% of
total residential loans (excluding FHA/VA guaranteed loans) and
44.8% of total non-performing loans.
Doral Financial does not hold a significant amount of adjustable
interest rate, negative amortization, or other exotic credit
features that are common in other parts of the United States.
However, as part of its loss mitigation programs, the Company
has granted certain concessions to borrowers in financial
difficulties that have proven payment capacity which may include
interest only periods or temporary interest rate reductions. The
payments for these loans will reset at the former payment amount
unless the loan is restructured again or the restructured terms
are extended. Substantially all residential mortgage loans are
conventional 30 and 15 year amortizing fixed rate loans at
origination. There has been significantly less fade in
residential real estate values in homes under $250,000 in Puerto
Rico, the price point for the preponderance of Dorals
residential mortgage loan portfolio. The following table shows
the composition of the mortgage non-performing loans according
to their actual LTV and whether they are covered by mortgage
insurance. LTV ratios are calculated based on current unpaid
balances and original property values.
124
Table
AA Composition of mortgage non-performing
assets
December 31,
2010
|
|
|
|
|
|
|
|
|
Collateral Type
|
|
Loan To Value
|
|
|
Distribution
|
|
|
FHA/VA loans
|
|
|
n/a
|
|
|
|
30.2
|
%
|
Loans with private mortgage insurance
|
|
|
n/a
|
|
|
|
4.9
|
%
|
Loans with no mortgage insurance
|
|
|
< 60
|
%
|
|
|
13.9
|
%
|
|
|
|
61-80
|
%
|
|
|
29.8
|
%
|
|
|
|
81-90
|
%
|
|
|
10.3
|
%
|
|
|
|
Over 91
|
%
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Actual LTV ratios, calculated based on current unpaid balances
and original (or updated, if available) property values, are
considered when establishing the levels of general reserves for
the residential mortgage portfolio. Assumed loss severity
fluctuates depending on the different LTV levels of individual
loans.
A significant portion of Dorals restructured residential
mortgage loans were current or paid-off as of December 31,
2010, as illustrated by the table of restructured loans that are
non-performing at December 31, 2010 by year of restructure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days and Over
|
|
|
Percentage of Amount
|
|
Year
|
|
Amount
|
|
|
Delinquency at
|
|
|
Restructured
|
|
Restructured
|
|
Restructured
|
|
|
December 31, 2010
|
|
|
in Year Past Due
|
|
|
2007
|
|
$
|
4,012
|
|
|
$
|
337
|
|
|
|
8.4
|
%
|
2008
|
|
|
50,339
|
|
|
|
14,849
|
|
|
|
29.5
|
%
|
2009
|
|
|
160,869
|
|
|
|
30,394
|
|
|
|
18.9
|
%
|
2010
|
|
|
470,209
|
|
|
|
27,005
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
685,429
|
|
|
$
|
72,585
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dorals construction and land loan portfolio reflected a
decrease in non-performing loans due primarily to the sale of a
portion of the portfolio to a third party in the third quarter
of 2010, and certain restructures during the year. Construction
and land had non-performing loans of $148.7 million as of
December 31, 2010, or 23.7% (98.9% of which are in Puerto
Rico), of total non-performing loans. As of December 31,
2010 and 2009, 32.4% and 55.6%, respectively, of the loans
within the construction and land portfolio were considered
non-performing loans. The sale of the construction loan
portfolio during 2010 reduced the Companys non-performing
loans in this sector, however, the remaining construction
portfolio is directly affected by the continuing Puerto Rico
recession as the underlying loans repayment capacity is
dependent on the ability to attract buyers.
During the past two years, the Companys construction and
land loan portfolio has experienced a significant increase in
default rates resulting from borrowers not being able to sell
finished units within the loan term. Although the Company has
taken (and continues to take) steps to mitigate the credit risk
underlying these loans, their ultimate performance will be
affected by each borrowers ability to complete the
project, maintain the pricing level of the housing units within
the project, and sell the inventory of units within a reasonable
timeframe.
For the years ended December 31, 2010 and 2009, Doral
Financial did not enter into commitments to fund new
construction loans for residential housing projects in Puerto
Rico, other than a new commitment of $28.0 million entered
into during the third quarter of 2010, related to the sale of an
asset portfolio to a third party in July 2010 and subsequent
funding to complete the acquired projects. The portfolio sold
consisted of performing and non-performing late-stage
residential construction and development loans and real estate.
125
Commitments to fund new construction loans in the
U.S. amounted to $133.9 million for the year ended
December 31, 2010, compared to $90.5 million for the
corresponding 2009 period.
The following table presents additional further information on
the Companys construction portfolio.
Table
BB Construction and land loan portfolio
analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Residential construction loans
|
|
$
|
181,240
|
|
|
$
|
300
|
|
|
$
|
181,540
|
|
|
$
|
274,938
|
|
|
$
|
404
|
|
|
$
|
275,342
|
|
Land, multifamily, condominium and commercial construction loans
|
|
|
168,659
|
|
|
|
108,535
|
|
|
|
277,194
|
|
|
|
173,051
|
|
|
|
103,518
|
|
|
|
276,569
|
|
Undisbursed funds under existing
commitments(1)
|
|
|
44,336
|
|
|
|
9,539
|
|
|
|
53,875
|
|
|
|
18,713
|
|
|
|
13,202
|
|
|
|
31,915
|
|
Non-performing loans
|
|
|
147,127
|
|
|
|
1,610
|
|
|
|
148,737
|
|
|
|
285,344
|
|
|
|
21,610
|
|
|
|
306,954
|
|
Net charge offs
|
|
|
54,944
|
|
|
|
991
|
|
|
|
55,935
|
|
|
|
19,658
|
|
|
|
|
|
|
|
19,658
|
|
Allowance for loan and lease losses
|
|
|
22,761
|
|
|
|
2,265
|
|
|
|
25,026
|
|
|
|
52,819
|
|
|
|
1,640
|
|
|
|
54,459
|
|
Non-performing loans to total construction and land loans
|
|
|
42.05
|
%
|
|
|
1.48
|
%
|
|
|
32.42
|
%
|
|
|
63.69
|
%
|
|
|
20.79
|
%
|
|
|
55.62
|
%
|
Net charge-offs on an annualized basis to total construction and
land loans
|
|
|
15.70
|
%
|
|
|
0.91
|
%
|
|
|
12.19
|
%
|
|
|
4.39
|
%
|
|
|
|
%
|
|
|
3.56
|
%
|
|
|
|
(1) |
|
Includes undisbursed funds to
matured loans and loans in non-accrual status that are still
active.
|
The following table sets forth information with respect to Doral
Financials loans past due 90 days and still accruing
as of the dates indicated. Loans included in this table are
90 days or more past due as to interest or principal and
still accruing, because they are either well-secured and in the
process of collection or charged-off prior to being placed in
non-accrual status.
126
Table
CC Loans past due 90 days and still
accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
cards(1)
|
|
$
|
973
|
|
|
$
|
|
|
|
$
|
973
|
|
|
$
|
1,231
|
|
|
$
|
|
|
|
$
|
1,231
|
|
|
$
|
1,299
|
|
|
$
|
858
|
|
|
$
|
734
|
|
Other
consumer(2)
|
|
|
1,022
|
|
|
|
|
|
|
|
1,022
|
|
|
|
906
|
|
|
|
|
|
|
|
906
|
|
|
|
1,304
|
|
|
|
1,185
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans past due 90 days and still accruing
|
|
|
1,995
|
|
|
|
|
|
|
|
1,995
|
|
|
|
2,137
|
|
|
|
|
|
|
|
2,137
|
|
|
|
2,603
|
|
|
|
2,043
|
|
|
|
2,106
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
560
|
|
|
|
|
|
|
|
560
|
|
|
|
1,245
|
|
|
|
|
|
|
|
1,245
|
|
|
|
1,428
|
|
|
|
987
|
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90 days and still accruing
|
|
$
|
2,555
|
|
|
$
|
|
|
|
$
|
2,555
|
|
|
$
|
3,382
|
|
|
$
|
|
|
|
$
|
3,382
|
|
|
$
|
4,031
|
|
|
$
|
3,030
|
|
|
$
|
3,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit cards until 180 days
delinquent.
|
|
(2) |
|
Revolving lines of credit until
180 days delinquent.
|
The following table sets forth information on loans 30 to
89 days past due as of the periods indicated. This table
excludes GNMA defaulted loans 30 to 89 days past due (for
which the Company has the option, but not an obligation, to buy
back from the pools serviced) and FHA/VA guaranteed loans.
Table
DD Loans past due
30-89 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage(1)
|
|
$
|
71,750
|
|
|
$
|
|
|
|
$
|
71,750
|
|
|
$
|
87,900
|
|
|
$
|
|
|
|
$
|
87,900
|
|
|
$
|
99,832
|
|
|
$
|
80,765
|
|
|
$
|
60,422
|
|
Lease financing receivables
|
|
|
245
|
|
|
|
|
|
|
|
245
|
|
|
|
972
|
|
|
|
|
|
|
|
972
|
|
|
|
851
|
|
|
|
1,083
|
|
|
|
413
|
|
Other consumer
|
|
|
1,343
|
|
|
|
|
|
|
|
1,343
|
|
|
|
1,887
|
|
|
|
|
|
|
|
1,887
|
|
|
|
1,990
|
|
|
|
1,900
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past-due consumer
|
|
|
73,338
|
|
|
|
|
|
|
|
73,338
|
|
|
|
90,759
|
|
|
|
|
|
|
|
90,759
|
|
|
|
102,673
|
|
|
|
83,748
|
|
|
|
62,730
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
35,353
|
|
|
|
|
|
|
|
35,353
|
|
|
|
31,132
|
|
|
|
|
|
|
|
31,132
|
|
|
|
21,894
|
|
|
|
12,208
|
|
|
|
26,988
|
|
Construction and land
|
|
|
2,286
|
|
|
|
|
|
|
|
2,286
|
|
|
|
12,381
|
|
|
|
|
|
|
|
12,381
|
|
|
|
34,444
|
|
|
|
18,542
|
|
|
|
19,171
|
|
Commercial and industrial
|
|
|
3,900
|
|
|
|
|
|
|
|
3,900
|
|
|
|
625
|
|
|
|
|
|
|
|
625
|
|
|
|
94
|
|
|
|
222
|
|
|
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past-due commercial
|
|
|
41,539
|
|
|
|
|
|
|
|
41,539
|
|
|
|
44,138
|
|
|
|
|
|
|
|
44,138
|
|
|
|
56,432
|
|
|
|
30,972
|
|
|
|
49,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 30
89 days(2)
|
|
$
|
114,877
|
|
|
$
|
|
|
|
$
|
114,877
|
|
|
$
|
134,897
|
|
|
$
|
|
|
|
$
|
134,897
|
|
|
$
|
159,105
|
|
|
$
|
114,720
|
|
|
$
|
111,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $7.4 million,
$7.4 million, $1.5 million, $0.3 million and
$0.2 million of FHA/VA guaranteed loans, as of
December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
|
|
(2) |
|
Regulatory guidance regarding days
past due followed by many banks provides that the number of days
past due may be based upon the number of payments missed.
According to this regulatory guidance, monthly pay loans are
reported as 30 days past due when the borrower has missed
two payments. Doral follows this guidance in its reporting
except that it more conservatively reports loans 90 days
past due based upon the contractual number of days past due.
|
127
Other
Real Estate Owned (OREO)
Doral Financial believes that the value of the OREO reflected in
its Consolidated Statements of Financial Condition represents a
reasonable estimate of the properties sales price, net of
disposition costs. The fair value of the OREO is normally
determined on the basis of internal and external appraisals and
physical inspections. A charge to the allowance for loan and
lease losses is recognized for any initial write down to fair
value less cost to sell. Any losses in the carrying value of the
properties arising from periodic appraisals are charged to
expense in the period incurred. Holding costs, property taxes,
maintenance and other similar expenses are charged to expense in
the period incurred.
OREO foreclosures have increased in recent periods as the volume
of the NPLs has increased and as Doral has shortened the period
from the initiation of foreclosure to possession of property by
approximately 10 months. OREO sales improved in 2010
compared to 2009 due to the Companys strategic decision to
reduce pricing on the OREO portfolio in order to accelerate
sales. The accelerated disposition of OREO is expected to reduce
the carrying costs of OREO.
For the year ended December 31, 2010, the Company sold 399
OREO properties, representing $54.2 million in unpaid
balance. Total proceeds amounted to $33.6 million,
representing the recovery of 52% and 60% of unpaid principal
balance and appraised value, respectively. For the year ended
December 31, 2009, the Company sold 404 OREO properties,
representing $35.3 million in unpaid principal balance.
Total proceeds amounted to $33.3 million, representing the
recovery of 94% and 103% of unpaid principal balance and
appraised value, respectively. Management made the strategic
decision to accelerate sales in 2010 to move a significant
portion of the foreclosed home inventory out. Gains and losses
on sales of OREO are recognized in other expenses in the
Companys Consolidated Statements of Operations.
The following tables provide the real estate owned activity for
the periods indicated.
Table
EE Other real estate owned activity by
portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
94,219
|
|
|
$
|
61,340
|
|
|
$
|
38,154
|
|
Additions
|
|
|
93,077
|
|
|
|
85,274
|
|
|
|
49,514
|
|
Sales
|
|
|
(58,808
|
)
|
|
|
(35,271
|
)
|
|
|
(23,460
|
)
|
Retirements
|
|
|
(2,724
|
)
|
|
|
(3,370
|
)
|
|
|
(1,662
|
)
|
Lower of cost or market adjustments
|
|
|
(25,491
|
)
|
|
|
(13,754
|
)
|
|
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
100,273
|
|
|
$
|
94,219
|
|
|
$
|
61,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses (ALLL)
Doral estimates and records its ALLL on a monthly basis. For all
performing loans and non-performing small balance homogeneous
loans the ALLL is estimated based upon estimated probability of
default and loss given default by shared product characteristics
using Doral Financials historical experience. For larger
construction, commercial real estate, commercial and industrial
loans and TDRs that are 90 or more days past due or are
otherwise considered to be impaired, management estimates the
related ALLL based upon an analysis of each individual
loans characteristics. The ALLL estimate methodologies are
described more fully in the following paragraphs.
Residential mortgage. The general allowance
for residential mortgage loans is calculated based on the
probability that loans within different delinquency buckets will
default and, in the case of default, the extent of losses that
the Company expects to realize. In determining the probabilities
of default, the Company considers recent experience of rolls of
loans from one delinquency bucket into the next. Roll rates as
of year-end show that the proportion of loans rolling into
subsequent buckets has remained constant. In determining the
allowance for loan and lease losses for residential mortgage
loans, given the current economic trends in Puerto
128
Rico, for purposes of forecasting the future behavior of the
portfolio, Doral Financial determined that it should use the
roll-rates of relatively recent months, which show a more
aggressive deteriorating trend than those in older periods.
Using the older historical performance would yield lower
probabilities of default that may not reflect recent
macroeconomic trends. Severity of loss is calculated based on
historical results from foreclosure and ultimate disposition of
collateral. Historical results are adjusted for the
Companys expectation of housing prices. Severity
assumptions for the residential portfolio range between 3% and
40% depending on the different loan types and
loan-to-value
ratios, and up to 75% for second mortgages.
Construction and land, commercial real estate and commercial
and industrial. The ALLL for performing
construction and land, commercial real estate and commercial and
industrial is estimated considering either the probability of
the loan defaulting in the next twelve months and the estimated
loss incurred in the event of default or the loan quality
assigned to each loan and the estimated expected loss associated
with that loan grade. The probability of a loan defaulting is
based upon Doral Financials experience with its current
portfolio. The loan grade is assigned based upon
managements review of the specific facts and circumstances
associated with a particular credit. The loss incurred upon
default is based upon Dorals actual experience in
resolving defaulted loans.
Construction and land, commercial real estate and commercial and
industrial loans with principal balances greater than
$1.0 million that are not performing, or when management
estimates it may not collect all contractual principal and
interest, are considered impaired and are measured for
impairment individually.
Loans are considered impaired when, based on current information
and events it is probable that the borrower will not be able to
fulfill its obligation according to the contractual terms of the
loan agreement. Due to the current economic environment and
managements perceived increase in risk in the commercial
loan portfolio, during the third quarter of 2010, management
individually reviewed for impairment all commercial loans over
$50,000 that were over 90 days past due to better estimate
the amount the Company expects to receive. During the fourth
quarter of 2010, management individually reviewed all commercial
real estate loans over $500,000 that were over 90 days past
due, 25% of all commercial loans between $50,000 and $500,000
and over 90 days past due, as well as all new loans
classified as substandard during the quarter. In future periods,
and while managements assessment of the inherent credit
risk in the commercial portfolio continues to be high, the
Company will continue to evaluate on a quarterly basis 25% of
all commercial loans over 90 days past due and between
$50,000 and $500,000 so that in any one year period it would
have individually evaluated for impairment 100% of all
substandard commercial loans between $50,000 and $500,000, as
well as all substandard commercial real estate loans over
$500,000 and all substandard commercial and construction loans
over $1.0 million.
The impairment loss, if any, on each individual loan identified
as impaired is generally measured based on the present value of
expected cash flows discounted at the loans effective
interest rate. As a practical expedient, impairment may be
measured based on the loans observable market price, or
the fair value of the collateral net of disposition costs, if
the loan is collateral dependent. If foreclosure is probable,
accounting guidance requires the measurement of impairment to be
based on the fair value of the collateral, net of disposition
costs. Since current appraisals were not available on all
properties at quarter end, management determined its loss
reserve estimates for these loans by estimating the fair value
of the collateral. In doing so, management considered a number
of factors including the general change in price levels as
indicated appraisals received compared to earlier appraisals of
the same property, the price at which individual units could be
sold in the current market, the period of time over which the
units would be sold, the estimated cost to complete the units,
the risks associated with completing and selling the units, the
required rate of return on investment a potential acquirer may
have and current market interest rates in the Puerto Rico market.
Consumer. The ALLL for consumer loans is
estimated based upon the historical charge-off rate using Doral
Financials historical experience. The ALLL is supplemented
by Dorals policy to charge-off all amounts in excess of
the collateral value when the loan principal or interest is
120 days or more days past due.
TDRs. In accordance with accounting guidance,
loans determined to be TDRs are impaired and for purposes of
estimating the ALLL must be individually evaluated for
impairment. For residential mortgage loans determined to be
TDRs, on a monthly basis, the Company pools TDRs with similar
characteristics and
129
performs an impairment analysis of discounted cash flows. If a
pool yields a present value below the recorded investment in the
pool of loans, an impairment is recognized by a charge to the
provision for loan and lease losses and a credit to the
allowance for loan and lease losses. For loss mitigated loans
without a concession in the interest rate, the Company performs
an impairment analysis of discounted cash flows giving
consideration to the probability of default and loss given
foreclosure on those estimated cash flows, and records an
impairment by charging the provision for loan and lease losses
with a corresponding credit to the ALLL.
Generally, the percentage of the allowance for loan and lease
losses to non-performing loans will not remain constant due to
the nature of Doral Financials loan portfolios, which are
primarily collateralized by real estate. The collateral for each
non-performing mortgage loan is analyzed to determine potential
loss exposure, and, in conjunction with other factors, this loss
exposure contributes to the overall assessment of the adequacy
of the allowance for loan and lease losses. On an ongoing basis,
management monitors the loan portfolio and evaluates the
adequacy of the allowance for loan and lease losses. In
determining the adequacy of the allowance, management considers
such factors as default probabilities, internal risk ratings
(based on borrowers financial stability, external credit
ratings, management strength, earnings and operating
environment), probable loss and recovery rates, and the degree
of risk inherent in the loan portfolios. Allocated general
reserves are supplemented by a macroeconomic or emerging risk
reserve. This portion of the total allowance for loan and lease
losses reflects managements evaluation of conditions that
are not directly reflected in the loss factors used in the
determination of the allowance. The conditions evaluated in
connection with the macroeconomic and emerging risk allowance
include national and local economic trends, industry conditions
within the portfolios, recent loan portfolio performance, loan
growth, changes in underwriting criteria and the regulatory and
public policy environment.
Loans considered by management to be uncollectible are charged
to the allowance for loan and lease losses. Recoveries on loans
previously charged-off are credited to the allowance. Provisions
for loan and lease losses are charged to expenses and credited
to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the
loan portfolio. While management believes that the current
allowance for loan and lease losses is adequate, future
additions to the allowance may be necessary. If economic
conditions change substantially from the assumptions used by
Doral Financial in determining the allowance for loan and lease
losses further changes in the allowance may be required.
130
The following tables summarize Doral Financials
provisions, charge-offs and recoveries for the ALLL for the
indicated periods and provide allocations by loan categories.
Table
EE Allowance for loan and leases
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
140,774
|
|
|
$
|
132,020
|
|
|
$
|
124,733
|
|
|
$
|
67,233
|
|
|
$
|
35,044
|
|
Provision for loans and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage
|
|
|
35,530
|
|
|
|
23,241
|
|
|
|
13,968
|
|
|
|
17,127
|
|
|
|
4,298
|
|
Lease financing
|
|
|
251
|
|
|
|
777
|
|
|
|
606
|
|
|
|
464
|
|
|
|
1,022
|
|
Other consumer
|
|
|
6,651
|
|
|
|
8,473
|
|
|
|
8,101
|
|
|
|
10,510
|
|
|
|
5,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
42,432
|
|
|
|
32,491
|
|
|
|
22,675
|
|
|
|
28,101
|
|
|
|
11,130
|
|
Commercial real estate
|
|
|
24,901
|
|
|
|
(560
|
)
|
|
|
12,235
|
|
|
|
11,065
|
|
|
|
8,703
|
|
Construction and land
|
|
|
26,503
|
|
|
|
15,765
|
|
|
|
11,563
|
|
|
|
36,406
|
|
|
|
18,157
|
|
Commercial and industrial
|
|
|
5,139
|
|
|
|
5,967
|
|
|
|
2,383
|
|
|
|
2,642
|
|
|
|
1,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
56,543
|
|
|
|
21,172
|
|
|
|
26,181
|
|
|
|
50,113
|
|
|
|
28,699
|
|
Total provision for loan and lease losses
|
|
|
98,975
|
|
|
|
53,663
|
|
|
|
48,856
|
|
|
|
78,214
|
|
|
|
39,829
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage
|
|
|
(31,010
|
)
|
|
|
(4,455
|
)
|
|
|
(2,006
|
)
|
|
|
(1,444
|
)
|
|
|
|
|
Lease financing
|
|
|
(1,829
|
)
|
|
|
(781
|
)
|
|
|
(1,012
|
)
|
|
|
(1,160
|
)
|
|
|
|
|
Other Consumer
|
|
|
(8,505
|
)
|
|
|
(10,315
|
)
|
|
|
(7,891
|
)
|
|
|
(7,931
|
)
|
|
|
(4,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
(41,344
|
)
|
|
|
(15,551
|
)
|
|
|
(10,909
|
)
|
|
|
(10,535
|
)
|
|
|
(4,612
|
)
|
Commercial real estate
|
|
|
(17,122
|
)
|
|
|
(5,133
|
)
|
|
|
(8,690
|
)
|
|
|
(2,379
|
)
|
|
|
(965
|
)
|
Construction and land
|
|
|
(56,057
|
)
|
|
|
(20,847
|
)
|
|
|
(21,749
|
)
|
|
|
(6,060
|
)
|
|
|
(1,220
|
)
|
Commercial and industrial
|
|
|
(3,393
|
)
|
|
|
(6,000
|
)
|
|
|
(1,232
|
)
|
|
|
(2,542
|
)
|
|
|
(1,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
(76,572
|
)
|
|
|
(31,980
|
)
|
|
|
(31,671
|
)
|
|
|
(10,981
|
)
|
|
|
(3,850
|
)
|
Total charge-offs
|
|
|
(117,916
|
)
|
|
|
(47,531
|
)
|
|
|
(42,580
|
)
|
|
|
(21,516
|
)
|
|
|
(8,462
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage
|
|
|
153
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing
|
|
|
713
|
|
|
|
75
|
|
|
|
215
|
|
|
|
239
|
|
|
|
|
|
Other consumer
|
|
|
655
|
|
|
|
833
|
|
|
|
593
|
|
|
|
454
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,521
|
|
|
|
910
|
|
|
|
808
|
|
|
|
693
|
|
|
|
260
|
|
Commercial real estate
|
|
|
50
|
|
|
|
500
|
|
|
|
132
|
|
|
|
7
|
|
|
|
14
|
|
Construction and land loans
|
|
|
122
|
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
Commercial and industrial
|
|
|
126
|
|
|
|
24
|
|
|
|
71
|
|
|
|
102
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
298
|
|
|
|
1,712
|
|
|
|
203
|
|
|
|
109
|
|
|
|
562
|
|
Total recoveries
|
|
|
1,819
|
|
|
|
2,622
|
|
|
|
1,011
|
|
|
|
802
|
|
|
|
822
|
|
Net charge-offs
|
|
|
(116,097
|
)
|
|
|
(44,909
|
)
|
|
|
(41,569
|
)
|
|
|
(20,714
|
)
|
|
|
(7,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
123,652
|
|
|
$
|
140,774
|
|
|
$
|
132,020
|
|
|
$
|
124,733
|
|
|
$
|
67,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as a percentage of loans receivable outstanding, at the end
of period
|
|
|
2.21
|
%
|
|
|
2.55
|
%
|
|
|
2.51
|
%
|
|
|
2.47
|
%
|
|
|
1.94
|
%
|
ALLL to period-end loans receivable (excluding FHA/VA guaranteed
loans and loans on savings deposits)
|
|
|
2.29
|
%
|
|
|
2.63
|
%
|
|
|
2.54
|
%
|
|
|
2.49
|
%
|
|
|
1.96
|
%
|
ALLL plus partial charge-offs and discounts to loans receivable
(excluding FHA/VA guaranteed loans and loans on savings deposits)
|
|
|
4.65
|
%
|
|
|
3.42
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Provision for loan losses to net charge-offs
|
|
|
85.25
|
%
|
|
|
119.49
|
%
|
|
|
117.53
|
%
|
|
|
377.59
|
%
|
|
|
521.32
|
%
|
Net charge-offs on an annualized basis to average loans
receivable outstanding
|
|
|
2.08
|
%
|
|
|
0.85
|
%
|
|
|
0.80
|
%
|
|
|
0.50
|
%
|
|
|
0.23
|
%
|
ALLL to net charge-offs on an annualized basis
|
|
|
106.51
|
%
|
|
|
313.47
|
%
|
|
|
317.59
|
%
|
|
|
602.17
|
%
|
|
|
880.01
|
%
|
131
The following table sets forth information concerning the
allocation of Doral Financials allowance for loans and
lease losses by category and the percentage of loans in each
category to total loans as of the dates indicated:
Table
FF Allocation of allowance for loan and lease
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
56,487
|
|
|
|
64
|
%
|
|
$
|
51,814
|
|
|
|
67
|
%
|
|
$
|
33,026
|
|
|
|
68
|
%
|
|
$
|
21,064
|
|
|
|
65
|
%
|
|
$
|
5,381
|
|
|
|
51
|
%
|
FHA/VA guaranteed residential mortgage
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
%
|
Lease financing receivable
|
|
|
518
|
|
|
|
|
%
|
|
|
1,383
|
|
|
|
|
%
|
|
|
1,312
|
|
|
|
|
%
|
|
|
1,503
|
|
|
|
1
|
%
|
|
|
1,960
|
|
|
|
1
|
%
|
Other consumer
|
|
|
5,756
|
|
|
|
1
|
%
|
|
|
6,955
|
|
|
|
1
|
%
|
|
|
7,964
|
|
|
|
2
|
%
|
|
|
7,161
|
|
|
|
2
|
%
|
|
|
4,128
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
62,761
|
|
|
|
68
|
%
|
|
|
60,152
|
|
|
|
71
|
%
|
|
|
42,302
|
|
|
|
71
|
%
|
|
|
29,728
|
|
|
|
69
|
%
|
|
|
11,469
|
|
|
|
55
|
%
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
25,026
|
|
|
|
8
|
%
|
|
|
54,458
|
|
|
|
10
|
%
|
|
|
58,352
|
|
|
|
12
|
%
|
|
|
68,538
|
|
|
|
14
|
%
|
|
|
38,192
|
|
|
|
25
|
%
|
Commercial real estate
|
|
|
29,712
|
|
|
|
12
|
%
|
|
|
21,883
|
|
|
|
13
|
%
|
|
|
27,076
|
|
|
|
14
|
%
|
|
|
23,399
|
|
|
|
15
|
%
|
|
|
14,706
|
|
|
|
15
|
%
|
Commercial and industrial
|
|
|
6,153
|
|
|
|
12
|
%
|
|
|
4,281
|
|
|
|
6
|
%
|
|
|
4,290
|
|
|
|
3
|
%
|
|
|
3,068
|
|
|
|
2
|
%
|
|
|
2,866
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
60,891
|
|
|
|
32
|
%
|
|
|
80,622
|
|
|
|
29
|
%
|
|
|
89,718
|
|
|
|
29
|
%
|
|
|
95,005
|
|
|
|
31
|
%
|
|
|
55,764
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
123,652
|
|
|
|
100
|
%
|
|
$
|
140,774
|
|
|
|
100
|
%
|
|
$
|
132,020
|
|
|
|
100
|
%
|
|
$
|
124,733
|
|
|
|
100
|
%
|
|
$
|
67,233
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Companys allowance for
loan and lease losses was $123.7 million, a decrease of
$17.1 million from $140.8 million as of
December 31, 2009. This decrease was driven by a decrease
of $29.4 million in the allowance for loan and lease losses
of the construction and land portfolio primarily as a result of
the sale of a portion of performing and non-performing
construction loans to a third party during the third quarter of
2010. The allowance for the residential mortgage and commercial
real estate portfolios increased $4.7 million and
$7.8 million, respectively.
The provision for loan and lease losses for the year ended
December 31, 2010, reflected an increase of
$45.3 million compared to the corresponding 2009 period,
primarily in non- FHA/VA residential mortgage, commercial real
estate and construction and land portfolios. The provision for
loan and lease losses for the residential mortgage portfolio
increased by $12.3 million, or 52.9%, for the year ended
December 31, 2010, when compared to the corresponding 2009
period. The increase in the provision for loan losses on
residential mortgage loans was driven by: (i) an increase
of $6.8 million due to TDRs individually evaluated for
impairment; (ii) an increase of $3.0 million related
to the impact of net charge offs on the allowance;
(iii) $6.3 million due to transfers of foreclosed
loans to OREO; and this was partially offset by
$3.8 million due to delinquency improvement. The provision
for loan and lease losses for the commercial real estate
portfolio increased by $25.5 million for the year ended
December 31, 2010, when compared to the corresponding 2009
period due to (i) a $4.5 million provision related to
a reduction in the threshold for individually evaluating
impaired loans from $1.0 million to $50,000, (ii) an
$8.4 million provision due to the adverse classification of
a participation interest in a current paying loan of
$37.7 million for which a charge-off over allowance was
recorded during the year, (iii) an $8.2 million
additional provision on loans individually measured for
impairment, (iv) a $1.0 million provision due to TDRs
during the year which are individually evaluated for impairment,
and (v) a $2.5 million provision as loans rolled to
delinquency. The provision for loan and lease losses on the
construction and land loan portfolio increased
$10.7 million during 2010 primarily due to the sale of a
construction portfolio to a third party during the third quarter
of 2010 that resulted in
132
additional provisions of $12.7 million, this offset by the
release of $2 million in reserve as one project loan was
worked-out. In general, the increase in the provision for loan
and lease losses during 2010 was largely driven by the impact of
loss mitigation efforts including the sale of a portion of the
construction loan portfolio, delinquencies trends, properties in
foreclosure, decreases in real estate values, an increase in
severities (in the determination of the provision) due to
strategic decision to accelerate OREO dispositions and the
continued deterioration in the Puerto Rico economy.
The provision for loan and lease losses for the year ended
December 31, 2010, was offset by net charge-offs of
$116.1 million, which included $35.8 million related
to the sale of certain construction loans, $8.8 million
related to a classified participation interest,
$31.0 million related to partial charge-offs on residential
mortgage loans during the period, $8.9 million related to
other consumer loans as those rolled to the 120 and over
delinquency bucket, as well as charge-offs of previously
reserved balances as a confirmed loss determinations are
reached. Net charge offs on residential mortgage loans increased
due to the implementation in 2010 of the Companys real
estate valuation policy under which the Company obtains
assessments of collateral value for residential mortgage loans
over 180 days past due and any outstanding balance in
excess of the value of the property less cost to sell is
classified as loss and written down by charging the allowance
for loan and lease losses.
The allowance for loan and lease losses coverage ratios as of
December 31, 2010 and 2009 (including and excluding the
effect of partial charge-offs and credit related discounts) were
as follows:
Table
GG Allowance for loans and lease losses coverage
ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
ALLL Plus Partial Charge-Offs and Discount as a % of:
(1)
|
|
ALLL as a %
of:(2)
|
|
ALLL Plus Partial Charge-Offs and Discount as a %
of:(1)
|
|
ALLL as a %
of:(2)
|
|
|
Loans(3)
|
|
NPLs
|
|
Loans(3)
|
|
NPLs
|
|
Loans(3)
|
|
NPLs
|
|
Loans(3)
|
|
NPLs
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
3.51
|
%
|
|
|
45.83
|
%
|
|
|
1.59
|
%
|
|
|
20.29
|
%
|
|
|
1.87
|
%
|
|
|
17.49
|
%
|
|
|
1.42
|
%
|
|
|
13.19
|
%
|
Consumer
|
|
|
11.18
|
%
|
|
|
769.45
|
%
|
|
|
11.14
|
%
|
|
|
766.06
|
%
|
|
|
10.12
|
%
|
|
|
524.09
|
%
|
|
|
10.01
|
%
|
|
|
517.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3.63
|
%
|
|
|
47.95
|
%
|
|
|
1.74
|
%
|
|
|
22.48
|
%
|
|
|
2.05
|
%
|
|
|
19.56
|
%
|
|
|
1.61
|
%
|
|
|
15.25
|
%
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
7.33
|
%
|
|
|
26.95
|
%
|
|
|
4.31
|
%
|
|
|
15.37
|
%
|
|
|
3.88
|
%
|
|
|
22.24
|
%
|
|
|
2.96
|
%
|
|
|
16.81
|
%
|
Commercial and industrial
|
|
|
1.21
|
%
|
|
|
304.27
|
%
|
|
|
0.97
|
%
|
|
|
243.97
|
%
|
|
|
1.46
|
%
|
|
|
489.18
|
%
|
|
|
1.38
|
%
|
|
|
458.84
|
%
|
Construction and land
|
|
|
12.79
|
%
|
|
|
42.76
|
%
|
|
|
5.46
|
%
|
|
|
16.83
|
%
|
|
|
12.91
|
%
|
|
|
24.02
|
%
|
|
|
9.87
|
%
|
|
|
17.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
6.69
|
%
|
|
|
35.80
|
%
|
|
|
3.42
|
%
|
|
|
17.67
|
%
|
|
|
6.59
|
%
|
|
|
24.48
|
%
|
|
|
5.03
|
%
|
|
|
18.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4.65
|
%
|
|
|
41.24
|
%
|
|
|
2.29
|
%
|
|
|
19.82
|
%
|
|
|
3.42
|
%
|
|
|
22.15
|
%
|
|
|
2.63
|
%
|
|
|
16.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans and NPL amounts are increased
by the amount of partial charge-offs and discounts.
|
|
(2) |
|
Loans and NPL amounts are not
increased by the amount of partial charge-offs and discounts.
|
|
(3) |
|
Excludes FHA/VA guaranteed loans
and loans on saving deposits.
|
After consideration of partial charge-offs and credit related
discounts, and in part due to the decrease in non-performing
loans, the coverage ratios are up 123 basis points (36.0%)
and 19.09 basis points (86.2%) for the allowance plus
partial charge-offs and credit related discounts and as a
percentage of all loans, and percentage of non-performing loans,
respectively. Doral discontinued new construction lending in
Puerto Rico in 2007, new commercial real estate and commercial
and industrial lending in Puerto Rico in 2008, and significantly
tightened its residential underwriting standards in 2009.
Dorals seasoned vintages, where problems have been
identified and addressed in previous periods, require smaller
additional provisions at this time. Considering the effect of
the partial charge-offs and credit related discounts, the
Companys coverage ratio was 4.65% as of December 31,
2010 and 3.42% as of December 31, 2009. In addition to the
partial charge-offs reflected in the ratios above, the Company
took a charge-off of $35.8 million during the second
quarter of 2010, on loans sold to a third party during the third
quarter of 2010 in exchange for cash and a note
133
receivable of $96.9 million. Doral reports the
$96.9 million note received as a construction loan. Giving
consideration to these additional charge-offs, the adjusted
coverage ratio (allowance for and lease losses adjusted for
partial charge-offs, credit related discounts and construction
loan charge-offs on the portfolio sold, to loans receivable)
would be 5.09%, an increase of 167 basis points compared to
the same ratio as of December 31, 2009. The adjusted
coverage ratio for the construction loan portfolio after giving
consideration to the charge-off of construction loans sold in
2010 would be 18.65%, an increase of 574 basis compared to the
same ratio as of December 31, 2009.
The allowance for loan and lease losses was 2.29% of period-end
loans receivable (excluding FHA/VA guaranteed loans and loans on
savings deposits) at December 31, 2010, a decrease of
34 basis points compared with 2.63% at December 31,
2009. The allowance for loan and lease losses to non-performing
loans (excluding non-performing loans held for sale) was 19.82%,
an increase of 291 basis points compared to 16.91% as of
December 31, 2009.
Mortgage lending is the Companys principal line of
business and has historically reflected significant recoveries
and low levels of losses. Nevertheless, due to current economic
conditions in Puerto Rico, and increases in loss severities in
this portfolio, the Company increased its allowance during 2010.
Non-performing residential mortgage loans excluding FHA/VA
guaranteed loans decreased $116.9 million, or 29.4%, and
the related allowance for loan and lease losses increased
$4.7 million or 9.0% during the year ended
December 31, 2010 compared with 2009. In 2010, charge-offs
of residential mortgage loans were driven by the implementation
of the Companys real estate valuation policy under which
the Company obtains assessments of collateral value for
residential mortgage loans that are over 180 days past due
and any outstanding balance in excess of the value of the
property less cost to sell is classified as loss and written
down by charging the allowance for loans and lease losses.
The construction and land loans portfolio decreased
$93.2 million for the year ended December 31, 2010,
mainly due to net charge-offs of $55.9 million.
Construction and land NPLs decreased $158.2 million as a
result of the sale of construction loan portfolio that included
approximately $108.5 million non-performing loans as of
December 31, 2009. There were also certain restructures and
a reduction in non-performing US construction loans of
$21.6 million as one large loan was worked out.
The commercial real estate loan portfolio decreased
$49.9 million during 2010 since the Company is not actively
lending in this line of business and due to partial charge-offs.
Non-performing commercial real estate loans increased
$62.7 million in 2010 as a result of the deterioration in
economic conditions in Puerto Rico and the classification of a
participation in interest in a current paying loan of
$37.7 million. The allowance for loan and lease losses for
this portfolio increased $7.8 million during 2010.
The following table summarizes the Companys loans
individually reviewed for impairment and its related allowance:
Table
HH Impaired loans and related
allowance
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(In thousands)
|
|
|
Impaired loans with allowance
|
|
$
|
774,946
|
|
|
$
|
531,162
|
|
Impaired loans without allowance
|
|
|
419,016
|
|
|
|
343,372
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,193,962
|
|
|
$
|
874,534
|
|
|
|
|
|
|
|
|
|
|
Related allowance
|
|
$
|
68,875
|
|
|
$
|
56,510
|
|
Average impaired loan portfolio
|
|
$
|
810,581
|
|
|
$
|
494,015
|
|
As part of the regular loan workout cycle, the Company
charges-off the portion of impaired loans that it considers a
confirmed loss. Accordingly, certain loans considered impaired
and loans individually measured for impairment are carried at
book balance that has already been reduced by charge-offs, and
therefore, carry a lower dollar allowance. Under some
circumstances, the economics of a particular credit relationship
suggest that the underlying loans are sufficiently
collateralized and that no specific reserve is necessary. The
Company
134
does not allocate general reserves for those loans for which an
impairment analysis has been conducted and for which the
impairment measure was zero.
Counterparty
Risk
The Company has exposure to many different counterparties, and
it routinely executes transactions with counterparties in the
financial services industry, including brokers and dealers,
commercial banks, and other institutional clients. Loans,
derivatives investments, repurchase agreements, other
borrowings, and receivables, among others, expose the Company to
counterparty risk. Many of these transactions expose the Company
to credit risk in the event of default of its counterparty or
client. In addition, the Companys credit risk may be
impacted when the collateral held by it cannot be realized or is
liquidated at prices not sufficient to recover the full amount
of the loan or derivative exposure due to the Company. There can
be no assurance that any such losses would not materially and
adversely affect the Companys results of operations.
The Company has procedures in place to mitigate the impact of
default among its counterparties. The Company requests
collateral for most credit exposures with other financial
institutions and monitors these on a regular basis.
Nevertheless, market volatility could impact the valuation of
collateral held by the Company and result in losses.
Operational
Risk
Operational risk includes the potential for financial losses
resulting from failed or inadequate controls. Operational risk
is inherent in every aspect of business operations, and can
result from a range of factors including human judgment, process
or system failures, or business interruptions. Operational risk
is present in all of Doral Financials business processes,
including financial reporting. The Company has adopted a policy
governing the requirements for operational risk management
activities. This policy defines the roles and responsibilities
for identifying key risks, key risks indicators, estimation of
probabilities and magnitudes of potential losses and monitoring
trends.
Overview
of Operational Risk Management
Doral Financial has a corporate-wide Chief Risk Officer, who is
responsible for implementing the process of managing the risks
faced by the Company. The Chief Risk Officer is responsible for
coordinating risk identification and monitoring throughout Doral
Financial with the Companys Internal Audit group. In
addition, the Internal Audit function provides support to
facilitate compliance with Doral Financials system of
policies and controls and to ensure that adequate attention is
given to correct issues identified.
Internal
Control Over Financial Reporting
For a detailed discussion of the Managements Report on
Internal Control Over Financial Reporting as of
December 31, 2010, please refer to Part II,
Item 9A. Controls and Procedures.
Liquidity
Risk
For a discussion of the risks associated with Doral
Financials ongoing need for capital to finance its
lending, servicing and investing activities, please refer to
Liquidity and Capital Resources above.
General
Business, Economic and Political Conditions; Puerto Rico Economy
and Fiscal Condition
The Companys business and earnings are sensitive to
general business and economic conditions in Puerto Rico and the
United States. Significant business and economic conditions
include short-term and long-term interest rates, inflation and
the strength of the Puerto Rico and U.S. economies and
housing markets. If any of these conditions deteriorate, the
Companys business and earnings could be adversely
affected. For example, business and economic conditions that
negatively impact household income could decrease the demand for
residential mortgage loans and increase the number of customers
who become delinquent or default on their
135
loans; or, a dramatically rising interest rate environment could
decrease the demand for loans and negatively affect the value of
the Companys investments and loans.
Inflation also generally results in increases in general and
administrative expenses. Interest rates normally increase during
periods of high inflation and decrease during periods of low
inflation. Please refer to Risk Management above for
a discussion of the effects of changes of interest rates on
Doral Financials operations.
Markets in the United States and elsewhere have experienced
extreme volatility and disruption for over two years, continuing
through the year ended December 31, 2010. The United
States, Europe and Japan entered into recessions during 2008
that persisted through most of 2009, despite past and expected
governmental intervention in the worlds major economies.
Doral Financials 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.
The economy of Puerto Rico is closely linked to the United
States economy, as most of the external factors that affect the
Puerto Rico economy (other than the price of oil) are determined
by the policies of, and economic conditions prevailing in, the
United States. These external factors include exports, direct
investment, the amount of federal transfer payments, the level
of interest rates, the rate of inflation, and tourist
expenditures. During the fiscal year ended June 30, 2010,
approximately 68.1% of Puerto Ricos exports went to the
U.S. mainland, which was also the source of approximately
51.2% of Puerto Ricos imports. In the past, the economy of
Puerto Rico has generally followed economic trends in the
overall United States economy. However, in recent years,
economic growth in Puerto Rico has lagged behind growth in the
United States.
The dominant sectors of the Puerto Rico economy in terms of
production and income are manufacturing and services. The
manufacturing sector has undergone fundamental changes over the
years as a result of an increased emphasis on higher-wage,
high-technology industries, such as pharmaceuticals,
biotechnology, computers, microprocessors, professional and
scientific instruments, and certain high-technology machinery
and equipment. The services sector, including finance,
insurance, real estate, wholesale and retail trade, and tourism,
also plays a major role in the economy. It ranks second to
manufacturing in contribution to Puerto Ricos gross
domestic product and leads all sectors in providing employment.
Puerto Ricos economy is currently in a recession that
began in the fourth quarter of the fiscal year that ended
June 30, 2006. Although the Puerto Rico economy is closely
linked to the United States economy, for fiscal years 2007, 2008
and 2009, Puerto Ricos real gross national product
decreased by 1.2%, 2.8% and 3.7%, respectively, while the United
States economy grew at a rate of 1.8% and 2.8% during fiscal
years 2007 and 2008, respectively, and contracted at a rate of
2.5% during fiscal year 2009. According to the Puerto Rico
Planning Boards latest projections, Puerto Ricos
real gross national product was projected to contract by 3.6%
during fiscal year 2010. Puerto Ricos real gross national
product for fiscal year 2011, however, is projected to grow by
0.4%.
The number of persons employed in Puerto Rico during fiscal year
2010 averaged 1,102,700, a decrease of 5.6% compared to the
previous fiscal year. During the first six months of fiscal year
2011, total employment averaged 1,084,500, a decline of 2.5%
compared with the same period of the previous fiscal year, and
the unemployment rate averaged 15.9%.
Future growth of the Puerto Rico economy will depend on several
factors including the condition of the United States economy,
the relative stability of the price of oil imports, the exchange
value of the United States dollar, the level of interest rates,
the effectiveness of the recently approved changes to the Puerto
Rico income tax code and other tax laws, and the continuing
economic uncertainty generated by the Puerto Rico
governments fiscal condition. The economy of Puerto Rico
is very sensitive to the price of oil in the global market.
Puerto Rico does not have significant mass transit available to
the public and most of its electricity is currently powered by
oil, making it highly sensitive to fluctuations in oil prices. A
substantial increase in the price of oil could impact adversely
the economy by reducing disposable income and increasing the
operating costs of most businesses and government. Consumer
spending is particularly sensitive to wide fluctuations in oil
prices.
136
For additional information relating to the fiscal situation and
challenges of the Government of Puerto Rico and various
initiatives it has undertaken during the last two fiscal years,
please refer to the sections titled Fiscal
Condition, Fiscal Stabilization Plan,
Government Reorganization Plan, Unfunded
Pension Benefit Obligations and Funding Shortfalls of the
Retirement System, Economic Reconstruction
Plan, and Economic Development Plan under
Business-The Commonwealth in Item 1 of this
Annual Report on
Form 10-K.
The Company cannot predict at this time the impact that the
current fiscal situation of the Commonwealth of Puerto Rico and
the various legislative and other measures adopted by the Puerto
Rico government in response to such fiscal situation will have
on the Puerto Rico economy and on Doral Financials
financial condition and results of operations.
The Company operates in a highly competitive industry that could
become even more competitive as a result of economic,
legislative, regulatory and technological changes. The Company
faces competition in such areas as mortgage and banking product
offerings, rates and fees, and customer service. In addition,
technological advances and increased
e-commerce
activities have, generally, increased accessibility to products
and services for customers which has intensified competition
among banking and non-banking companies in the offering of
financial products and services, with or without the need for a
physical presence.
MISCELLANEOUS
Refer to Note 2 of the accompanying financial statements
for a discussion of changes in accounting standards adopted in
the 2010 financial statements
CEO
and CFO Certifications
Doral Financials Chief Executive Officer and Chief
Financial Officer have filed with the Securities and Exchange
Commission the certifications required by Section 302 of
the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to
this Annual Report on
Form 10-K.
In addition, in 2010 Doral Financials Chief Executive
Officer certified to the New York Stock Exchange that he was not
aware of any violation by the Company of the NYSE corporate
governance listing standards.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
|
The information required by this Item is incorporated by
reference to the information included under the subcaption
Risk Management in the Managements Discussion
and Analysis of Financial Condition and Results of Operations
section in this
Form 10-K.
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Item 8.
|
Financial
Statements and Supplementary Data.
|
The consolidated financial statements of Doral Financial,
together with the report thereon of PricewaterhouseCoopers LLP,
Doral Financials independent registered public accounting
firm, are included herein beginning on page F-1 of this
Form 10-K.
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
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Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
Doral Financials management, with the participation of its
Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
under the Exchange Act) as of December 31, 2010. Disclosure
controls and procedures are defined under SEC rules as controls
and other procedures that are designed to ensure that
information required to be disclosed by a company in the reports
that it files or submits under the
137
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that
information required to be disclosed by a company in the reports
that it files or submits under the Securities Exchange Act of
1934 is accumulated and communicated to the companys
management, including its principal executive and principal
financial officers, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives.
Based upon this evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Companys
disclosure controls and procedures, at a reasonable level of
assurance, are effective as of December 31, 2010.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, and for the
assessment of the effectiveness of internal control over
financial reporting. The Companys internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with GAAP and includes controls over the preparation
of financial statements to comply with the reporting
requirements of Section 112 of FDICIA.
A companys internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
the preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In making its assessment, management, including the Chief
Executive Officer and Chief Financial Officer, used the criteria
set forth in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
As a result of its assessment, management has concluded that the
Companys internal control over financial reporting is
effective as of December 31, 2010.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2010 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
under Item 8 of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There have been no changes to the Companys internal
control over financial reporting (as such term is defined in
Rules 13a-15(f)
and 15(d)-15(f) under the Exchange Act) during the year ended
December 31, 2010, that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
138
|
|
Item 9B.
|
Other
Information.
|
As previously announced, on December 2, 2010, the Company
sent a letter to the Board of Directors of First BanCorp
proposing the acquisition of First BanCorp by the Company
subject to certain terms and conditions. On December 6,
2010, First BanCorp issued a press release announcing that it
had received and rejected such proposal. The Companys
invitation to the First BanCorp Board of Directors to commence
discussions with respect to its proposal remains open.
PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance.
|
The information required by this Item 10 is hereby
incorporated by reference to the sections titled Election
of Directors, Corporate Governance,
Executive Officers, and Section 16(a)
Beneficial Ownership Reporting Compliance contained in
Doral Financials proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the
2010 fiscal year.
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Item 11.
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Executive
Compensation.
|
The information required by this Item 11 is hereby
incorporated by reference to the sections titled
2010 Director Compensation, Compensation
Committee Interlocks and Insider Participation,
Executive Compensation (including Compensation
Committee Report, and the various compensation tables),
Equity Compensation Plan Information, and
Potential Payments upon Termination or Change in
Control contained in Doral Financials proxy
statement, to be filed pursuant to Regulation 14A within
120 days after the end of the 2010 fiscal year.
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Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item 12 is hereby
incorporated by reference to the section titled Security
Ownership of Management, Directors and Principal Holders
contained in Doral Financials proxy statement, to be filed
pursuant to Regulation 14A within 120 days after the
end of the 2010 fiscal year.
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Item 13.
|
Certain
Relationships and Related Transactions.
|
The information required by this Item 13 is hereby
incorporated by reference to the sections titled Certain
Relationships and Related Transactions and Corporate
Governance contained in Doral Financials proxy
statement, to be filed pursuant to Regulation 14A within
120 days after the end of the 2010 fiscal year.
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Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item 14 is hereby
incorporated by reference to the section titled
Ratification of Independent Registered Public Accounting
Firm contained in Doral Financials proxy statement,
to be filed pursuant to Regulation 14A within 120 days
after the end of the 2010 fiscal year.
PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules.
|
(a) List of documents filed as part of this report.
(1) Financial Statements.
139
The following consolidated financial statements of Doral
Financial, together with the report thereon of Doral
Financials independent registered public accounting firm,
PricewaterhouseCoopers LLP, dated March 7, 2011, are
included herein beginning on
page F-1:
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|
|
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|
Report of Independent Registered Public Accounting Firm
|
|
|
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Consolidated Statements of Financial Condition as of
December 31, 2010 and 2009
|
|
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|
Consolidated Statements of Income for each of the three years in
the period ended December 31, 2010, 2009 and 2008
|
|
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|
Consolidated Statements of Changes in Stockholders Equity
for each of the three years in the period ended
December 31, 2010, 2009 and 2008
|
|
|
|
Consolidated Statements of Comprehensive Income for each of the
three years in the period ended December 31, 2010, 2009 and
2008
|
|
|
|
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2010, 2009 and 2008
|
|
|
|
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.
The exhibits to this Annual Report on
Form 10-K
are listed in the exhibit index below.
The Company has not filed as exhibits certain instruments
defining the rights of holders of debt of the Company not
exceeding 10% of the total assets of the Company and its
consolidated subsidiaries. The Company will furnish copies of
any such instruments to the Securities and Exchange Commission
upon request.
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Exhibit
|
|
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Number
|
|
Description
|
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|
3
|
.1
|
|
Certificate of Incorporation of Doral Financial, as currently in
effect. (Incorporated herein by reference to exhibit number
3.1(j) to Doral Financials Annual Report on Form 10-K for
the year ended December 31, 2007 filed with the Commission on
March 19, 2008).
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3
|
.2
|
|
Bylaws of Doral Financial, as amended on August 2, 2007.
(Incorporated herein by reference to exhibit number 3.1 of Doral
Financials Current Report on Form 8-K filed with the
Commission on August 6, 2007).
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3
|
.3
|
|
Certificate of Amendment of the Certificate of Incorporation of
Doral Financial dated March 12, 2010 (Incorporated herein by
reference to exhibit number 3.1 of Doral Financials
Current Report on Form 8-K filed with the Commission on March
16, 2010).
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3
|
.4
|
|
Certificate of Designations of Mandatorily Convertible
Non-Cumulative Non-Voting Preferred Stock dated April 20, 2010
(Incorporated herein by reference to exhibit number 3.1 of Doral
Financials Current Report on Form 8-K filed with the
Commission on April 26, 2010).
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4
|
.1
|
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Common Stock Certificate (Incorporated herein by reference to
exhibit number 4.1 to Doral Financials Annual Report on
Form 10-K for the year ended December 31, 2007 filed with the
Commission on March 19, 2008).
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4
|
.2
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|
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 Doral Financials
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 filed with the Commission on November 15, 1999).
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140
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|
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Exhibit
|
|
|
Number
|
|
Description
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|
|
4
|
.3
|
|
Trust Agreement between AFICA and Citibank, N.A. (Incorporated
herein by reference to exhibit number 4.2 of Doral
Financials Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 filed with the Commission on November 15,
1999).
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4
|
.4
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Form of Serial and Term Bond (included in Exhibit 4.3 hereof).
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4
|
.5
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Deed of Constitution of First Mortgage over Doral Financial
Plaza. (Incorporated herein by reference to exhibit number 4.4
of Doral Financials Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 filed with the Commission on
November 15, 1999).
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4
|
.6
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Mortgage Note secured by First Mortgage referred to in Exhibit
4.5 hereto (included in Exhibit 4.5 hereof).
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4
|
.7
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Pledge and Security Agreement. (Incorporated herein by reference
to exhibit number 4.6 of Doral Financials Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999 filed with the
Commission on November 15, 1999).
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4
|
.8
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|
Indenture, dated May 14, 1999, between Doral Financial and U.S.
Bank National Association, as trustee, pertaining to senior debt
securities. (Incorporated herein by reference to exhibit number
4.1 of Doral Financials Current Report on Form 8-K filed
with the Commission on May 21, 1999).
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4
|
.9
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|
Indenture, dated May 14, 1999, between Doral Financial and
Bankers Trust Company, as trustee, pertaining to subordinated
debt securities. (Incorporated herein by reference to exhibit
number 4.3 of Doral Financials Current Report on Form 8-K
filed with the Commission on May 21, 1999).
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4
|
.10
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Form of Stock Certificate for 7% Noncumulative Monthly Income
Preferred Stock, Series A. (Incorporated herein by reference to
exhibit number 4(A) of Doral Financials Registration
Statement on Form S-3 filed with the Commission on October 30,
1998).
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4
|
.11
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Form of Stock Certificate for 8.35% Noncumulative Monthly Income
Preferred Stock, Series B. (Incorporated herein by reference to
exhibit number 4.1 of Doral Financials Registration
Statement on Form 8-A filed with the Commission on August 30,
2000).
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4
|
.12
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First Supplemental Indenture, dated as of March 30, 2001,
between Doral Financial and Deutsche Bank Trust Company Americas
(formerly known as Bankers Trust Company), as trustee.
(Incorporated herein by reference to exhibit number 4.9 to Doral
Financials Current Report on Form 8-K filed with the
Commission on April 2, 2001).
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4
|
.13
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|
Form of Stock Certificate for 7.25% Noncumulative Monthly Income
Preferred Stock, Series C. (Incorporated herein by reference to
exhibit number 4.1 of Doral Financials Registration
Statement on Form 8-A filed with the Commission on May 30, 2002).
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4
|
.14
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Form of Stock Certificate for 4.75% Perpetual Cumulative
Convertible Preferred Stock. (Incorporated herein by reference
to exhibit number 4 to Doral Financials Current Report on
Form 10-K filed with the Commission on March 31, 2003).
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4
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.15
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Form of Stock Certificate for Mandatorily Convertible
Non-Cumulative Non-Voting Preferred Stock (Incorporated herein
by reference to exhibit number 4.1 of Doral Financials
Current Report on Form 8-K filed with the Commission on April
26, 2010)(included in Exhibit 3.4 hereto).
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10
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.1
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Order to Cease and Desist issued by the Board of Governors of
the Federal Reserve System on March 16, 2006. (Incorporated
herein by reference to exhibit number 99.2 of Doral
Financials Current Report of Form 8-K filed with the
Commission on March 17, 2006).
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10
|
.2
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|
Stipulation and Agreement of Partial Settlement, dated as of
April 27, 2007. (Incorporated herein by reference to same
exhibit number of Doral Financials Annual Report on Form
10-K for the year ended December 31, 2006 filed with the
Commission on April 30, 2007).
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10
|
.3
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Order to Cease and Desist issued by the Federal Deposit
Insurance Corporation, dated February 19, 2008. (Incorporated
herein by reference to exhibit number 99-2 of Doral
Financials Current Report of Form 8-K filed with the
Commission on February 21, 2008).
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10
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.4
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Purchase Agreement, dated September 23, 2003, between Doral
Financial Corporation and Wachovia Securities LLC, as
Representative of the Initial Purchasers of Doral
Financials 4.75% Perpetual Cumulative Convertible
Preferred Stock named therein. (Incorporated herein by reference
to exhibit number 1 to Doral Financials Current Report on
Form 8-K filed with the Commission on March 31, 2003).
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141
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Exhibit
|
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Number
|
|
Description
|
|
|
10
|
.5
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Employment Agreement, dated as of May 23, 2006, between Doral
Financial Corporation and Glen Wakeman. (Incorporated herein by
reference to exhibit number 10.1 to Doral Financials
Current Report on Form 8-K filed with the Commission on May 30,
2006).
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10
|
.6
|
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Employment Agreement, dated as of August 14, 2006, between Doral
Financial Corporation and Lesbia Blanco. (Incorporated herein by
reference to exhibit number 10.1 to Doral Financials
Quarterly Report on Form 10-Q for the quarter ended March 31,
2006 filed with the Commission on December 29, 2006).
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10
|
.7
|
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Employment Agreement, dated as of October 2, 2006, between Doral
Financial Corporation and Enrique R. Ubarri, Esq.
(Incorporated herein by reference to exhibit number 10.7 to
Doral Financials Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006 filed with the Commission on
December 29, 2006).
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10
|
.8
|
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Employment Agreement, dated as of June 25, 2007, between Doral
Financial Corporation and Paul Makowski (Incorporated herein by
reference to exhibit number 10.11 to Doral Financials
Annual Report on Form 10-K for the year ended December 31, 2007
filed with the Commission on March 19, 2008).
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10
|
.9
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|
Employment Agreement, dated as of June 1, 2007, between Doral
Financial Corporation and Christopher Poulton (Incorporated
herein by reference to exhibit number 10.10 to Doral
Financials Annual Report on Form 10-K for the year ended
December 31, 2007 filed with the Commission on March 19, 2008).
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10
|
.10
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|
Securityholders Registration Rights Agreement dated as of July
19, 2007, between Doral Financial Corporation and Doral Holding
Delaware, LLC (Incorporated herein by reference to exhibit
number 10.1 to the Current Report on Form 8-K filed with the
Commission on July 20, 2007).
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10
|
.11
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Advisory Services Agreements, dated as of July 19, 2007, between
Doral Financial Corporation and Bear Stearns Merchant Manager
III, L.P. (Incorporated herein by reference to exhibit number
10.2 to the Current Report on Form 8-K filed with the Commission
on July 20, 2007).
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10
|
.12
|
|
Doral Financial 2008 Stock Incentive Plan (Incorporated herein
by reference to Annex A to the Definitive Proxy Statement for
the Doral Financial 2008 Annual Stockholders Meeting filed
with the Commission on April 11, 2008).
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10
|
.13
|
|
Employment Agreement, dated as of March 24, 2009, between Doral
Financial and Robert E. Wahlman. (Incorporated herein by
reference to exhibit number 99.2 to Doral Financials
Current Report on Form 8-K filed with the Commission on March
26, 2009).
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10
|
.14
|
|
Summary of Doral Financials 2007 Key Incentive Plan
(Incorporated herein by reference to Exhibit 10.15 to Amendment
No. 1 to Doral Financials Registration Statement of Form
S-4 filed with the Commission on September 29, 2009).
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10
|
.15
|
|
Cooperation Agreement dated as of April 19, 2010 between Doral
Financial Corporation, Doral Holdings Delaware, LLC, Doral
Holdings, L.P. and Doral GP, Ltd. (Incorporated herein by
reference to exhibit number 10.15 to Doral Financials
Quarterly Report on Form 10-Q for the quarter ended March 31,
2010 filed with the Commission on May 10, 2010).
|
|
10
|
.16
|
|
Stock Purchase Agreement dated as of April 19, 2010 between
Doral Financial Corporation with the purchasers named therein.
(Incorporated herein by reference to exhibit number 10.16 to
Doral Financials Quarterly Report on Form 10-Q for the
quarter ended March 31, 2010 filed with the Commission on May
10, 2010).
|
|
10
|
.17
|
|
Amendment to Employment Agreement between the Company and Robert
Wahlman dated June 25, 2010. (Incorporated herein by reference
to exhibit number 10.3 to Doral Financials Current Report
on Form 8-K filed with the Commission on June 25, 2010).
|
|
10
|
.18
|
|
Form of Restricted Stock Award Granted to Certain Named
Executive Officers of the Company on June 25, 2010.
(Incorporated herein by reference to exhibit number 10.1 to
Doral Financials Current Report on Form 8-K filed with the
Commission on June 25, 2010).
|
|
10
|
.19
|
|
Form of Retention Bonus Letter Regarding Retention Bonuses
Granted to Certain Named Executive Officers of the Company on
June 25, 2010. (Incorporated herein by reference to exhibit
number 10.2 to Doral Financials Current Report on Form 8-K
filed with the Commission on June 25, 2010).
|
142
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.20
|
|
Amendment No. 1 to Securityholders and Registration Rights
Agreement between Doral Financial Corporation and Doral Holdings
Delaware, LLC dated as of August 5, 2010. (Incorporated herein
by reference to Exhibit 10.1 to Doral Financials Current
Report on Form 8-K filed with the Commission on August 10, 2010).
|
|
10
|
.21
|
|
Form of Restricted Stock Award Agreement for Directors of Doral
Financial Corporation under the 2008 Stock Incentive Plan.
(Incorporated herein by reference to exhibit number 10.1 to
Doral Financials Current Report on Form 8-K filed with the
Commission on January 24, 2011).
|
|
10
|
.22
|
|
Employment Agreement, dated as of December 31, 2010, between
Doral Financial and Maurice Spagnoletti.
|
|
12
|
.1
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
12
|
.2
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends.
|
|
21
|
|
|
List of Doral Financials Subsidiaries.
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
31
|
.1
|
|
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31
|
.2
|
|
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.1
|
|
CEO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
CFO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to the Sarbanes-Oxley Act of 2002.
|
143
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
DORAL FINANCIAL CORPORATION
(Registrant)
Glen R. Wakeman
Chief Executive Officer and President
Date: March 7, 2011
Robert E. Wahlman
Executive Vice President and
Chief Financial Officer
Date: March 7, 2011
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:
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Glen
R. Wakeman
Glen
R. Wakeman
|
|
Chief Executive Officer and President
|
|
March 7, 2011
|
|
|
|
|
|
/s/ Robert
E. Wahlman
Robert
E. Wahlman
|
|
Executive Vice President and Chief
Financial Officer
|
|
March 7, 2011
|
|
|
|
|
|
/s/ Frank
Baier
Frank
Baier
|
|
Director
|
|
March 7, 2011
|
|
|
|
|
|
/s/ Dennis
G. Buchert
Dennis
G. Buchert
|
|
Director
|
|
March 7, 2011
|
|
|
|
|
|
/s/ James
E. Gilleran
James
E. Gilleran
|
|
Director
|
|
March 7, 2011
|
|
|
|
|
|
/s/ Douglas
L. Jacobs
Douglas
L. Jacobs
|
|
Director
|
|
March 7, 2011
|
|
|
|
|
|
/s/ David
E. King
David
E. King
|
|
Director
|
|
March 7, 2011
|
|
|
|
|
|
/s/ Gerard
L. Smith
Gerard
L. Smith
|
|
Director
|
|
March 7, 2011
|
|
|
|
|
|
/s/ Laura
G. Vázquez
Laura
G. Vázquez
|
|
Chief Accounting Officer
|
|
March 7, 2011
|
144
Doral
Financial Corporation Index Page
|
|
|
|
|
|
|
Page
|
|
PART I FINANCIAL INFORMATION
|
|
|
|
|
Item 1 Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-10
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Doral Financial Corporation:
In our opinion, the accompanying consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of Doral Financial Corporation and its
subsidiaries at December 31, 2010 and 2009, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2010 in conformity
with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements and on the
Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Managements
assessment and our audit of Doral Financial Corporations
internal control over financial reporting also included controls
over the preparation of financial statements in accordance with
the instructions to the Consolidated Financial Statements for
Bank Holding Companies (Form FR Y-9C) to comply with the
reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA). A
companys internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Juan, Puerto Rico
March 7, 2011
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2013
Stamp 2493532 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
F-2
DORAL
FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except
|
|
|
|
for per share data)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
353,177
|
|
|
$
|
725,002
|
|
Other interest-earning assets
|
|
|
30,034
|
|
|
|
|
|
Restricted cash and due from banks and other interest-earning
assets
|
|
|
129,215
|
|
|
|
95,275
|
|
Securities held for trading, at fair value
|
|
|
45,029
|
|
|
|
47,726
|
|
Securities available for sale, at fair value (includes $743,843
and $1,402,906 pledged as collateral at December 31, 2010
and 2009, respectively, that may be repledged)
|
|
|
1,505,065
|
|
|
|
2,789,177
|
|
Federal Home Loan Bank of NY (FHLB) stock, at cost
|
|
|
78,087
|
|
|
|
126,285
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,628,181
|
|
|
|
2,963,188
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or market (includes
$121,988 and $143,111 pledged as collateral at December 31,
2010 and 2009, respectively, that may be repledged)
|
|
|
319,269
|
|
|
|
320,930
|
|
Loans receivable (includes $180,447 and $192,700 pledged as
collateral at December 31, 2010 and 2009, respectively,
that may be repledged)
|
|
|
5,588,812
|
|
|
|
5,516,891
|
|
Less: Unearned interest
|
|
|
(241
|
)
|
|
|
(1,083
|
)
|
Less: Allowance for loan and lease losses
|
|
|
(123,652
|
)
|
|
|
(140,774
|
)
|
|
|
|
|
|
|
|
|
|
Total net loans receivable
|
|
|
5,464,919
|
|
|
|
5,375,034
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
|
5,784,188
|
|
|
|
5,695,964
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
28,704
|
|
|
|
60,478
|
|
Mortgage-servicing advances
|
|
|
51,462
|
|
|
|
19,592
|
|
Accrued interest receivable
|
|
|
38,774
|
|
|
|
41,866
|
|
Servicing assets, net
|
|
|
114,342
|
|
|
|
118,493
|
|
Premises and equipment, net
|
|
|
104,053
|
|
|
|
101,437
|
|
Real estate held for sale, net
|
|
|
100,273
|
|
|
|
94,219
|
|
Deferred tax asset (DTA)
|
|
|
105,712
|
|
|
|
131,201
|
|
Other assets
|
|
|
178,239
|
|
|
|
185,237
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,646,354
|
|
|
$
|
10,231,952
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Deposits:
|
|
|
|
|
|
|
|
|
Non interest-bearing deposits
|
|
$
|
258,230
|
|
|
$
|
353,516
|
|
Other retail interest-bearing deposits
|
|
|
2,000,991
|
|
|
|
1,637,096
|
|
Brokered certificates of deposit
|
|
|
2,359,254
|
|
|
|
2,652,409
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
4,618,475
|
|
|
|
4,643,021
|
|
Securities sold under agreements to repurchase
|
|
|
1,176,800
|
|
|
|
2,145,262
|
|
Advances from FHLB
|
|
|
901,420
|
|
|
|
1,606,920
|
|
Other short-term borrowings
|
|
|
|
|
|
|
110,000
|
|
Loans payable
|
|
|
304,035
|
|
|
|
337,036
|
|
Notes payable
|
|
|
513,958
|
|
|
|
270,838
|
|
Accrued expenses and other liabilities
|
|
|
269,471
|
|
|
|
243,831
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,784,159
|
|
|
|
9,356,908
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Please refer to Notes 31 and
32)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, $1 par value; 40,000,000 shares
authorized; 5,811,391 shares issued and outstanding, at
aggregate liquidation preference value at December 31, 2010
(7,500,850 shares issued and outstanding, at aggregate
liquidation preference value at December 31, 2009):
|
|
|
|
|
|
|
|
|
Perpetual noncumulative nonconvertible preferred stock
(Series A, B and C)
|
|
|
148,700
|
|
|
|
197,388
|
|
Perpetual cumulative convertible preferred stock
|
|
|
203,382
|
|
|
|
218,040
|
|
Common stock, $0.01 par value; 300,000,000 shares
authorized; 127,293,756 shares issued and outstanding at
December 31, 2010 (97,500,000 shares authorized and
62,064,304 shares issued and outstanding at 2009)
|
|
|
1,273
|
|
|
|
621
|
|
Additional paid-in capital
|
|
|
1,219,280
|
|
|
|
1,010,661
|
|
Legal surplus
|
|
|
23,596
|
|
|
|
23,596
|
|
Accumulated deficit
|
|
|
(738,199
|
)
|
|
|
(463,781
|
)
|
Accumulated other comprehensive income (loss), net of income tax
expense of $1,332 and a benefit of $18,328 at December 31,
2010 and 2009, respectively
|
|
|
4,163
|
|
|
|
(111,481
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
862,195
|
|
|
|
875,044
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
8,646,354
|
|
|
$
|
10,231,952
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-3
DORAL
FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
for per share data)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
318,576
|
|
|
$
|
321,384
|
|
|
$
|
342,631
|
|
Mortgage-backed securities (MBS)
|
|
|
68,219
|
|
|
|
114,032
|
|
|
|
111,940
|
|
Interest-only strips (IOs)
|
|
|
6,186
|
|
|
|
6,142
|
|
|
|
7,162
|
|
Investment securities
|
|
|
1,566
|
|
|
|
10,234
|
|
|
|
47,602
|
|
Other interest-earning assets
|
|
|
6,974
|
|
|
|
6,473
|
|
|
|
15,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
401,521
|
|
|
|
458,265
|
|
|
|
524,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
110,838
|
|
|
|
125,133
|
|
|
|
156,730
|
|
Securities sold under agreements to repurchase
|
|
|
52,654
|
|
|
|
70,712
|
|
|
|
80,527
|
|
Advances from FHLB
|
|
|
47,155
|
|
|
|
62,948
|
|
|
|
69,643
|
|
Other short-term borrowings
|
|
|
15
|
|
|
|
1,212
|
|
|
|
233
|
|
Loans payable
|
|
|
6,742
|
|
|
|
9,881
|
|
|
|
18,865
|
|
Notes payable
|
|
|
23,513
|
|
|
|
20,752
|
|
|
|
21,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
240,917
|
|
|
|
290,638
|
|
|
|
347,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
160,604
|
|
|
|
167,627
|
|
|
|
177,481
|
|
Provision for loan and lease losses
|
|
|
98,975
|
|
|
|
53,663
|
|
|
|
48,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
61,629
|
|
|
|
113,964
|
|
|
|
128,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment (OTTI) losses
|
|
|
(44,717
|
)
|
|
|
(105,377
|
)
|
|
|
(920
|
)
|
Portion of loss recognized in other comprehensive income (before
taxes)
|
|
|
30,756
|
|
|
|
77,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit related OTTI losses
|
|
|
(13,961
|
)
|
|
|
(27,577
|
)
|
|
|
(920
|
)
|
Net gain (loss) on trading activities
|
|
|
25,437
|
|
|
|
(3,375
|
)
|
|
|
29,981
|
|
Net gain on mortgage loan sales and fees
|
|
|
8,614
|
|
|
|
9,746
|
|
|
|
13,112
|
|
Servicing income (loss) (net of
mark-to-market
adjustments)
|
|
|
20,906
|
|
|
|
29,337
|
|
|
|
(7,700
|
)
|
Net loss on early repayment of debt
|
|
|
(7,749
|
)
|
|
|
|
|
|
|
|
|
Net (loss) gain on sales of investment securities
|
|
|
(93,713
|
)
|
|
|
34,916
|
|
|
|
(3,979
|
)
|
Retail banking fees
|
|
|
28,595
|
|
|
|
29,088
|
|
|
|
28,060
|
|
Insurance agency commissions
|
|
|
13,306
|
|
|
|
12,024
|
|
|
|
12,801
|
|
Other income
|
|
|
4,489
|
|
|
|
3,042
|
|
|
|
8,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest (loss) income
|
|
|
(14,076
|
)
|
|
|
87,201
|
|
|
|
79,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
75,080
|
|
|
|
68,724
|
|
|
|
70,562
|
|
Professional services
|
|
|
53,902
|
|
|
|
31,582
|
|
|
|
24,156
|
|
FDIC insurance expense
|
|
|
19,833
|
|
|
|
18,238
|
|
|
|
4,654
|
|
Communication expenses
|
|
|
17,019
|
|
|
|
16,661
|
|
|
|
17,672
|
|
Occupancy expenses
|
|
|
17,658
|
|
|
|
15,232
|
|
|
|
18,341
|
|
EDP expenses
|
|
|
14,197
|
|
|
|
13,727
|
|
|
|
11,146
|
|
Depreciation and amortization
|
|
|
12,689
|
|
|
|
12,811
|
|
|
|
16,013
|
|
Taxes, other than payroll and income taxes
|
|
|
11,177
|
|
|
|
10,051
|
|
|
|
9,880
|
|
Recourse provision (recovery)
|
|
|
3,939
|
|
|
|
3,809
|
|
|
|
(965
|
)
|
Advertising
|
|
|
8,917
|
|
|
|
6,633
|
|
|
|
8,519
|
|
Office expenses
|
|
|
5,490
|
|
|
|
5,303
|
|
|
|
6,099
|
|
Corporate insurance
|
|
|
5,664
|
|
|
|
4,662
|
|
|
|
4,586
|
|
Other
|
|
|
25,929
|
|
|
|
21,811
|
|
|
|
27,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,494
|
|
|
|
229,244
|
|
|
|
217,970
|
|
Other reserves and OREO:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Lehman Brothers, Inc. (LBI)
|
|
|
12,359
|
|
|
|
|
|
|
|
21,600
|
|
Other real estate owned (OREO) expenses
|
|
|
40,711
|
|
|
|
14,542
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,070
|
|
|
|
14,542
|
|
|
|
22,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
324,564
|
|
|
|
243,786
|
|
|
|
240,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(277,011
|
)
|
|
|
(42,621
|
)
|
|
|
(32,258
|
)
|
Income tax expense (benefit)
|
|
|
14,883
|
|
|
|
(21,477
|
)
|
|
|
286,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
shareholders(1)(2)
|
|
$
|
(274,418
|
)
|
|
$
|
(45,613
|
)
|
|
$
|
(351,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share(1)(2)
|
|
$
|
(2.96
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(6.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the years ended
December 31, 2010, 2009 and 2008, net loss per common share
represents basic and diluted loss per common share,
respectively, for each of the periods presented. Refer to
Note 36 for additional information regarding net loss
attributable to common shareholders.
|
|
(2) |
|
For the years ended
December 31, 2010 and 2009, net loss per common share
included an income of $26.6 million and a loss of
$8.6 million, respectively, related to the effect of the
preferred stock exchange. Refer to Note 36 for additional
information.
|
The accompanying notes are an integral part of these financial
statements.
F-4
DORAL
FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
415,428
|
|
|
$
|
573,250
|
|
|
$
|
573,250
|
|
Preferred stock issued (mandatorily convertible)
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock at par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncumulative nonconvertible
|
|
|
(48,687
|
)
|
|
|
(30,862
|
)
|
|
|
|
|
Cumulative convertible
|
|
|
(14,659
|
)
|
|
|
(126,960
|
)
|
|
|
|
|
Mandatorily convertible
|
|
|
(171,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
352,082
|
|
|
|
415,428
|
|
|
|
573,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
621
|
|
|
|
538
|
|
|
|
538
|
|
Common stock issued/converted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncumulative nonconvertible
|
|
|
40
|
|
|
|
14
|
|
|
|
|
|
Cumulative convertible
|
|
|
12
|
|
|
|
69
|
|
|
|
|
|
Mandatorily convertible
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,273
|
|
|
|
621
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
1,010,661
|
|
|
|
849,172
|
|
|
|
849,081
|
|
Stock-based compensation recognized
|
|
|
1,510
|
|
|
|
94
|
|
|
|
91
|
|
Conversion of preferred stock to common stock at par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncumulative nonconvertible
|
|
|
17,010
|
|
|
|
5,697
|
|
|
|
|
|
Cumulative convertible
|
|
|
19,699
|
|
|
|
155,698
|
|
|
|
|
|
Mandatorily convertible
|
|
|
170,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,219,280
|
|
|
|
1,010,661
|
|
|
|
849,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Surplus
|
|
|
23,596
|
|
|
|
23,596
|
|
|
|
23,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(463,781
|
)
|
|
|
(418,168
|
)
|
|
|
(66,610
|
)
|
Net loss
|
|
|
(291,894
|
)
|
|
|
(21,144
|
)
|
|
|
(318,259
|
)
|
Dividend accrued on preferred stock
|
|
|
(9,109
|
)
|
|
|
(7,516
|
)
|
|
|
|
|
Cash dividends paid on preferred stock
|
|
|
|
|
|
|
(8,325
|
)
|
|
|
(33,299
|
)
|
Effect of conversion of preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncumulative nonconvertible
|
|
|
31,637
|
|
|
|
23,917
|
|
|
|
|
|
Cumulative convertible
|
|
|
(5,052
|
)
|
|
|
(32,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(738,199
|
)
|
|
|
(463,781
|
)
|
|
|
(418,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), Net of Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(111,481
|
)
|
|
|
(123,217
|
)
|
|
|
(33,148
|
)
|
Other comprehensive income (loss), net of deferred tax
|
|
|
115,644
|
|
|
|
11,736
|
|
|
|
(90,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
4,163
|
|
|
|
(111,481
|
)
|
|
|
(123,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
862,195
|
|
|
$
|
875,044
|
|
|
$
|
905,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
DORAL
FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF COMPRENHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities arising during the period
|
|
|
58,812
|
|
|
|
104,851
|
|
|
|
(78,504
|
)
|
Non-credit portion of OTTI losses
|
|
|
(30,756
|
)
|
|
|
(77,800
|
)
|
|
|
|
|
Reclassification of net realized losses (gains) included in net
loss
|
|
|
102,873
|
|
|
|
(20,377
|
)
|
|
|
(11,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) on investment securities,
before tax
|
|
|
130,929
|
|
|
|
6,674
|
|
|
|
(90,208
|
)
|
Income tax (expense) benefit related to investment securities
|
|
|
(19,660
|
)
|
|
|
(1,001
|
)
|
|
|
13,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) on investment securities, net
of tax
|
|
|
111,269
|
|
|
|
5,673
|
|
|
|
(76,954
|
)
|
Other comprehensive income (loss) on cash flow
hedges(1)
|
|
|
4,375
|
|
|
|
6,063
|
|
|
|
(13,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
115,644
|
|
|
|
11,736
|
|
|
|
(90,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(176,250
|
)
|
|
$
|
(9,408
|
)
|
|
$
|
(408,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) on investment securities
|
|
$
|
10,741
|
|
|
$
|
(37,726
|
)
|
|
$
|
(109,530
|
)
|
Other comprehensive losses on investment securities on which
OTTI has been recognized
|
|
|
(3,329
|
)
|
|
|
(66,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) on investment securities
|
|
|
7,412
|
|
|
|
(103,857
|
)
|
|
|
(109,530
|
)
|
Other comprehensive loss on cash flow
hedge(1)
|
|
|
(3,249
|
)
|
|
|
(7,624
|
)
|
|
|
(13,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss), net of tax
|
|
$
|
4,163
|
|
|
$
|
(111,481
|
)
|
|
$
|
(123,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2010 and
2009, other comprehensive loss on cash flow hedges includes
$1.3 million and $3.0 million related to a deferred
tax asset valuation allowance.
|
The accompanying notes are an integral part of these financial
statements.
F-6
DORAL
FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,510
|
|
|
|
94
|
|
|
|
91
|
|
Depreciation and amortization
|
|
|
12,689
|
|
|
|
12,811
|
|
|
|
16,013
|
|
Mark-to-market
adjustment of servicing assets
|
|
|
12,087
|
|
|
|
3,131
|
|
|
|
42,642
|
|
Deferred tax expense (benefit)
|
|
|
7,452
|
|
|
|
(10,029
|
)
|
|
|
281,761
|
|
Provision for loan and lease losses
|
|
|
98,975
|
|
|
|
53,663
|
|
|
|
48,856
|
|
Provision for OREO losses
|
|
|
31,581
|
|
|
|
13,309
|
|
|
|
2,114
|
|
Net loss on LBI
|
|
|
12,359
|
|
|
|
|
|
|
|
21,600
|
|
Impairment of other assets
|
|
|
482
|
|
|
|
|
|
|
|
1,203
|
|
Net loss on sale of premises and equipment
|
|
|
|
|
|
|
16
|
|
|
|
|
|
Loss (gain) on sale of real estate held for sale
|
|
|
4,921
|
|
|
|
(502
|
)
|
|
|
(1,650
|
)
|
Net gain on assets to be disposed of by sale
|
|
|
|
|
|
|
|
|
|
|
(979
|
)
|
Net premium amortization (discount accretion) on loans,
investment securities and debt
|
|
|
17,043
|
|
|
|
7,920
|
|
|
|
(19,555
|
)
|
Origination and purchases of loans held for sale
|
|
|
(403,748
|
)
|
|
|
(459,844
|
)
|
|
|
(445,066
|
)
|
Principal repayments and sales of loans held for sale
|
|
|
94,650
|
|
|
|
416,197
|
|
|
|
220,247
|
|
Loss (gain) on sale of securities
|
|
|
81,826
|
|
|
|
(41,296
|
)
|
|
|
(9,352
|
)
|
Net OTTI losses
|
|
|
13,961
|
|
|
|
27,577
|
|
|
|
920
|
|
Net loss on early repayment of liabilities
|
|
|
7,749
|
|
|
|
|
|
|
|
|
|
Unrealized loss (gain) on trading securities
|
|
|
127
|
|
|
|
16,108
|
|
|
|
(14,944
|
)
|
Purchases of securities held for trading
|
|
|
(36,586
|
)
|
|
|
(200,042
|
)
|
|
|
(717,980
|
)
|
Principal repayment and sales of securities held for trading
|
|
|
453,104
|
|
|
|
816,803
|
|
|
|
1,075,622
|
|
Amortization and net gain on the fair value of IOs
|
|
|
1,473
|
|
|
|
6,456
|
|
|
|
(251
|
)
|
Unrealized loss on derivative instruments
|
|
|
2,032
|
|
|
|
648
|
|
|
|
1,519
|
|
(Increase) decrease in derivative instruments
|
|
|
(2,099
|
)
|
|
|
247
|
|
|
|
(143
|
)
|
Decrease (increase) in accounts receivable
|
|
|
19,415
|
|
|
|
(5,281
|
)
|
|
|
7,955
|
|
(Increase) decrease in mortgage servicing advances
|
|
|
(31,870
|
)
|
|
|
(1,283
|
)
|
|
|
2,312
|
|
Decrease (increase) in accrued interest receivable
|
|
|
3,092
|
|
|
|
1,068
|
|
|
|
(3,722
|
)
|
Increase in other assets
|
|
|
(15,453
|
)
|
|
|
(153,013
|
)
|
|
|
(28,463
|
)
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
115,151
|
|
|
|
(218,445
|
)
|
|
|
(68,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
501,923
|
|
|
|
286,313
|
|
|
|
412,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
210,029
|
|
|
|
265,169
|
|
|
|
93,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
(1,605,414
|
)
|
|
|
(2,486,297
|
)
|
|
|
(2,923,708
|
)
|
Principal repayment and sales of securities available for sale
|
|
|
2,893,431
|
|
|
|
3,132,457
|
|
|
|
856,844
|
|
Decrease (increase) in FHLB stock
|
|
|
48,198
|
|
|
|
(8,347
|
)
|
|
|
(44,071
|
)
|
Originations, purchases and repurchases of loans receivable
|
|
|
(1,138,400
|
)
|
|
|
(866,626
|
)
|
|
|
(946,419
|
)
|
Principal repayment of loans receivable
|
|
|
666,585
|
|
|
|
304,192
|
|
|
|
574,732
|
|
Proceeds from sales of servicing assets
|
|
|
192
|
|
|
|
159
|
|
|
|
|
|
Purchases of premises and equipment
|
|
|
(14,653
|
)
|
|
|
(9,226
|
)
|
|
|
(9,240
|
)
|
Proceeds from sale of premises and equipment
|
|
|
|
|
|
|
143
|
|
|
|
|
|
Proceeds from assets to be disposed of by sale
|
|
|
|
|
|
|
|
|
|
|
4,761
|
|
Proceeds from sales of real estate held for sale
|
|
|
33,553
|
|
|
|
35,271
|
|
|
|
23,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
883,492
|
|
|
|
101,726
|
|
|
|
(2,463,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in deposits
|
|
|
(24,546
|
)
|
|
|
240,249
|
|
|
|
134,748
|
|
(Decrease) increase in securities sold under agreements to
repurchase
|
|
|
(976,211
|
)
|
|
|
237,815
|
|
|
|
967,112
|
|
Proceeds from advances from FHLB
|
|
|
800,000
|
|
|
|
507,000
|
|
|
|
2,129,400
|
|
Repayment of advances from FHLB
|
|
|
(1,505,500
|
)
|
|
|
(523,480
|
)
|
|
|
(1,740,000
|
)
|
Proceeds from other short-term borrowings
|
|
|
345,000
|
|
|
|
2,996,000
|
|
|
|
1,031,600
|
|
Repayment of other short-term borrowings
|
|
|
(455,000
|
)
|
|
|
(3,237,600
|
)
|
|
|
(680,000
|
)
|
Repayment of secured borrowings
|
|
|
(33,001
|
)
|
|
|
(29,740
|
)
|
|
|
(35,925
|
)
|
Proceeds from notes payable
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(7,054
|
)
|
|
|
(6,357
|
)
|
|
|
(5,892
|
)
|
Issuance of common stock
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
Payment associated with conversion of preferred stock
|
|
|
|
|
|
|
(4,972
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(8,325
|
)
|
|
|
(33,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,435,312
|
)
|
|
|
170,590
|
|
|
|
1,767,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(341,791
|
)
|
|
$
|
537,485
|
|
|
$
|
(601,927
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
725,002
|
|
|
|
187,517
|
|
|
|
789,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
383,211
|
|
|
$
|
725,002
|
|
|
$
|
187,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
353,177
|
|
|
$
|
725,002
|
|
|
$
|
184,027
|
|
Other interest-earning assets
|
|
|
30,034
|
|
|
|
|
|
|
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
383,211
|
|
|
$
|
725,002
|
|
|
$
|
187,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
DORAL
FINANCIAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Supplemental schedule of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan securitizations
|
|
$
|
404,631
|
|
|
$
|
430,938
|
|
|
$
|
374,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans foreclosed
|
|
$
|
90,353
|
|
|
$
|
81,904
|
|
|
$
|
47,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of servicing assets
|
|
$
|
8,128
|
|
|
$
|
7,387
|
|
|
$
|
7,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of loans held for investment portfolio to the
held for sale portfolio
|
|
$
|
127,557
|
|
|
$
|
6,055
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of loans held for sale portfolio to the held
for investment portfolio
|
|
$
|
210
|
|
|
$
|
6,558
|
|
|
$
|
48,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of assets to be disposed of by sale to premises
and equipment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of securities from the held for trading to
available for sale portfolio
|
|
$
|
|
|
|
$
|
|
|
|
$
|
68,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information for cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay interest
|
|
$
|
244,944
|
|
|
$
|
303,460
|
|
|
$
|
197,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay income taxes
|
|
$
|
8,821
|
|
|
$
|
5,282
|
|
|
$
|
26,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-8
DORAL
FINANCIAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-10
|
|
|
|
|
F-10
|
|
|
|
|
F-23
|
|
|
|
|
F-26
|
|
|
|
|
F-26
|
|
|
|
|
F-27
|
|
|
|
|
F-28
|
|
|
|
|
F-30
|
|
|
|
|
F-33
|
|
|
|
|
F-34
|
|
|
|
|
F-43
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
|
|
|
F-52
|
|
|
|
|
F-53
|
|
|
|
|
F-54
|
|
|
|
|
F-54
|
|
|
|
|
F-55
|
|
|
|
|
F-55
|
|
|
|
|
F-56
|
|
|
|
|
F-56
|
|
|
|
|
F-58
|
|
|
|
|
F-58
|
|
|
|
|
F-59
|
|
|
|
|
F-60
|
|
|
|
|
F-61
|
|
|
|
|
F-61
|
|
|
|
|
F-66
|
|
|
|
|
F-67
|
|
|
|
|
F-68
|
|
|
|
|
F-68
|
|
|
|
|
F-70
|
|
|
|
|
F-70
|
|
|
|
|
F-74
|
|
|
|
|
F-76
|
|
|
|
|
F-77
|
|
|
|
|
F-80
|
|
|
|
|
F-89
|
|
|
|
|
F-91
|
|
|
|
|
F-94
|
|
|
|
|
F-97
|
|
|
|
|
F-98
|
|
|
|
|
F-101
|
|
F-9
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL CORPORATION
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
|
|
1.
|
Nature
of Operations and Basis of Presentation
|
Doral Financial Corporation (Doral, Doral
Financial or the Company) is a bank holding
company engaged in banking (including thrift operations),
mortgage banking and insurance agency activities through its
wholly-owned subsidiaries Doral Bank (Doral Bank
PR), Doral Bank, FSB (Doral Bank US), Doral
Insurance Agency, Inc. (Doral Insurance Agency), and
Doral Properties, Inc. (Doral Properties). Doral
Bank PR operates three wholly-owned subsidiaries, Doral
Mortgage, LLC (Doral Mortgage), Doral Money, Inc.
(Doral Money), engaged in commercial and middle
market syndicated lending primarily in the New York metropolitan
area and since September 2010, in the northwest region of
Florida, and CB, LLC, an entity formed to dispose of a real
estate project of which Doral Bank PR took possession during
2005. Doral Money consolidates two variable interest entities
created for the purpose of entering into a collateralized loan
arrangement with a third party.
In the past, the Company operated an institutional securities
business through Doral Securities, Inc. (Doral
Securities), a wholly-owned subsidiary of Doral Financial.
During the third quarter of 2007, Doral Securities voluntarily
withdrew its license as broker dealer with the SEC and its
membership with the Financial Industry Regulatory Authority
(FINRA). As a result of this decision, Doral
Securities operations during 2008 were limited to acting
as a co-investment manager to a local fixed-income investment
company. Doral Securities provided notice to the investment
company in December 2008 of its intent to assign its rights and
obligations under the investment advisory agreement to Doral
Bank PR. The assignment was completed in January 2009 and Doral
Securities did not conduct any other operations in 2009. During
the third quarter of 2009, this investment advisory agreement
was terminated by the investment company. Effective on
December 31, 2009, Doral Securities was merged with and
into its holding company, Doral Financial Corporation.
On July 1, 2008, Doral International, Inc. (Doral
International), an international banking entity
(IBE), subject to supervision, examination and
regulation by the Commissioner of Financial Institutions under
the International Banking Center Regulatory Act (the IBC
Act), was merged with and into Doral Bank PR, Doral
Internationals parent company, with Doral Bank PR being
the surviving corporation, in a transaction structured as a tax
free reorganization.
On December 16, 2008, Doral Investment International, LLC
(Doral Investment) was organized to become a new
subsidiary of Doral Bank PR, but is not operational.
Certain amounts reflected in the 2009 and 2008 Consolidated
Financial Statements have been reclassified to conform with the
presentation for 2010.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying Consolidated Financial Statements include the
accounts of Doral Financial Corporation and its wholly-owned
subsidiaries. The Companys accounting and reporting
policies conform with the generally accepted accounting
principles in the United States of America (GAAP).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The following summarizes the most significant accounting
policies followed in the preparation of the accompanying
Consolidated Financial Statements:
Use of
Estimates in the Preparation of Financial
Statements
The preparation of the Consolidated Financial Statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements
as well as the reported
F-10
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
amounts of revenues and expenses during the reporting periods.
Because of uncertainties inherent in the estimation process, it
is possible that actual results could differ from those
estimates.
The accounting policies that have a significant impact on Doral
Financials statements and that require the most judgment
are those relating to the assumptions underlying the valuation
of its MSRs, IOs, investments (including OTTI), collectibility
of accounts receivable, the value of repossessed assets, income
taxes, the allowance for loan and lease losses and recourse
obligations.
The estimation of fair value for financial instruments,
including derivative instruments, required to be recorded at
fair value under GAAP permeates the financial statements. Fair
value estimates are included in Doral Financials financial
condition and results of operations and, in many instances,
requires management to make complex judgments. Fair value is
generally based on quoted prices, including dealer marks or
direct market observations. If quoted prices or market
parameters are not available, fair value is based on internal
and external valuation models using market data inputs adjusted
by the Companys particular characteristics, when
appropriate. The use of different models and assumptions could
produce materially different estimates of fair value.
Other
Interest-Earning Assets
Other interest-earning assets include time deposits, short-term
investments and cash pledged to counterparties, among others.
These investments are carried at cost, which approximates fair
value due to their short-term nature (less than three months).
In the case of securities purchased under agreements to resell,
it is the Companys policy to require and take possession
of collateral whose fair value exceeds the balance of the
related receivable. The collateral is valued daily, and the
Company may require counterparties to deposit additional
collateral or return collateral pledged when appropriate. The
securities underlying the agreements are not recorded in the
asset accounts of the Company since the counterparties retain
effective control of such securities. Also, other
interest-earning assets include cash pledged with counterparties
to back the Companys securities sold under agreements to
repurchase
and/or
derivative positions.
Investment
Securities
Investment securities are recorded on trade date basis, except
for securities underlying forward purchases and sales contracts
which are recorded on contractual settlement date. At the end of
the period, unsettled purchase transactions are recorded in the
Companys investment portfolio and as a liability, while
unsettled sale transactions are deducted from the Companys
investment portfolio and recorded as an other asset. Investment
securities are classified as follows:
Securities Held for Trading: Securities that
are bought and held principally for the purpose of selling them
in the near term are classified as securities held for trading
and reported at fair value generally based on quoted market
prices or quoted market prices for similar instruments. If
quoted market prices are not available, fair values are
estimated based on dealer quotes, pricing models, discounted
cash flow methodologies, or similar techniques where the
determination of fair value may require significant management
judgment on estimation. Realized and unrealized changes in
market value are recorded in net gain or loss on trading
activities in the period in which the changes occur. Interest
income and expense arising from trading instruments are included
in net interest income in the Consolidated Statements of
Operations.
Forwards, caps and swap contracts are accounted for as
derivative instruments. Doral Financial recognizes a derivative
at the time of the execution of the contract and marks to market
the contracts against current operations until settlement as
part of its trading activities. The securities underlying the
forward contracts are recorded at settlement at their market
value and generally classified as available for sale.
F-11
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Securities Held to Maturity: Securities that
the Company has the ability and intent to hold until their
maturities are classified as held to maturity and reported at
amortized cost.
Securities Available for Sale: Securities not
classified as either securities held to maturity or securities
held for trading are classified as available for sale and
reported at fair value, with unrealized non-credit gains and
losses excluded from net income (loss) and reported, net of tax,
in other comprehensive income (loss). The cost of securities
sold is determined on the specific identification method.
For most of the Companys investment securities, deferred
items, including premiums, and discounts, are amortized into
interest income over the contractual life of the securities
adjusted for actual prepayments using the effective interest
method.
The Company regularly evaluates each security whose value has
declined below amortized cost to assess whether the decline in
fair value is
other-than-temporary.
Amortized cost basis includes adjustments made to the cost of a
security for accretion, amortization, collection of cash,
previous OTTI recognized into earnings (less any cumulative
effect adjustments) and fair value hedge accounting adjustments.
OTTI is considered to have occurred under the following
circumstances:
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If the Company intends to sell the investment security and its
fair value is less than its amortized cost.
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If, based on available evidence, it is more likely than not that
the Company will decide or be required to sell the investment
security before the recovery of its amortized cost basis.
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If the Company does not expect to recover the entire amortized
cost basis of the investment security. This credit loss occurs
when the present value of cash flows expected to be collected is
less than the amortized cost basis of the security. In
determining whether a credit loss exists, the Company uses its
best estimate of the present value of cash flows expected to be
collected from the investment security. Cash flows expected to
be collected are estimated based on a careful assessment of all
available information. The difference between the present value
of the cash flows expected to be collected and the amortized
cost basis represents the amount of credit loss.
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Beginning in 2009, the credit component of OTTI losses is
recognized in earnings and the non-credit component is
recognized in accumulated other comprehensive income (loss).
Prior to 2009, the credit and non-credit components of OTTI
losses were included in current period earnings.
Other Investment Securities: Investments in
equity that do not have readily determinable fair values, are
classified as other securities in the Consolidated Statement of
Financial Condition. These securities are stated at cost. Stock
that is owned by the Company to comply with regulatory
requirements, such as FHLB stock, is included in this category.
Loans
Held for Sale
Loans held for sale are carried at the lower of net cost or
market value on an aggregate portfolio basis. The amount by
which cost exceeds market value, if any, is accounted for as a
loss through a valuation allowance. Changes in the valuation
allowance are included in the determination of income in the
period in which those changes occur and are reported under net
gain on mortgage loan sales and fees in the Consolidated
Statements of Operations. Loan origination fees and direct loan
origination costs related to loans held for sale are deferred as
an adjustment to the carrying basis of such loans until these
are sold or securitized. Premiums and discounts on loans
classified as held for sale are not amortized as interest income
while such loans are classified as held for sale. See
Servicing Assets and Servicing Activities, below for
a description of the sales and securitization process. Loans
held for sale consist primarily of mortgage loans held for sale.
The market value of mortgage loans held for sale is generally
based on quoted market prices for
F-12
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
MBS adjusted by particular characteristics like guarantee fees,
servicing fees, actual delinquency and the credit risk
associated to the individual loans.
The Company recognizes interest income on loans held for sale on
an accrual basis, except when management believes the collection
of principal or interest is doubtful. Loans held for sale are
placed on non-accrual status when any portion of principal or
interest is more than 90 days past due, except for FHA/VA
guaranteed loans that are still accruing until 270 days
past due. When a loan is placed on non-accrual status, all
accrued but unpaid interest to date is reversed against interest
income. Such interest, if collected, is credited to income in
the period of the recovery and the loan is accounted for on the
cash or cost recovery method until it qualifies for return to
accrual status. Loans return to accrual status when principal
and interest become current under the terms of the loan
agreement or when the loan is both well-secured and in the
process of collection and collectibility is no longer doubtful.
The Company regularly reviews its loans held for sale portfolio
and may transfer loans from the loans held for sale portfolio to
its loans receivable portfolio. At the time of such transfers,
the Company recognizes a market value adjustment charged against
earnings based on the lower of aggregate cost or market value.
Loans held for sale include GNMA defaulted loans which have a
conditional buy-back option (refer to Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities below for more information). If the Company
exercises the buy-back options, the loans are repurchased and
the composition of the Statement of Financial Condition is
affected. The loans are removed from the held for sale portfolio
and are classified as part of the held for investment (loans
receivable) portfolio, and the cash and the payable previously
recorded are reduced accordingly. If the Company exercises the
buy-back options it may incur a loss to the extent of any
interest advanced through its servicing.
Loans
Receivable
Loans receivable are those held principally for investment
purposes. These consist of construction and land, residential
mortgage, commercial real estate, commercial and industrial, and
consumer loans which the Company does not expect to sell in the
near future.
Loans receivable are carried at their unpaid principal balance,
less unearned interest, net of deferred loan fees or costs
(including premiums and discounts), undisbursed portion of
construction loans and an allowance for loan and lease losses.
These items, except for the undisbursed portion of construction
loans and the allowance for loan and lease losses, are deferred
at inception and amortized into interest income throughout the
lives of the underlying loans using the effective interest
method.
The Company recognizes interest income on loans receivable on an
accrual basis, except when management believes the collection of
principal or interest is doubtful. Loans receivable are placed
on non-accrual status when any portion of principal or interest
is more than 90 days past due, except for revolving lines
of credit and credit cards that are still accruing until
180 days past due and FHA/VA guaranteed loans that are
still accruing until 270 days past due. When a loan is
placed on non-accrual status, all accrued but unpaid interest to
date is reversed against interest income. Such interest, if
collected, is credited to income in the period of the recovery
and the loan is accounted for on the cash or cost recovery
method until it qualifies for return to accrual status. Loans
return to accrual status when principal and interest become
current under the terms of the loan agreement or when the loan
is both well-secured and in the process of collection and
collectibility is no longer doubtful. In the case of loans under
troubled debt restructuring agreements, the Company continues to
place them in non-accrual status and reports them as
non-performing loans unless the Company expects to collect all
contractual principal and interest and the loans have proven
repayment capacity for a sufficient amount of time at which time
the loans are returned to accrual status.
The Company also engages in the restructuring
and/or
modifications of the debt of borrowers, who are delinquent due
to economic or legal reasons, if the Company determines that it
is in the best interest for both
F-13
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
the Company and the borrower to do so. In some cases, due to the
nature of the borrowers financial condition, the
restructure or loan modification fits the definition of Troubled
Debt Restructuring (TDR). Such restructures are
identified as TDRs and accounted for as impaired loans
(described below).
Allowance
for Loan and Lease Losses
The Companys allowance for loan and lease losses
(ALLL) is established to provide for probable credit
losses inherent in the portfolio of loans receivable as of the
balance sheet date. Management estimates the ALLL separately for
each product category (non-FHA/VA residential mortgage loans,
other consumer, commercial real estate, construction and land
and other commercial and industrial) and geography (Puerto Rico
and U.S. mainland), and combines the amounts in reaching
its estimate for the full portfolio. The Company performs
periodic and systematic detailed reviews of its lending
portfolios to identify credit risks and to assess the overall
collectability of those portfolios. The allowance for certain
homogeneous loan portfolios, which generally consist of consumer
loans and certain commercial loans, is based on aggregated
portfolio segment evaluations generally by product type. The
remaining commercial portfolios (including commercial real
estate, construction and land, and large commercial and
industrial loans) are reviewed on an individual loan basis.
Loans subject to individual reviews are analyzed and segregated
by risk according to the Companys internal risk rating
scale. The ALLL for these portfolios is based on these risk
classifications, in conjunction with an analysis of historical
loss experience, current economic conditions, industry
performance trends, geographic or obligor concentrations and any
other pertinent information.
Managements product category loss reserve estimate
consists of one or more of the following methodologies for
performing loans: (i) the reserve is estimated based upon
the probability a loan will proceed through foreclosure and the
collateral will be repossessed, and recognizing the loss that
will be realized on the repossessed collateral, if any (mortgage
loans, certain commercial real estate and small land loans),
(ii) historical experience of charge-offs related to the
outstanding principal balance, or (iii) historical
experience of charge-offs as related to credit grade and
outstanding principal balances (construction loans, commercial
loans, some commercial real estate loans, and some land loans).
For non-performing loans, the reserve is estimated either by
(i) considering the loans current level of
delinquency and the probability that the loan will be foreclosed
upon from that delinquency stage, and the loss that will be
realized assuming foreclosure (mortgage loans), or
(ii) measuring impairment for individual loans considering
the specific facts and circumstances of the borrower,
guarantors, collateral, legal matters, market matters, and other
circumstances that may affect the borrowers ability to
repay their loan, Dorals ability to repossess and
liquidate the collateral, and Dorals ability to pursue and
enforce any deficiency in payment received. The probability of a
loan migrating to foreclosure whether a current loan or a past
due loan, and the amount of loss given foreclosure, is based
upon the Companys own experience, with more recent
experience judgmentally weighted more heavily in the calculated
factors. With this practice management believes the factors used
better represent existing economic conditions. In estimating the
loss given foreclosure factor, management differentiates the
foreclosure factor based upon the loans
loan-to-value
ratio (calculated as current loan balance divided by the
original appraisal value).
In accordance with accounting guidance, loans determined to be
TDRs are impaired and for purposes of estimating the ALLL must
be individually evaluated for impairment. For residential
mortgage loans determined to be TDRs, on a monthly basis, the
Company pools TDRs with similar characteristics and performs an
impairment analysis of discounted cash flows. If a pool yields a
present value below the recorded investment in the pool of
loans, an impairment is recognized by a charge to the provision
for loan and lease losses and a credit to the allowance for loan
and lease losses. For loss mitigated loans without a concession
in the interest rate, the Company performs an impairment
analysis of discounted cash flows giving consideration to the
probability of default and loss given foreclosure on those
estimated cash flows, and records an impairment by charging the
provision for loan and lease losses with a corresponding credit
to the ALLL.
F-14
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Doral charges loans off when it is determined that the
likelihood of collecting the amount is so low the continuation
of their recognition as an asset is not warranted. For
residential mortgage loans, the reported loan investment is
reduced, by a charge to the ALLL, to an updated appraised amount
less estimated costs to sell the property when the loan is
180 days past due. For consumer loans, the reported loan
balance is reduced by a charge to the ALLL when the loan is
120 days past due, except for revolving lines of credit
(typically credit cards) which are charged off to the estimated
value of the collateral (if any) at 180 days. For all
commercial loans the determination of whether a loan should be
fully or partially charged off is much more subjective, and must
consider the results of an operating business, the value of the
collateral, the financial strength of the guarantors, the
likelihood of different outcomes of pending litigation affecting
the borrower, the potential effect of new laws or regulations,
and other matters. Dorals commercial loan charge-offs are
determined by the Charge-off Committee, which is a subcommittee
of the Credit Committee.
Doral evaluates all commercial real estate, construction and
land and other commercial loans classified as substandard or
lower by its internal loan classification processes for
impairment, either individually or collectively, with other
loans generally of the same risk characteristics. Loans are
considered substandard when, based on current information and
events, it is probable that the borrower will not be able to
fulfill their contractual obligations pursuant to the loan
agreement. Commercial and construction and land substandard
loans with balances greater than $1.0 million are reviewed
individually for impairment, though management may elect to
individually review smaller balance loans that are considered
higher risk. Substandard commercial real estate loans greater
than $0.5 million are also individually evaluated for
impairment and 25% of substandard commercial loans between
$50,000 and $500,000 are individually evaluated for impairment
each quarter so that in a one year period all substandard
commercial loans over $50,000 have been individually evaluated
for impairment. If a loan is determined to be impaired, the
impairment is generally measured as the difference between the
loan balance and present value of expected cash flows associated
with the loan at the loans effective interest rate less
costs to sell. As a practical expedient, and for all collateral
dependent loans for which foreclosure is probable, Doral
measures impairment based on the fair value of the collateral.
The fair value of the collateral is generally obtained from
appraisals, but if a current appraisal is not available it may
be estimated using forecasted cash flows discounted at a rate
that provides for a reasonable builder return on the investment
equity and market borrowing rates for similar assets.
An allowance reserve is established for individual impaired
loans. Loans are considered impaired when, based on current
information and events it is probable that the borrower will not
be able to fulfill its obligation under the contractual terms of
the loan agreement. The impairment loss measurement, if any, on
each individual loan identified as impaired is generally
measured based on the present value of expected cash flows
discounted at the loans effective interest rate. As a
practical expedient, impairment may be measured based on the
loans observable market price, or the fair value of the
collateral, if the loan is collateral dependent. If foreclosure
is probable, the Company is required to measure impairment based
on the fair value of the collateral. The fair value of the
collateral is generally obtained from appraisals or is based on
managements estimates of future cash flows discounted at
the contractual interest rate, or for loans probable of
foreclosure, discounted at a rate reflecting the principal
market participant cost of funding, required rate of return and
risks associated with the cash flows forecast. Consistent with
managements intention of preserving capital, its strategy
is to maximize proceeds from the disposition of foreclosed
assets as opposed to rapid liquidation. Accordingly, the market
value of appraisals is used. In the event that appraisals show a
deficiency, the Company includes the deficiency in its loss
reserve estimate. Although accounting guidance for loan
impairment excludes large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment (e.g.
mortgage loans), it specifically requires that loan
modifications considered TDRs be analyzed for impairment in the
same manner described above.
F-15
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Troubled
Debt Restructurings
Doral has created a number of loan modification programs to help
borrowers stay in their homes and operate their businesses which
also optimizes borrower performance and returns to Doral. In
these cases, the restructure or loan modification fits the
definition of a TDR. The programs are designed to provide
temporary financial relief and, if necessary, longer term
financial relief to the consumer loan customer. Dorals
consumer loan loss mitigation program (including consumer loan
products and residential mortgage loans), grants a concession
for economic or legal reasons related to the borrowers
financial difficulties Doral would not otherwise consider.
Dorals loss mitigation programs can provide for one or a
combination of the following: movement of unpaid principal and
interest to the end of the loan, extension of the loan term for
up to ten years, deferral of principal payments for a period of
time, and reduction of interest rates either permanently
(feature discontinued in 2010) or for a period of up to two
years. No programs adopted by Doral provide for the forgiveness
of contractually due principal or interest. Deferred principal
and uncollected interest are added to the end of the loan term
at the time of the restructuring and uncollected interest is not
recognized as income until collected or when the loan is paid
off or at the end of the loan term. Doral wants to make these
programs available only to those borrowers who have defaulted,
or are likely to default, permanently on their loan and would
lose their homes in foreclosure action absent some lender
concession. However, Doral will move borrowers and properties to
foreclosure if the Company is not reasonably assured that the
borrower will be able to repay all contractual principal or
interest (which is not forgiven in part or whole in any current
or contemplated program).
In accordance with accounting guidance, loans determined to be
TDRs are impaired and for purposes of estimating the ALLL must
be individually evaluated for impairment. For residential
mortgage loans determined to be TDRs, on a monthly basis, the
Company pools TDRs with similar characteristics and performs an
impairment analysis of discounted cash flows. If a pool yields a
present value below the recorded investment in the pool of
loans, an impairment is recognized by a charge to the provision
for loan and lease losses and a credit to the allowance for loan
and lease losses. For loss mitigated loans without a concession
in the interest rate, the Company performs an impairment
analysis of discounted cash flows giving consideration to the
probability of default and loss given foreclosure on those
estimated cash flows, and records an impairment by charging the
provision for loan and lease losses with a corresponding credit
to the ALLL.
Regarding the commercial loan loss mitigation programs
(including commercial real estate, commercial, land and
construction loan portfolios), the determination is made on a
loan by loan basis at the time of restructuring as to whether a
concession was made for economic or legal reasons related to the
borrowers financial difficulty that Doral would not
otherwise consider. Concessions made for commercial loans could
include reductions in interest rates, extensions of maturity,
waiving of borrower covenants, or other contract changes that
would be considered a concession. Doral mitigates loan defaults
for its commercial loan portfolios loans through its Collections
function. The functions objective is to minimize losses
upon default of larger credit relationships. The group uses
relationship officers, collection specialists, attorneys and
third party service providers to supplement its internal
resources. In the case of residential construction projects, the
workout function monitors project specifics, such as project
management and marketing.
Residential or other consumer or commercial loan modifications
can result in returning a loan to accrual status when the
criteria for returning a loan to performing status are met. Loan
modifications also increase Dorals interest income by
returning a non-performing loan to performing status and cash
flows by providing for payments to be made by the borrower, and
decreases foreclosure and real estate owned (REO)
costs by decreasing the number of foreclosed properties. Loan
modifications completed on loans less than 90 days past due
may reduce interest income due to the reversal of previous past
due interest and reducing the interest earned on the loans.
Doral continues to consider a modified loan as a non-performing
asset for purposes of estimating its allowance for loan and
lease losses until the borrower has made at least six
consecutive contractual payments. At such time the loan will be
treated as any other performing loan for purposes of estimating
the allowance for loan and lease losses.
F-16
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Servicing
Assets and Servicing Activities
The Company pools FHA-insured and VA-guaranteed mortgages for
issuance of GNMA MBS. Conforming loans are pooled and issued as
FNMA or FHLMC MBS as well as sold in bulk to investors with
servicing retained.
Mortgage servicing rights (MSRs or servicing
assets) retained in a sale or securitization arise from
contractual agreements between the Company and investors in
mortgage securities and mortgage loans. The value of MSRs is
derived from the net positive cash flows associated with the
servicing contracts. Under these contracts, the Company performs
loan servicing functions in exchange for fees and other
remuneration. The servicing function typically includes:
collecting and remitting loan payments, responding to borrower
inquiries, accounting for principal and interest, holding
custodial funds for payment of property taxes and insurance
premiums, supervising foreclosures and property dispositions,
and generally administering the loans. The servicing rights
entitle the Company to annual servicing fees based on the
outstanding principal balance of the mortgage loans and the
contractual servicing rate. The annual servicing fees generally
fluctuate between 25 and 50 basis points. The servicing
fees are credited to income on a monthly basis when collected.
In addition, the Company generally receives other remuneration
consisting of mortgagor-contracted fees such as late charges and
prepayment penalties, which are credited to income when
collected.
Considerable judgment is required to determine the fair value of
the Companys servicing assets. Unlike the market value of
highly liquid investments, the market value of servicing assets
cannot be readily determined because these assets are not
actively traded in securities markets. The initial carrying
value of the servicing assets is generally determined based on
an allocation of the carrying amount of the loans sold (adjusted
for deferred fees and costs related to loan origination
activities) and the retained interest (MSRs) based on their
relative fair value.
The fair value of the Companys MSRs is determined based on
a combination of market information, benchmarking of servicing
assets (valuation surveys) and cash flow modeling. The valuation
of the Companys MSRs incorporates two sets of assumptions:
(i) market derived assumptions for discount rates,
servicing costs, escrow earnings rate, float earnings rate and
cost of funds and (ii) market derived assumptions adjusted
for the Companys loan characteristics and portfolio
behavior for escrow balances, delinquencies and foreclosures,
late fees, prepayments and prepayment penalties.
Under many of its servicing contracts, Doral must advance all or
part of the scheduled payments to the owner of an outstanding
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,
as servicer, pay mortgage and hazard insurance and tax payments
on schedule even if sufficient escrow funds are not available.
Doral generally recovers its advances from the mortgage owner or
from liquidation proceeds when the mortgage loan is foreclosed.
However, in the interim, Doral must absorb the cost of the funds
it advances during the time the advance is outstanding. Doral
must also bear the 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 will not receive any future
servicing income with respect to that loan.
In the ordinary course of business, Doral makes certain
representations and warranties to purchasers and insurers of
mortgage loans at the time of the loan sales to third parties
regarding the characteristics of the loans sold. To the extent
the loans do not meet specified characteristics, if there is a
breach of contract of a representation or warranty, or if there
is an early payment default, Doral may be required to repurchase
the mortgage loan and bear any subsequent loss related to the
loan. Doral does not have a reserve on its financial statements
for possible losses related to repurchases resulting from
representation and warranty violations because it does not
expect any such losses to be material.
F-17
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
In the past, the Company sold mortgage loans and MBS subject to
recourse provisions. Pursuant to these recourse arrangements,
the Company agreed to retain or share the credit risk with the
purchaser of such mortgage loans for a specified period or up to
a certain percentage of the total amount in loans sold. The
Company estimates the fair value of the retained recourse
obligation or any liability incurred at the time of sale and
includes such obligation with the net proceeds from the sale,
resulting in a lower gain on sale recognition. Doral estimates
the fair value of its recourse obligation based on historical
losses from foreclosure and disposition of mortgage loans
adjusted for expectations of changes in portfolio behavior and
market environment.
Interest-Only
Strips
IOs represent the estimated present value of the estimate future
cash flows retained by the Company as part of its past sale and
securitization activities. The Company no longer engages in this
activity and classifies its existing IOs as trading securities.
In order to determine the value of its IOs, the Company uses a
valuation model that calculates the present value of estimated
cash flows. The model incorporates the Companys own
estimates of assumptions market participants use in determining
the fair value, including estimates of prepayment speeds,
discount rates, defaults and contractual fee income. Changes in
fair value of IOs held in the trading portfolio are recorded in
earnings as incurred.
Real
Estate Held for Sale
The Company acquires real estate through foreclosure
proceedings. Legal fees and other direct costs incurred in a
foreclosure are expensed as incurred. These properties are held
for sale and are stated at the lower of cost or fair value
(after deduction of estimated disposition costs). A charge to
ALLL is recognized for any initial write down to fair value less
costs to sell. Any losses in the carrying value arising from
periodic appraisals of the properties after foreclosures are
charged to expense in the period incurred. The cost of
maintaining and operating such properties is expensed as
incurred. Gains and losses not previously recognized that result
from disposition of real estate held for sale are recorded in
non-interest expense within the other expenses caption in the
accompanying Consolidated Statements of Operations.
Premises
and Equipment
Premises, equipment and leasehold improvements are carried at
cost, less accumulated depreciation and amortization.
Depreciation of premises and equipment is provided on a
straight-line basis. Amortization of leasehold improvements is
provided on a straight-line basis over the lesser of the
estimated useful lives of the assets or the terms of the leases.
The lease term is defined as the contractual term plus lease
renewals that are considered to be reasonably
assured. Useful lives range from three to ten years for
leasehold improvements and equipment, and thirty to forty years
for retail branches and office facilities.
The Company measures impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If identified, an impairment loss is
recognized through a charge to earnings based on the fair value
of the property.
Rent expense under operating leases is recognized on a
straight-line basis over the lease term taking into
consideration contractual rent increases. The difference between
rent expense and the amount actually paid during a period is
charged to a Deferred rent obligation account,
included in accrued expenses and other liabilities in the
Consolidated Statements of Financial Condition.
Goodwill
and Other Intangible Assets
Goodwill is recognized when the purchase price is higher than
the fair value of net assets acquired in business combinations
under the purchase method of accounting. Goodwill is not
amortized, but is tested for impairment at least annually or
more frequently if events or circumstances indicate possible
impairment. In
F-18
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
determining the fair value of a reporting unit the Company uses
a discounted cash flow analysis. Goodwill impairment losses are
recorded as part of operating expenses in the Consolidated
Statement of Operations.
Impairment testing of goodwill follows a two-step process. The
first step is used to identify potential impairment and requires
comparison of the estimated fair value of the reporting unit
with its carrying amount including goodwill. If the estimated
fair value of the reporting unit exceeds its carrying value,
goodwill is considered not to be impaired. If the carrying value
exceeds the estimated fair value, there is an indication of
potential impairment and the second step is performed to measure
the amount of impairment.
If needed, the second step consists of calculating an implied
fair value of goodwill. If the implied fair value of the
reporting unit goodwill exceeds the carrying value of that
goodwill, there is no impairment. If the carrying value of
goodwill exceeds the implied fair value of the goodwill, an
impairment charge is recorded for the excess. An impairment loss
cannot exceed the carrying value of goodwill, and the loss
establishes a new basis in the goodwill. Subsequent reversal of
goodwill impairment is not permitted.
Finite lived intangibles are amortized over their estimated
life, generally on a straight-line basis, and are reviewed
periodically for impairment when events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
Accounting
for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
The Company recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.
A transfer of an entire financial asset, a group of entire
financial assets, or a participating interest in an entire
financial asset in which Doral surrenders control over those
financial assets shall be accounted for as a sale if, and only
if, all of the following conditions are met:
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The transferred financial assets have been isolated from
Doral put presumptively beyond the reach of Doral
and its creditors, even in bankruptcy or other receivership.
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Each transferee has the right to pledge or exchange the assets
it received, and no condition both constrains the transferee
from taking advantage of its rights to pledge or exchange and
provides more than a trivial benefit to Doral.
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Doral, its consolidated affiliates included in these financial
statements, or its agents do not maintain effective control over
the transferred financial assets or third-party beneficial
interests related to those transferred assets. Examples of
Dorals effective control over the transferred financial
assets include, but are not limited to (i) an agreement
that both entitles and obligates Doral to repurchase or redeem
them before their maturity, (ii) an agreement that provides
Doral with both the unilateral ability to cause the holder to
return specific financial assets and a
more-than-trivial
benefit attributable to that ability, other than through a
cleanup call, or (iii) an agreement that permits the
transferee to require Doral to repurchase the transferred
financial assets at a price that is so favorable to the
transferee that it is probable that the transferee will require
Doral to repurchase them.
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If a transfer of financial assets in exchange for cash or other
consideration (other than beneficial interests in the
transferred assets) does not meet the criteria for a sale as
described above, Doral accounts for the transfer as a secured
borrowing with pledge of collateral.
GNMA programs allow financial institutions to buy back
individual delinquent mortgage loans that meet certain criteria
from the securitized loan pool for which the Company provides
servicing. At the Companys option and without GNMA prior
authorization, Doral may repurchase such delinquent loans for an
amount equal to 100% of the loans remaining principal
balance. This buy-back option is considered a conditional option
until the delinquency criteria is met, at which time the option
becomes unconditional. When the loans
F-19
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
backing a GNMA security are initially securitized, the Company
treats the transaction as a sale for accounting purposes because
the conditional nature of the buy-back option means that the
Company does not maintain effective control over the loans and
therefore these are derecognized from the balance sheet. When
individual loans later meet GNMAs specified delinquency
criteria and are eligible for repurchase, Doral is deemed to
have regained effective control over these loans and they must
be brought back onto the Companys books as assets at fair
value, regardless of whether the Company intends to exercise the
buy-back option. An offsetting liability is also recorded in
Accrued Expenses and Other Liabilities.
Securities
Sold under Agreements to Repurchase
As part of its financing activities the Company enters into
sales of securities under agreements to repurchase the same or
substantially similar securities. The Company retains control
over such securities. Accordingly, the amounts received under
these agreements represent borrowings, and the securities
underlying the agreements remain in the asset accounts. These
transactions are carried at the amounts at which transactions
will be settled. The counterparties to the contracts generally
have the right to repledge the securities received as
collateral. Those securities are presented in the Consolidated
Statements of Financial Condition as part of pledged investment
securities and its interest is accounted for on an accrual basis
in the Consolidated Statement of Operations.
Insurance
Agency Commissions
Commissions generated by the Companys insurance agency
operation are recorded when earned. The Companys insurance
agency earns commissions when the insurance policies are issued
by unaffiliated insurance companies. An allowance is created for
expected adjustments to commissions earned relating to policy
cancellations.
Derivatives
and Interest Rate Risk Management
Doral Financial uses derivatives to manage its exposure to
interest rate risk caused by changes in interest rates, to
changes in fair value of assets and liabilities and to secure
future cash flows. Derivatives are generally either privately
negotiated
over-the-counter
(OTC) contracts or standard contracts transacted
through regulated exchanges. OTC contracts generally consist of
swaps, caps and collars, forwards and options. Exchange-traded
derivatives include futures and options.
All derivatives are recognized as either assets or liabilities
on the balance sheet and are measured at fair value through
adjustments to accumulated other comprehensive income (loss)
and/or
current earnings, as appropriate. On the date the Company enters
into a derivative contract, it designates the derivative
instrument as either a fair value hedge, cash flow hedge or as a
free-standing derivative instrument. In the case of a qualifying
fair value hedge, changes in the value of the derivative
instruments that have been highly effective are recognized in
current period earnings along with the change in value of the
designated hedged item. If the hedge relationship is terminated,
hedge accounting is discontinued and changes in the value of the
derivative instrument continue to be recognized in current
period earnings, the hedged item is no longer adjusted for fair
value changes, and the fair value adjustment to the hedged item,
while it was designated as a hedge, continues to be reported as
part of the basis of the item and is amortized to earnings as a
yield adjustment. In the case of a qualifying cash flow hedge,
changes in the value of the derivative instruments that have
been highly effective are recognized in other comprehensive
income, until such a time as those earnings are affected by the
variability of the cash flows of the underlying hedged item. If
the hedge relationship is terminated, the net derivative gain or
loss related to the discontinued cash flow hedge should continue
to be reported in accumulated other comprehensive income (loss)
and will be reclassified into earnings when the cash flows that
were hedged occur, or when the forecasted transaction affects
earnings or if it is no longer expected to occur. After a cash
flow hedge is discontinued, future changes in the fair value of
the derivative instrument are recognized in current period
earnings. In either a fair value hedge or a cash flow hedge, net
earnings may be
F-20
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
impacted to the extent the changes in the value of the
derivative instruments do not perfectly offset changes in the
value of the hedged items. For freestanding derivative
instruments, changes in fair values are reported in current
period income.
Prior to entering a hedge transaction, the Company formally
documents the relationship between hedging instruments and
hedged items, as well as the risk management objective and
strategy for undertaking various hedge transactions. This
process includes linking all derivative instruments that are
designated as fair value or cash flow hedges to specific assets
and liabilities on the statement of condition or to specific
forecasted transactions or firm commitments along with a formal
assessment, at both inception of the hedge and on an ongoing
basis, as to the effectiveness of the derivative instrument in
offsetting changes in fair values or cash flows of the hedged
item. If it is determined that the derivative instrument is not
highly effective as a hedge, hedge accounting is discontinued
and the adjustment to fair value of the derivative instrument is
recorded in current period earnings.
Fair
Value Measurements
The Company measures the fair values of its financial
instruments in accordance with accounting guidance that requires
an entity to base fair value on exit price and to maximize the
use of observable inputs and minimize the use of unobservable
inputs to determine the exit price. The Company categorizes its
financial instruments, based on the priority of inputs to the
valuation technique, into a three level hierarchy described
below. Securities held for trading, securities available for
sale, derivatives and servicing assets are recorded at fair
value on a recurring basis. Additionally, from time to time, the
Company may be required to record other financial assets at fair
value on a nonrecurring basis, such as loans held for sale,
loans receivable and certain other assets. These adjustments to
fair value usually result from applications of
lower-of-cost-or-market
accounting or write-downs of individual assets. These
nonrecurring fair value adjustments typically involve
application of the
lower-of-cost-or-market
accounting or write-downs of individual assets.
The following describes the three level hierarchy:
|
|
|
|
|
Level 1 Valuation is based upon
unadjusted quoted prices for identical instruments traded in
active markets.
|
|
|
|
Level 2 Valuation is based upon quoted
prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all
significant assumptions are observable in the market, or are
derived principally from or corroborated by observable market
data, by correlation or by other means.
|
|
|
|
Level 3 Valuation is generated from
model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions reflect
the Companys estimates of assumptions that market
participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
|
Please refer to Note 38 for additional information.
Income
Taxes
Doral Financial recognizes deferred tax assets and liabilities
based upon the expected future tax consequences of existing
temporary differences between the carrying amounts and the tax
bases of assets and liabilities based on applicable tax laws. To
the extent tax laws change, deferred tax assets and liabilities
are adjusted, when necessary, in the period that the tax change
is enacted and recognizes income tax benefits when the
realization of such benefits is probable. A valuation allowance
is recognized for any deferred tax asset for which, based on
managements evaluation, it is more likely than not (a
likelihood of more than 50%) that some portion or all of the
deferred tax asset will not be realized. Significant management
judgment is required in determining the provision for income
taxes and, in particular, any valuation allowance recorded
F-21
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
against deferred tax assets. In determining the realizability of
deferred tax assets the Company considers, among others matters,
all sources of taxable income including the future reversal of
existing temporary differences, future taxable income,
carryforwards and tax planning strategies. In the determination
of the realizability of the deferred tax asset, the Company
evaluates both positive and negative evidence regarding the
ability of the Company to generate sufficient taxable income. In
making its assessment, significant weight is given to evidence
that can be objectively verified.
Income tax benefit or expense includes: (i) deferred tax
expense or benefit, which represents the net change in the
deferred tax liability or asset during the year plus any change
in the valuation allowance, if any, and (ii) current tax
expense. Income tax expense excludes the tax effects related to
adjustments recorded to accumulated other comprehensive income
(loss).
Legal
Surplus
The Banking Act of the Commonwealth of Puerto Rico requires that
a minimum of 10% of Doral Bank PRs net income for the year
be transferred to a legal surplus account until such surplus
equals its paid-in capital. The surplus account is not available
for payment of dividends.
Statements
of Cash Flows
Cash and cash equivalents include cash and due from banks and
other interest-earning assets. The statement of cash flows
excludes restricted cash accounted for as other interest-earning
assets.
Earnings
(Losses) per Share
Basic net income (loss) per share is determined by dividing net
income, after deducting any dividends declared on preferred
stock (whether paid or not) or any inducement charges on
preferred stock conversions, by the weighted-average number of
common shares outstanding during the period.
Diluted net income (loss) per share is computed based on the
assumption that all of the shares of convertible instruments
will be converted into common stock, if dilutive, and considers
the dilutive effect of stock options using the Treasury stock
method.
During 2010 and 2009, the Company made offers to holders of
convertible and non-convertible preferred stock to exchange
their preferred shares for the Companys common stock. The
accounting treatment for exchanges of convertible and
non-convertible preferred stock is different. The exchange to
holders of shares of non-convertible preferred stock resulted in
the extinguishment and retirement of such shares of
non-convertible preferred stock and the issuance of common
stock. The carrying (liquidation) value of each share of
non-convertible preferred stock retired is reduced and common
stock and additional
paid-in-capital
increased in the amount of the fair value of the common stock
and other consideration issued. Upon the cancellation of such
shares of non-convertible preferred stock acquired by the
Company, the difference between the carrying (liquidation) value
of shares of non-convertible preferred stock retired and the
fair value of the exchange offer consideration exchanged is
treated as an increase or decrease to retained earnings and
income available to common shareholders, for earnings per share
purposes.
The exchange to holders of convertible preferred stock is
accounted for as an induced conversion (except for the
Mandatorily Convertible Preferred Stock). Common stock and
additional
paid-in-capital
is increased by the carrying (liquidation) value of the amount
of convertible preferred stock exchanged. The fair value of
common stock and other consideration issued in excess of the
fair value of securities issuable pursuant to the original
exchange terms is treated as a reduction to retained earnings
and net income available to common shareholders for earnings per
share purposes.
F-22
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Stock
Based Compensation
The Company has a Stock Incentive Plan that was approved in
2008. Stock options and restricted stock units granted under the
plan are expensed over the vesting period based on fair value at
the date the awards are granted. In accordance with applicable
accounting guidance for stock based compensation, compensation
cost recognized includes the cost for all share-based awards
based on the fair value of awards at the date granted.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes net income and other
transactions, except those with stockholders, which are recorded
directly in equity. In the Companys case, in addition to
net income, other comprehensive income (loss) results from the
changes in the unrealized gains and losses on securities that
are classified as available for sale and unrealized gains and
losses classified as cash flow hedges.
Segment
Information
The Company reports financial and descriptive information about
its reportable segments. Please refer to Note 41 for
additional information. Operating segments are components of an
enterprise about which separate financial information is
available that is evaluated regularly by management and is used
by the Companys executive management team to decide how to
allocate resources and assess performance.
The Companys segment information is organized by legal
entity and aggregated by line of business consistent with the
Companys business model. Legal entities that do not meet
the threshold for separate disclosure are aggregated with other
legal entities with similar lines of business. Dorals
management made this determination based on operating decisions
particular to each line of business.
Reclassifications
Certain amounts reflected in the 2009 and 2008 Consolidated
Financial Statements have been reclassified to conform to the
presentation for 2010.
|
|
3.
|
Recent
Accounting Pronouncements
|
Accounting Standards Update (ASU)
No. 2011-01
Receivables (Topic 310): Deferral of the Effective date of
Disclosures about Troubled Debt Restructurings in Update
No. 2010-20. In
January 2011, FASB issued ASU
No. 2011-01
to defer the effective date of the disclosure requirements for
public entities about troubled debt restructurings in Accounting
Standards Update
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses,
to be concurrent with the effective date of the guidance for
determining what constitutes a troubled debt restructuring, as
presented in proposed Accounting Standards Update,
Receivables (Topic 310): Clarifications to Accounting for
Troubled Debt Restructurings by Creditors.
The effective date of the new disclosures about troubled debt
restructurings for public entities and the guidance for
determining what constitutes a troubled debt restructuring will
then be coordinated. Currently, that guidance is anticipated to
be effective for interim and annual periods ending after
June 15, 2011. The deferral in this amendment is effective
upon issuance. Management valuation discloses the information
subject to the topic and, therefore, does not expect any effect
on the financial statements as a result of this update.
Accounting Standards Update
No. 2010-29
Business Combinations (Topic 805): Disclosures of Supplementary
Pro Forma Information for Business Combinations (a consensus of
the FASB Emerging Issues Task Force). In December 2010, FASB
issued ASU
No. 2010-29
to address diversity in practice about the interpretation of the
pro forma revenue and earnings disclosure requirements for
business combinations. The amendments in this update clarify the
acquisition date that should be used for reporting the pro forma
financial information disclosures in
F-23
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Topic 805 when comparative financial statements are presented.
The amendments also improve the usefulness of the pro-forma
revenue and earnings disclosures by requiring a description of
the nature and amount of material, nonrecurring pro forma
adjustments that are directly attributable to the business
combination(s).
The amendments in this Update are effective prospectively for
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2010. Early adoption is
permitted. Management does not expect any effect on the
financial statements as a result of this update.
Accounting Standards Update
No. 2010-28
Intangibles-Goodwill and Other (Topic 350): When to Perform Step
2 of the Goodwill Impairment Test for Reporting Units with Zero
or Negative Carrying Amounts (a consensus of the FASB Emerging
Issues Task Force). In December 2010, FASB issued ASU
No. 2010-28
to address questions about entities with reporting units with
zero or negative carrying amounts because some entities
concluded that Step 1 of the test is passed in those
circumstances because the fair value of their reporting unit
will generally be greater than zero. As a result of that
conclusion, some constituents raised concerns that Step 2 of the
test is not performed despite factors indicating that goodwill
may be impaired. The amendments in this Update modify Step 1 of
the goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity
is required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that an impairment
may exist. The qualitative factors are consistent with the
existing guidance and examples in
paragraph 350-20-35-30,
which requires that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount.
For public entities, the amendments in this Update are effective
for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not
permitted. Upon adoption of the amendments, an entity with
reporting units that have carrying amounts that are zero or
negative is required to assess whether it is more likely than
not that the reporting units goodwill is impaired. If the
entity determines that it is more likely than not that the
goodwill of one or more of its reporting units is impaired, the
entity should perform Step 2 of the goodwill impairment test for
those reporting unit(s). Any resulting goodwill impairment
should be recorded as a cumulative-effect adjustment to
beginning retained earnings in the period of adoption. Any
goodwill impairments occurring after the initial adoption of the
amendments should be included in earnings as required by
Section 350-20-35.
Management does not expect any effect on the financial
statements as a result of this update.
Changes
in Accounting Standards Adopted in the Financial
Statements
Accounting Standards Update
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses
(ASU
No. 2010-20).
This ASU requires new disclosures and clarifies existing
disclosure requirements about an entitys allowance for
credit losses and credit quality of its financing receivables.
The FASBs objective is to improve these disclosures and,
thus, increase the transparency in financial reporting, as well
as clarify the requirements of existing disclosures. ASU
2010-20 is
effective the first fiscal quarter ending after
December 15, 2010, except for certain disclosure
requirements about activity that occurs during a reporting
period which are effective the first fiscal quarter beginning
after December 15, 2010. This ASU was adopted by the
Company and is reflected in the enhanced disclosures in the
financial statements.
Accounting Standards Update
No. 2010-18
Receivables (Topic 310): Effect of a Loan
Modification When the Loan Is Part of a Pool That Is Accounted
for as a Single Asset, a consensus of the FASB Emerging Issues
Task Force (ASU
No. 2010-18).
In April 2010, FASB issued ASU
No. 2010-18
to address diversity in practice on whether a loan that is part
of a pool of loans accounted for as a single asset (Subtopic
310-30,
F-24
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Receivables Loans and Debt Securities Acquired
with Deteriorated Credit Quality) should be removed from
that pool upon a modification that would constitute a troubled
debt restructuring. As a result of the amendments in this ASU,
modifications of loans that are accounted for within a pool
under Subtopic
310-30 do
not result in the removal of those loans from the pool even if
the modification of those loans would otherwise be considered a
troubled debt restructuring. An entity will continue to be
required to consider whether the pool of assets in which the
loan is included is impaired if expected cash flows for the pool
change. The amendments in this Update are effective for
modifications of loans accounted for within pools under Subtopic
310-30
occurring in the first interim or annual period ending on or
after July 15, 2010. The amendments are to be applied
prospectively. Early application is permitted. This ASU was
adopted by the Company with no significant impact on the
financial statements.
Accounting Standard Update
No. 2010-11
Derivatives and Hedging (Topic 815): Scope Exception
Related to Embedded Credit Derivatives (ASU
No. 2010-11).
In March 2010, the FASB Issued ASU
No. 2010-11,
to clarify the practice of the embedded credit derivative scope
exception in Topic 815 Derivatives and Hedging. The
amendment in this ASU addresses how to determine which embedded
credit derivative features, including those in collateralized
debt obligations and synthetic collateralized debt obligations
are considered to be embedded derivatives that should not be
analyzed under Topic 815 for potential bifurcation and separate
accounting.
The amendment in this ASU is effective for each reporting entity
at the beginning of its first fiscal quarter beginning after
June 15, 2010. The adoption of this guidance effective with
the interim reporting period ending September 30, 2010 did
not have a material effect on the Companys Financial
Statements.
Accounting Standard Update
No. 2010-09
Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements (ASU
No. 2010-09).
In February 2010, the FASB issued ASU
No. 2010-09,
an amendment to Topic 855 Subsequent Events, to address
potentially conflicting interactions of the requirements in this
Topic with the SECs reporting requirements. This update
amends Topic 855 as follows: (i) an entity that either is
an SEC filer or a conduit bond obligor is required to evaluate
subsequent events through the date that the financial statements
are issued; if the entity does not meet either of these criteria
then it should evaluate subsequent events through the date the
financial statements are available to be issued; (ii) an
SEC filer is not required to disclose the date through which
subsequent events have been evaluated. All amendments in this
ASU are effective upon issuance of this ASU, except for the use
of the issued date for conduit debt obligors which effective
date is for interim and annual periods ending after
June 15, 2010. This ASU was adopted by the Company with no
significant impact on the financial statements.
Accounting Standard Update
No. 2010-06-
Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements (ASU
No. 210-06).
In January 2010 FASB issued ASU
No. 2010-06,
an amendment to Subtopic
820-10 Fair
Value Measurements and Disclosures-Overall, to improve
required disclosures and increase transparency in financial
reporting. This ASU requires new disclosures in:
(i) transfers in and transfers out of Levels 1 and 2;
and (ii) activity (purchases, sales, issuances and
settlements) in Level 3 fair value measurements. It also
provides amendments to existing disclosures related to:
(i) level of disaggregation, (ii) disclosures about
inputs and valuation techniques, and iii) amendments to the
guidance on employers disclosures about postretirement
benefit plan assets.
The new disclosures and clarifications to existing disclosures
are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward
of the activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those
fiscal years. This ASU was adopted by the Company effective
January 1, 2010, with no significant impact on the
financial statements. Management does not expect prospective
disclosures to have a material effect on the financial
statements as a result of this update.
F-25
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Accounting Standard Codification (ASC) 860,
Transfer and Servicing In June 2009, the FASB
issued ASC 860 to improve the relevance, representational
faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a
transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a
transferors continuing involvement in transferred
financial assets. ASC 860 became effective as of
January 1, 2010. Earlier application was prohibited.
ASC 860 was evaluated and adopted by the Company, and such
adoption did not have a significant impact on the financial
statements.
ASC 810, Consolidation In June 2009, the FASB
issued ASC 810, to amend certain requirements of FASB
Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities to improve
financial reporting by enterprises involved with variable
interest entities and to provide more relevant and reliable
information to users of financial statements. This Statement
carries forward the scope of ASC 810, with the addition of
entities previously considered qualifying special-purpose
entities, as the concept of these entities was eliminated in
ASC 860, Transfers and Servicing.
This Statement became effective as of January 1,
2010. Earlier application was prohibited. Management adopted
the accounting and disclosure requirements for reporting period
beginning January 1, 2010. Please refer to Note 40 for
additional information.
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4.
|
Cash
and due from banks
|
At December 31, 2010 and 2009, the Companys cash
amounted to $355.8 million and $725.3 million,
respectively, which includes non-interest bearing balance
deposits with other banks amounting to $10.4 million and
$2.4 million, respectively.
As of December 31, 2010 and 2009, the Companys cash
balances included interest bearing balances with the Federal
Reserve of $218.9 million and $658.8 million,
respectively, and with the Federal Home Loan Bank of
$92.0 million and $26.9 million, respectively.
The Companys bank subsidiaries are required by federal and
state regulatory agencies to maintain average reserve balances
with the Federal Reserve Bank or other banks. Those required
average reserve balances were $115.9 million and
$153.8 million as of December 31, 2010 and 2009,
respectively.
As of December 31, 2010 and 2009, restricted cash and due
from banks amounted to $2.6 million and $0.3 million,
respectively.
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|
5.
|
Other
Interest-Earning Assets
|
At December 31, 2010 and 2009, the Companys other
interest-earning assets totaled $156.6 million and
$95.0 million, respectively. Other interest-earning assets
includes short-term investments, securities purchased under
agreements to resell, cash pledged with counterparties to back
the Companys securities sold under agreements to
repurchase
and/or
derivatives positions, among others.
As of December 31, 2010 and 2009, $126.6 million and
$95.0 million was included as restricted other
interest-earning assets.
F-26
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
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|
6.
|
Securities
Held for Trading
|
The following table summarizes the fair value of Doral
Financials securities held for trading as of
December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Mortgage-backed securities
|
|
$
|
766
|
|
|
$
|
893
|
|
Variable rate IOs
|
|
|
44,018
|
|
|
|
45,342
|
|
Fixed rate IOs
|
|
|
232
|
|
|
|
381
|
|
Derivatives(1)
|
|
|
13
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,029
|
|
|
$
|
47,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Doral Financial uses derivatives to
manage its exposure to interest rate risk caused by changes in
interest rates. Derivatives include interest rate caps and
forward contracts. Doral Financials general policy is to
account for derivatives on a
mark-to-market
basis with gains or losses charged to operations as they occur.
Derivatives not accounted for as hedges in a net asset position
are recorded as securities held for trading, and derivatives in
a net liability position are reported as liabilities. The gross
notional amount of derivatives recorded as held for trading
totaled $310.0 million as of December 31, 2010 and
$480.0 million as of 2009. Notional amounts indicate the
volume of derivatives activity, but do not represent Doral
Financials exposure to market or credit risk.
|
The weighted-average yield is computed based on amortized cost
and, therefore, does not give effect to changes in fair value.
As of December 31, 2010 and 2009 weighted-average yield,
including IOs, was 13.38% and 12.02%, respectively.
The components of net gain (loss) on trading activities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net gain on securities held for trading
|
|
$
|
11,761
|
|
|
$
|
4,117
|
|
|
$
|
724
|
|
Net gain (loss) on derivatives/securities held for trading
economically hedging
MSRs
|
|
|
7,476
|
|
|
|
(8,678
|
)
|
|
|
27,551
|
|
Gain on IO valuation
|
|
|
8,811
|
|
|
|
2,780
|
|
|
|
5,649
|
|
Loss on derivative instruments
|
|
|
(2,611
|
)
|
|
|
(1,594
|
)
|
|
|
(3,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,437
|
|
|
$
|
(3,375
|
)
|
|
$
|
29,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
7.
|
Securities
Available for Sale
|
The following tables summarize the amortized cost, gross
unrealized gains and losses, approximate fair value,
weighted-average yield and contractual maturities of securities
available for sale as of December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
Agency MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
36
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
37
|
|
|
|
6.67
|
%
|
Due from one to five years
|
|
|
220
|
|
|
|
11
|
|
|
|
|
|
|
|
231
|
|
|
|
4.87
|
%
|
Due from five to ten years
|
|
|
416,709
|
|
|
|
3,447
|
|
|
|
130
|
|
|
|
420,026
|
|
|
|
2.47
|
%
|
Due over ten years
|
|
|
718,690
|
|
|
|
4,949
|
|
|
|
960
|
|
|
|
722,679
|
|
|
|
2.57
|
%
|
CMO Government Sponsored Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from five to ten years
|
|
|
17,953
|
|
|
|
122
|
|
|
|
178
|
|
|
|
17,897
|
|
|
|
4.10
|
%
|
Due over ten years
|
|
|
288,414
|
|
|
|
6,750
|
|
|
|
230
|
|
|
|
294,934
|
|
|
|
3.57
|
%
|
Non-Agency CMOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due over ten years
|
|
|
11,108
|
|
|
|
|
|
|
|
3,916
|
|
|
|
7,192
|
|
|
|
19.74
|
%
|
Obligations U.S. Government Sponsored Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
34,987
|
|
|
|
5
|
|
|
|
|
|
|
|
34,992
|
|
|
|
0.16
|
%
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due over ten years
|
|
|
8,203
|
|
|
|
|
|
|
|
1,126
|
|
|
|
7,077
|
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,496,320
|
|
|
$
|
15,285
|
|
|
$
|
6,540
|
|
|
$
|
1,505,065
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
Agency MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from one to five years
|
|
$
|
85
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
92
|
|
|
|
6.67
|
%
|
Due from five to ten years
|
|
|
302
|
|
|
|
13
|
|
|
|
|
|
|
|
315
|
|
|
|
4.83
|
%
|
Due over ten years
|
|
|
898,027
|
|
|
|
20,574
|
|
|
|
737
|
|
|
|
917,864
|
|
|
|
4.36
|
%
|
CMO Government Sponsored Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from five to ten years
|
|
|
57,584
|
|
|
|
690
|
|
|
|
175
|
|
|
|
58,099
|
|
|
|
3.73
|
%
|
Due over ten years
|
|
|
1,424,235
|
|
|
|
12,663
|
|
|
|
6,984
|
|
|
|
1,429,914
|
|
|
|
3.48
|
%
|
Non-Agency CMOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due over ten years
|
|
|
418,299
|
|
|
|
|
|
|
|
147,699
|
|
|
|
270,600
|
|
|
|
3.03
|
%
|
Obligations U.S Government Sponsored Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
48,120
|
|
|
|
102
|
|
|
|
|
|
|
|
48,222
|
|
|
|
1.03
|
%
|
P.R. Housing Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from five to ten years
|
|
|
645
|
|
|
|
16
|
|
|
|
|
|
|
|
661
|
|
|
|
4.92
|
%
|
Due over ten years
|
|
|
1,980
|
|
|
|
37
|
|
|
|
|
|
|
|
2,017
|
|
|
|
5.49
|
%
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
6,538
|
|
|
|
62
|
|
|
|
|
|
|
|
6,600
|
|
|
|
4.26
|
%
|
Due from one to five years
|
|
|
47,548
|
|
|
|
388
|
|
|
|
|
|
|
|
47,936
|
|
|
|
5.31
|
%
|
Due from five to ten years
|
|
|
5,000
|
|
|
|
207
|
|
|
|
|
|
|
|
5,207
|
|
|
|
5.50
|
%
|
Due over ten years
|
|
|
3,000
|
|
|
|
|
|
|
|
1,350
|
|
|
|
1,650
|
|
|
|
5.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,911,363
|
|
|
$
|
34,759
|
|
|
$
|
156,945
|
|
|
$
|
2,789,177
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average yield is computed based on amortized cost
and, therefore, does not give effect to changes in fair value.
Expected maturities of MBS and certain debt securities might
differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of securities available for sale during 2010
were approximately $2.3 billion (2009
$2.0 billion and 2008 $234.3 million). For
2010, gross gains of $43.0 million and gross losses of
$136.7 million were realized on those sales, in addition to
losses of $14.0 million related to the recognition of OTTI
on securities from this portfolio. For 2009 and 2008, gross
gains of $35.4 million and $0.2 million, respectively,
were realized on sales. For 2009, the Company realized gross
losses of $0.5 million on sales, in addition to losses of
$27.6 million related to the recognition of OTTI on
securities from this portfolio. For 2008, the Company recognized
gross losses of $0.9 million related to the recognition of
OTTI on securities from this portfolio, and a gross gain of
$2.1 million and a gross loss of $6.3 million were
recognized related to the Lehman transaction. For 2008, the
Company did not realize gross losses on sales of securities.
Refer to Note 13 for additional information related to the
Lehman Transaction.
F-29
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
8.
|
Investments
in an Unrealized Loss Position
|
The following tables show Doral Financials gross
unrealized losses and fair value for available for sale
investments, aggregated by investment category and length of
time that individual securities have been in a continuous
unrealized loss position, at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
|
Positions
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
Agency MBS
|
|
|
13
|
|
|
$
|
241,675
|
|
|
$
|
1,090
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
13
|
|
|
$
|
241,675
|
|
|
$
|
1,090
|
|
CMO Government Sponsored Agencies
|
|
|
2
|
|
|
|
11,564
|
|
|
|
255
|
|
|
|
1
|
|
|
|
1,704
|
|
|
|
153
|
|
|
|
3
|
|
|
|
13,268
|
|
|
|
408
|
|
Non-Agency CMOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
7,192
|
|
|
|
3,916
|
|
|
|
3
|
|
|
|
7,192
|
|
|
|
3,916
|
|
Other
|
|
|
1
|
|
|
|
5,162
|
|
|
|
41
|
|
|
|
1
|
|
|
|
1,915
|
|
|
|
1,085
|
|
|
|
2
|
|
|
|
7,077
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
$
|
258,401
|
|
|
$
|
1,386
|
|
|
|
5
|
|
|
$
|
10,811
|
|
|
$
|
5,154
|
|
|
|
21
|
|
|
$
|
269,212
|
|
|
$
|
6,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
|
Positions
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
Agency MBS
|
|
|
6
|
|
|
|
211,709
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
211,709
|
|
|
|
737
|
|
CMO Government Sponsored Agencies
|
|
|
9
|
|
|
|
403,114
|
|
|
|
7,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
403,114
|
|
|
|
7,159
|
|
Non-Agency CMOs
|
|
|
1
|
|
|
|
2,163
|
|
|
|
233
|
|
|
|
11
|
|
|
|
268,437
|
|
|
|
147,466
|
|
|
|
12
|
|
|
|
270,600
|
|
|
|
147,699
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1,650
|
|
|
|
1,350
|
|
|
|
1
|
|
|
|
1,650
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
$
|
616,986
|
|
|
$
|
8,129
|
|
|
|
12
|
|
|
$
|
270,087
|
|
|
$
|
148,816
|
|
|
|
28
|
|
|
$
|
887,073
|
|
|
$
|
156,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities held by the Company are principally MBS or
securities backed by a U.S. government sponsored entity and
therefore, principal and interest on the securities are
considered recoverable. During 2010 and 2009, Doral
Financials investment portfolio consisted primarily of AAA
rated debt securities, except for the Non-Agency Collateralized
Mortgage Obligations (CMO), which are non-investment
grade.
The Company performs an assessment of OTTI whenever the fair
value of an investment security is less than its amortized cost
basis at the balance sheet date. Amortized cost basis includes
adjustments made to the cost of a security for accretion,
amortization, collection of cash, previous OTTI recognized into
earnings (less any cumulative effect adjustments) and fair value
hedge accounting adjustments. OTTI is considered to have
occurred under the following circumstances:
|
|
|
|
|
If the Company intends to sell the investment security and its
fair value is less than its amortized cost.
|
|
|
|
If, based on available evidence, it is more likely than not that
the Company will decide or be required to sell the investment
security before the recovery of its amortized cost basis.
|
|
|
|
If the Company does not expect to recover the entire amortized
cost basis of the investment security. This occurs when the
present value of cash flows expected to be collected is less
than the amortized cost basis of the security. In determining
whether a credit loss exists, the Company uses its best estimate
of the present value of cash flows expected to be collected from
the investment security. Cash flows expected to be collected are
estimated based on a careful assessment of all available
information. The amount of estimated credit loss is determined
as the amount by which the amortized cost basis exceeds the
present value of expected cash flows.
|
F-30
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The Company evaluates its individual available for sale
investment securities for OTTI on at least a quarterly basis. As
part of this process, the Company considers its intent to sell
each investment security and whether it is more likely than not
that it will be required to sell the security before its
anticipated recovery. If either of these conditions is met, the
Company recognizes an OTTI charge to earnings equal to the
entire difference between the securitys amortized cost
basis and its fair value at the balance sheet date. For
securities that meet neither of these conditions, an analysis is
performed to determine if any of these securities are at risk
for OTTI. To determine which securities are at risk for OTTI and
should be quantitatively evaluated utilizing a detailed cash
flow analysis, the Company evaluates certain indicators which
consider various characteristics of each security including, but
not limited to, the following: the credit rating and related
outlook or status of the securities; the creditworthiness of the
issuers of the securities; the value and type of underlying
collateral; the duration and level of the unrealized loss; any
credit enhancements; and other collateral-related
characteristics such as the ratio of credit enhancements to
expected credit losses. The relative importance of this
information varies based on the facts and circumstances
surrounding each security, as well as the economic environment
at the time of assessment. The amount of estimated credit loss
is determined as the amount by which the amortized cost basis
exceeds the present value of expected cash flows.
As a result of its review of the portfolio as of
December 31, 2010, the Company performed a detailed cash
flow analysis of certain securities in unrealized loss positions
to assess whether they were OTTI. The Company uses a third party
provider to generate cash flow forecasts of each security
reviewed based on a combination of management and market driven
assumptions and securitization terms, including remaining
payment terms of the security, prepayment speeds, the estimated
amount of loans to become seriously delinquent over the life of
the security, the estimated life-time severity rate, estimated
losses over the life of the security, loan characteristics, the
level of subordination within the security structure, expected
housing price changes and interest rate assumptions.
During 2010, it was determined that eight securities reflected
OTTI. The characteristics of these securities that led to the
OTTI conclusion included: (i) the cumulative level and
estimated future delinquency levels; (ii) the effect of
severely delinquent loans on forecasted defaults; (iii) the
cumulative severity and expected severity in resolving the
defaulted loans; and (iv) the current subordination of the
securities that resulted in the present value of the forecast
cash flows being less than the cost basis of the security.
Management estimated that credit losses of $14.0 million
were incurred during the year on these securities for the year
ended December 31, 2010.
Five of the eight OTTI securities were subordinated interests in
a securitization structure collateralized by option adjustable
rate mortgage (ARM) loans and resulted in the
recognition of an OTTI loss of $13.3 million in the first
quarter of 2010. On April 23, 2010, the Company sold the
entire portfolio of U.S. non-agency CMOs, including the five
securities that were OTTI, and recognized a loss of
$136.7 million, of which $129.7 million had previously
been reflected in other comprehensive income (loss).
Non-Agency CMOs include subordinated tranches of 2006
securitizations of Doral originated mortgage loans primarily
composed of 2003 and 2004 vintages. Doral purchased these CMOs
at a discounted price of 61% of par value, anticipating a
partial loss of contractual principal and interest value. These
original three securities have an amortized cost of
$11.1 million as of December 31, 2010 including an
OTTI loss of $0.7 million due to credit. Higher default and
loss assumptions driven by higher delinquencies in Puerto Rico,
primarily due to the impact of inflationary pressures on the
consumer, the high rate of unemployment and general recessionary
condition on the Island, has resulted in higher default and loss
estimates on the P.R. Non-Agency CMOs. The higher default and
loss estimates have resulted in lower bond prices and higher
levels of unrealized losses on the bonds. It is possible that
future loss assumptions could change and cause future OTTI
charges in these securities.
As of December 31, 2010 and 2009, the Company did not
intend to sell the remaining securities which were evaluated for
OTTI and concluded it was not more likely than not that it would
be required to sell these
F-31
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
securities before the anticipated recovery of each
securitys remaining amortized cost basis. Therefore, the
difference between the amortized cost basis and the market value
of the securities is recorded in accumulated other comprehensive
income (loss).
For the remainder of the Companys securities portfolio
that have experienced decreases in the fair value, the decline
is considered to be temporary as the Company expects to recover
the entire amortized cost basis on the securities and neither
intends to sell these securities nor is it more likely than not
that it will be required to sell these securities.
In subsequent periods the Company will account for the
securities judged to be OTTI as if the securities had been
purchased at the previous amortized cost less the credit related
OTTI. Once a credit loss is recognized, the investment will be
adjusted to a new amortized cost basis equal to the previous
amortized cost basis less the amount recognized in earnings. For
the investment securities for which OTTI was recognized in
earnings, the difference between the new amortized cost basis
and the cash flows expected to be collected will be accreted as
interest income.
The following table presents the securities for which an OTTI
was recognized based on the Companys impairment analysis
of its investment portfolio at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
Year Ended December 31, 2010
|
|
|
|
Amortized Cost
|
|
|
Gross
|
|
|
|
|
|
OTTI
|
|
|
OTTI
|
|
|
Total
|
|
|
|
(after credit
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Related to
|
|
|
Related to
|
|
|
Impairment
|
|
|
|
related OTTI)
|
|
|
Losses
|
|
|
Value
|
|
|
Credit Loss
|
|
|
Non-Credit Loss
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
OTTI Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Non-Agency
CMOs(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,257
|
|
|
$
|
26,840
|
|
|
$
|
40,097
|
|
P.R. Non-Agency CMOs
|
|
|
11,108
|
|
|
|
3,916
|
|
|
|
7,192
|
|
|
|
704
|
|
|
|
3,916
|
|
|
|
4,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,108
|
|
|
$
|
3,916
|
|
|
$
|
7,192
|
|
|
$
|
13,961
|
|
|
$
|
30,756
|
|
|
$
|
44,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
OTTI related to non-credit loss was
recognized during the first quarter of 2010. These securities
were subsequently sold and the loss was recognized in
non-interest loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
Year Ended December 31, 2009
|
|
|
|
Amortized Cost
|
|
|
Gross
|
|
|
|
|
|
OTTI
|
|
|
OTTI
|
|
|
Total
|
|
|
|
(after credit
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Related to
|
|
|
Related to
|
|
|
Impairment
|
|
|
|
related OTTI)
|
|
|
Losses
|
|
|
Value
|
|
|
Credit Loss
|
|
|
Non-Credit Loss
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
OTTI Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Non-Agency CMOs
|
|
$
|
235,083
|
|
|
$
|
73,750
|
|
|
$
|
161,333
|
|
|
$
|
26,386
|
|
|
$
|
73,750
|
|
|
$
|
100,136
|
|
P.R. Non-Agency CMOs
|
|
|
11,568
|
|
|
|
3,982
|
|
|
|
7,586
|
|
|
|
1,191
|
|
|
|
4,050
|
|
|
|
5,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,651
|
|
|
$
|
77,732
|
|
|
$
|
168,919
|
|
|
$
|
27,577
|
|
|
$
|
77,800
|
|
|
$
|
105,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The following table presents activity related to the credit
losses recognized in earnings on debt securities held by the
Company for which a portion of OTTI remains in accumulated other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
28,497
|
|
|
$
|
920
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses for which OTTI was not previously recognized
|
|
|
1,301
|
|
|
|
27,467
|
|
|
|
920
|
|
Additional OTTI credit losses for which an
other-than-temporary
charge was previously recognized
|
|
|
12,660
|
|
|
|
110
|
|
|
|
|
|
Securities sold during the period for which an OTTI was
previously recognized
|
|
|
(39,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,816
|
|
|
$
|
28,497
|
|
|
$
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company will continue to monitor and analyze the performance
of its securities to assess the collectability of principal and
interest as of each balance sheet date. As conditions in the
housing and mortgage markets continue to change over time, the
amount of projected credit losses could also change. Valuation
and OTTI determinations will continue to be affected by external
market factors including default rates, severity rates, and
macro-economic factors in the United States and Puerto Rico.
Doral Financials future results may be affected by
worsening defaults and severity rates related to the underlying
collateral.
At December 31, 2010 and 2009, certain securities and
loans, as well as cash and other interest-earning assets, were
pledged to secure public and trust deposits, assets sold under
agreements to repurchase, other borrowings and credit facilities
available.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
2,642
|
|
|
$
|
275
|
|
Other interest-earning assets
|
|
|
126,573
|
|
|
|
95,000
|
|
Securities available for sale
|
|
|
1,458,992
|
|
|
|
2,498,149
|
|
Loans held for sale
|
|
|
121,988
|
|
|
|
143,111
|
|
Loans receivable
|
|
|
2,388,428
|
|
|
|
2,868,697
|
|
|
|
|
|
|
|
|
|
|
Total pledged assets
|
|
$
|
4,098,623
|
|
|
$
|
5,605,232
|
|
|
|
|
|
|
|
|
|
|
F-33
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
10.
|
Loans
Held for Sale and Loans Receivable
|
Loans held for sale consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Conventional single family
residential(1)
|
|
$
|
119,290
|
|
|
$
|
137,134
|
|
FHA/VA
|
|
|
172,216
|
|
|
|
151,187
|
|
Commercial loans to financial institutions
|
|
|
14,608
|
|
|
|
17,059
|
|
Commercial real estate
|
|
|
13,155
|
|
|
|
15,550
|
|
|
|
|
|
|
|
|
|
|
Total loans held for
sale(2)(3)
|
|
$
|
319,269
|
|
|
$
|
320,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At both, December 31, 2010 and
2009, the loans held for sale portfolio includes
$0.1 million related to U.S. subsidiaries loans.
|
|
(2) |
|
At both, December 31, 2010 and
2009, the loans held for sale portfolio includes
$1.1 million of interest-only loans.
|
|
(3) |
|
Includes $21.4 million and $28.6
million of balloon loans, as of December 31, 2010 and 2009,
respectively.
|
At December 31, 2010 and 2009, the loans held for sale
portfolio includes $153.4 million and $128.6 million,
respectively, of defaulted loans collateralizing Ginnie Mae
(GNMA) securities for which the Company has an
unconditional option (but not an obligation) to repurchase the
defaulted loans. Payment of principal and a portion of the
interest on these loans is guaranteed by the Federal Housing
Administration (FHA).
As of December 31, 2010 and 2009, the Company had a net
deferred origination fee on loans held for sale amounting to
approximately $0.7 million and $84,000, respectively.
Non-performing loans held for sale totaled $2.7 million and
$5.6 million as of December 31, 2010 and 2009,
respectively, excluding FHA/VA guaranteed loans and GNMA
defaulted loans.
Dorals exposure to credit risk associated with its lending
activities is measured on a customer basis as well as by groups
of customers that share similar attributes. In the normal course
of business, the Company has a concentration of loan credit risk
in Puerto Rico and the mainland U.S., with the preponderance of
its loans receivable credit exposure in Puerto Rico.
F-34
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The table below presents the Companys loans receivable by
product and geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
3,451,895
|
|
|
|
108,641
|
|
|
$
|
3,560,536
|
|
|
$
|
3,598,995
|
|
|
$
|
59,706
|
|
|
$
|
3,658,701
|
|
FHA/VA guaranteed residential mortgage
|
|
|
187,473
|
|
|
|
|
|
|
|
187,473
|
|
|
|
168,569
|
|
|
|
|
|
|
|
168,569
|
|
Personal
|
|
|
15,003
|
|
|
|
|
|
|
|
15,003
|
|
|
|
25,164
|
|
|
|
|
|
|
|
25,164
|
|
Revolving lines of credit
|
|
|
17,810
|
|
|
|
|
|
|
|
17,810
|
|
|
|
22,062
|
|
|
|
|
|
|
|
22,062
|
|
Credit cards
|
|
|
17,719
|
|
|
|
|
|
|
|
17,719
|
|
|
|
22,725
|
|
|
|
|
|
|
|
22,725
|
|
Lease financing receivables
|
|
|
4,807
|
|
|
|
|
|
|
|
4,807
|
|
|
|
12,702
|
|
|
|
|
|
|
|
12,702
|
|
Loans on savings deposits
|
|
|
2,860
|
|
|
|
|
|
|
|
2,860
|
|
|
|
3,249
|
|
|
|
|
|
|
|
3,249
|
|
Other consumer
|
|
|
962
|
|
|
|
26
|
|
|
|
988
|
|
|
|
628
|
|
|
|
1
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3,698,529
|
|
|
|
108,667
|
|
|
|
3,807,196
|
|
|
|
3,854,094
|
|
|
|
59,707
|
|
|
|
3,913,801
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
629,043
|
|
|
|
59,903
|
|
|
|
688,946
|
|
|
|
684,781
|
|
|
|
54,057
|
|
|
|
738,838
|
|
Commercial and industrial
|
|
|
36,639
|
|
|
|
597,056
|
|
|
|
633,695
|
|
|
|
53,752
|
|
|
|
257,506
|
|
|
|
311,258
|
|
Construction and land
|
|
|
349,899
|
|
|
|
108,835
|
|
|
|
458,734
|
|
|
|
447,990
|
|
|
|
103,921
|
|
|
|
551,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
1,015,581
|
|
|
|
765,794
|
|
|
|
1,781,375
|
|
|
|
1,186,523
|
|
|
|
415,484
|
|
|
|
1,602,007
|
|
Loans receivable,
gross(1)(2)
|
|
|
4,714,110
|
|
|
|
874,461
|
|
|
|
5,588,571
|
|
|
|
5,040,617
|
|
|
|
475,191
|
|
|
|
5,515,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(117,821
|
)
|
|
|
(5,831
|
)
|
|
|
(123,652
|
)
|
|
|
(136,878
|
)
|
|
|
(3,896
|
)
|
|
|
(140,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
4,596,289
|
|
|
$
|
868,630
|
|
|
$
|
5,464,919
|
|
|
$
|
4,903,739
|
|
|
$
|
471,295
|
|
|
$
|
5,375,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $565.9 million and
$604.6 million of balloon loans, as of December 31,
2010 and 2009, respectively.
|
|
(2) |
|
Includes $442.6 million and
$388.2 million of interest-only loans, as of
December 31, 2010 and 2009, respectively.
|
Fixed-rate loans and adjustable-rate loans were approximately
$4.7 billion and $0.9 billion at December 31,
2010, and $4.8 billion and $0.7 billion, at
December 31, 2009, respectively.
The adjustable rate loans, consisting of construction, land and
commercial loans have interest rate adjustment limitations and
are generally tied to interest rate market indices (primarily
Prime Rate and
3-month
London Interbank Offered Rate (LIBOR)). Future
market factors may affect the correlation of the interest rate
adjustment with the rate the Company pays on the short-term
deposits that have primarily funded these loans.
Loan origination fees, as well as discount points and certain
direct origination costs for loans held for sale, are initially
recorded as an adjustment to the cost basis of the loan and
reflected in Doral Financials earnings as part of the net
gain on mortgage loan sales and fees when the loan is sold or
securitized into a MBS. In the case of loans held for
investment, such fees and costs are deferred and amortized to
income as adjustments to the yield of the loan. As of
December 31, 2010 and 2009, the Company had a net deferred
origination fee on loans held for investment amounting to
approximately $24.0 million and $22.4 million,
respectively.
The Company has not traditionally made variable interest rate
residential mortgage loans, option adjustable rate mortgages, or
many of the higher risk mortgage loans made by a number of
U.S. mainland banks. However, as part of its loss
mitigation programs, the Company has granted certain concessions
to borrowers in financial difficulties that have proven payment
capacity which may include interest only periods or temporary
interest rate reductions. Loans with temporarily reduced
principal and interest payments may be subject to significant
increases in loan payments as the temporary payment periods end
which may lead to
F-35
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
higher level of re-defaults. Doral works with the borrowers to
establish terms and conditions (at the payment reset date) in
order to optimize the Companys interests.
Non-accrual
and Past Due Loans and Leases
Doral recognizes interest income on loans receivable on an
accrual basis unless it is determined that collection of all
contractual principal or interest is unlikely. Doral
discontinues recognition of interest income, when a loan
receivable is delinquent on principal or interest for more than
90 days, except for revolving lines of credit and credit
cards (non-accrual at 180 days), mortgage loans insured by
FHA/VA (non-accrual at 270 days), and certain loans
determined to be well collateralized so that ultimate collection
of principal and interest is not in question (for example, when
the outstanding loan and interest balance as a percentage of
current collateral value is less than 60%). When a loan is
placed on non-accrual, all accrued but unpaid interest is
reversed against interest income in that period. Loans return to
accrual status when principal and interest become current under
the terms of the loan agreement or when the loan is both
well-secured and in the process of collection and collectability
is no longer doubtful. In the case of loans under troubled debt
restructuring agreements, the Company continues to place them in
non-accrual status and reports them as non-performing loans
unless the Company expects to collect all contractual principal
and interest and the loans have proven repayment capacity for a
sufficient amount of time the loans are returned to accrual
status. Previously reversed or not accrued interest will be
credited to income in the period of recovery. Interest income is
recognized when a payment is received on a non-accrual loan if
ultimate collection of principal is not in doubt.
For consumer loans (primarily residential real estate), all of
Dorals loss mitigation tools require that the borrower
demonstrate the intent and ability to pay all principal and
interest on the loan. Doral must receive at least three
consecutive monthly payments prior to qualifying the borrower
for a loss mitigation product. Dorals loan underwriters
must be reasonably assured of the borrowers future
repayment and performance from their review of the
borrowers circumstances, and when all the conditions are
met, the customer is approved for a loss mitigation product and
placed on a probation period. When the loan is returned to
accrual status, on a monthly basis Doral reviews the loan to
ensure that payments are made during the probationary period. If
a payment is not made during this probationary period the loan
is immediately returned to non-accrual status. Also, if a
payment is missed during the probationary period, the loan
reverts to its original terms, and collections/foreclosure
procedures begin from the point at which they stood prior to the
restructure. Consumer loans not delinquent 90 days or more
that are eligible for loss mitigation products are subject to
the same requirements as the delinquent consumer loans, except
that the requirement of making three consecutive payments prior
to the restructure is waived.
For commercial loan loss mitigation (which includes commercial
real estate, commercial and industrial and construction and land
loans), the loans are underwritten by the Collections function,
the intent and ability of the borrower to service the debt under
the revised terms is studied, and if approved for the troubled
debt restructuring, the customer is placed on a six month
probationary period during which the customer is required to
make six consecutive payments before the loan is returned to
accrual status.
F-36
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Loans receivable on which accrual of interest income had been
discontinued as of December 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
276,328
|
|
|
$
|
2,030
|
|
|
$
|
278,358
|
|
|
$
|
392,797
|
|
|
$
|
|
|
|
$
|
392,797
|
|
Lease financing receivables
|
|
|
415
|
|
|
|
|
|
|
|
415
|
|
|
|
1,091
|
|
|
|
|
|
|
|
1,091
|
|
Other
consumer(1)
|
|
|
404
|
|
|
|
|
|
|
|
404
|
|
|
|
519
|
|
|
|
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
277,147
|
|
|
|
2,030
|
|
|
|
279,177
|
|
|
|
394,407
|
|
|
|
|
|
|
|
394,407
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
193,348
|
|
|
|
|
|
|
|
193,348
|
|
|
|
130,156
|
|
|
|
|
|
|
|
130,156
|
|
Construction and land
|
|
|
147,127
|
|
|
|
1,610
|
|
|
|
148,737
|
|
|
|
285,344
|
|
|
|
21,610
|
|
|
|
306,954
|
|
Commercial and industrial
|
|
|
2,522
|
|
|
|
|
|
|
|
2,522
|
|
|
|
933
|
|
|
|
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
342,997
|
|
|
|
1,610
|
|
|
|
344,607
|
|
|
|
416,433
|
|
|
|
21,610
|
|
|
|
438,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable on which accrual of interest had been
discontinued(2)(3)
|
|
$
|
620,144
|
|
|
$
|
3,640
|
|
|
$
|
623,784
|
|
|
$
|
810,840
|
|
|
$
|
21,610
|
|
|
$
|
832,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes personal, revolving lines
of credit and other consumer loans.
|
|
(2) |
|
Excludes $2.7 million and
$5.6 million in loans held for sale on which accrual of
interest had been discontinued as of December 31, 2010 and
2009, respectively.
|
|
(3) |
|
Excludes $121.3 million and
$10.3 million of non-performing FHA/VA guaranteed loans
that due to the nature of their guarantees, present little risk
to the Company as of December 31, 2010 and 2009,
respectively.
|
Dorals aging of past due loan receivables as of
December 31, 2010 and 2009 were as follows:
As of
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 90
|
|
|
|
30 to 89 Days
|
|
|
90 to 179 Days
|
|
|
180 to 240 Days
|
|
|
Over 240 Days
|
|
|
|
|
|
|
|
|
|
|
|
Days and
|
|
|
|
Past
Due(1)
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total Past Due
|
|
|
Total Past
|
|
|
Still
|
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
Due
|
|
|
Accruing
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage(2)
|
|
$
|
68,361
|
|
|
$
|
|
|
|
$
|
55,947
|
|
|
$
|
1,624
|
|
|
$
|
19,379
|
|
|
$
|
|
|
|
$
|
196,181
|
|
|
$
|
409
|
|
|
$
|
339,868
|
|
|
$
|
2,033
|
|
|
$
|
341,901
|
|
|
$
|
|
|
Lease financing receivables
|
|
|
234
|
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620
|
|
|
|
|
|
|
|
620
|
|
|
|
|
|
Other consumer
|
|
|
1,341
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
1,745
|
|
|
|
|
|
|
|
1,745
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
69,936
|
|
|
|
|
|
|
|
56,733
|
|
|
|
1,624
|
|
|
|
19,379
|
|
|
|
|
|
|
|
196,185
|
|
|
|
409
|
|
|
|
342,233
|
|
|
|
2,033
|
|
|
|
344,266
|
|
|
|
1,993
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
35,202
|
|
|
|
|
|
|
|
65,484
|
|
|
|
|
|
|
|
6,962
|
|
|
|
|
|
|
|
120,231
|
|
|
|
|
|
|
|
227,879
|
|
|
|
|
|
|
|
227,879
|
|
|
|
|
|
Construction and land
|
|
|
2,281
|
|
|
|
|
|
|
|
8,135
|
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
138,144
|
|
|
|
1,610
|
|
|
|
148,955
|
|
|
|
1,610
|
|
|
|
150,565
|
|
|
|
|
|
Commercial and industrial
|
|
|
3,901
|
|
|
|
|
|
|
|
284
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
1,916
|
|
|
|
|
|
|
|
6,426
|
|
|
|
|
|
|
|
6,426
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
41,384
|
|
|
|
|
|
|
|
73,903
|
|
|
|
|
|
|
|
7,682
|
|
|
|
|
|
|
|
260,291
|
|
|
|
1,610
|
|
|
|
383,260
|
|
|
|
1,610
|
|
|
|
384,870
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans
|
|
$
|
111,320
|
|
|
$
|
|
|
|
$
|
130,636
|
|
|
$
|
1,624
|
|
|
$
|
27,061
|
|
|
$
|
|
|
|
$
|
456,476
|
|
|
$
|
2,019
|
|
|
$
|
725,493
|
|
|
$
|
3,643
|
|
|
$
|
729,136
|
|
|
$
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with regulatory
guidance, Doral defines 30 days past due as when the
borrower is delinquent two payments. Doral defines 90 days
past due based upon the actual number of days past due.
|
|
(2) |
|
As of December 31, 2010
excludes $128.5 million of total past due FHA/VA guaranteed
loans, respectively, that due to the nature of their guarantees,
present little credit risk to the Company.
|
F-37
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
As of
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 90
|
|
|
|
30 to 89 Days
|
|
|
90 to 179 Days
|
|
|
180 to 240 Days
|
|
|
Over 240 Days
|
|
|
|
|
|
|
|
|
|
|
|
Days and
|
|
|
|
Past
Due(1)
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total Past Due
|
|
|
Total Past
|
|
|
Still
|
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
Due
|
|
|
Accruing
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage(2)
|
|
$
|
84,117
|
|
|
$
|
|
|
|
$
|
105,061
|
|
|
$
|
|
|
|
$
|
43,864
|
|
|
$
|
|
|
|
$
|
238,277
|
|
|
$
|
|
|
|
$
|
471,319
|
|
|
$
|
|
|
|
$
|
471,319
|
|
|
$
|
|
|
Lease financing receivables
|
|
|
894
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,880
|
|
|
|
|
|
|
|
1,880
|
|
|
|
|
|
Other consumer
|
|
|
1,888
|
|
|
|
|
|
|
|
492
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
2,407
|
|
|
|
|
|
|
|
2,407
|
|
|
|
2,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
86,899
|
|
|
|
|
|
|
|
106,539
|
|
|
|
|
|
|
|
43,875
|
|
|
|
|
|
|
|
238,293
|
|
|
|
|
|
|
|
475,606
|
|
|
|
|
|
|
|
475,606
|
|
|
|
2,137
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
29,553
|
|
|
|
|
|
|
|
19,015
|
|
|
|
|
|
|
|
21,035
|
|
|
|
|
|
|
|
89,164
|
|
|
|
|
|
|
|
158,767
|
|
|
|
|
|
|
|
158,767
|
|
|
|
|
|
Construction and land
|
|
|
20,230
|
|
|
|
|
|
|
|
1,366
|
|
|
|
|
|
|
|
251,571
|
|
|
|
20,000
|
|
|
|
23,905
|
|
|
|
1,610
|
|
|
|
297,072
|
|
|
|
21,610
|
|
|
|
318,682
|
|
|
|
|
|
Commercial and industrial
|
|
|
625
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
760
|
|
|
|
|
|
|
|
1,559
|
|
|
|
|
|
|
|
1,559
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
50,408
|
|
|
|
|
|
|
|
20,497
|
|
|
|
|
|
|
|
272,664
|
|
|
|
20,000
|
|
|
|
113,829
|
|
|
|
1,610
|
|
|
|
457,398
|
|
|
|
21,610
|
|
|
|
479,008
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans
|
|
$
|
137,307
|
|
|
$
|
|
|
|
$
|
127,036
|
|
|
$
|
|
|
|
$
|
316,539
|
|
|
$
|
20,000
|
|
|
$
|
352,122
|
|
|
$
|
1,610
|
|
|
$
|
933,004
|
|
|
$
|
21,610
|
|
|
$
|
954,614
|
|
|
$
|
3,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with regulatory
guidance, Doral defines 30 days past due as when the
borrower is delinquent two payments. Doral defines 90 days
past due based upon the actual number of days past due.
|
|
(2) |
|
As of December 31, 2009
excludes $17.3 million of total past due FHA/VA guaranteed
loans, respectively, that due to the nature of their guarantees,
present little credit risk to the Company.
|
The Company would have recognized additional interest income had
all delinquent loans been accounted for on an accrual basis as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Non FHA/VA guaranteed residential
mortgage(1)
|
|
$
|
16,059
|
|
|
|
22,005
|
|
|
$
|
18,642
|
|
Other consumer
|
|
|
28
|
|
|
|
58
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
16,087
|
|
|
|
22,063
|
|
|
|
18,702
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
7,237
|
|
|
|
8,272
|
|
|
|
7,065
|
|
Commercial and industrial
|
|
|
265
|
|
|
|
67
|
|
|
|
76
|
|
Construction and land
|
|
|
12,964
|
|
|
|
18,981
|
|
|
|
17,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
20,466
|
|
|
|
27,320
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
36,553
|
|
|
$
|
49,383
|
|
|
$
|
43,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $7.6 million,
$0.7 million and $0.3 million in additional interest
income the Company would have recognized if FHA/VA non-accrual
loans been accounted for on an accrual status.
|
Credit
Quality
The Companys lending activity is its core function and as
such the quality and effectiveness of the loan origination and
credit risk areas are imperative to its long term success. The
Company manages credit risk by
F-38
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
maintaining sound underwriting standards, monitoring and
evaluating loan portfolio quality (including trends and
collectability) and assessing reserves and loan concentrations.
Critical risk management responsibilities include establishing
sound lending standards, monitoring the quality of the loan
portfolio performance, establishing loan rating systems,
assessing reserves and loan concentrations, supervising document
control and accounting, providing necessary training and
resources to credit officers, implementing lending policies and
loan documentation procedures, identifying problem loans as
early as possible, and instituting procedures to ensure
appropriate actions to comply with laws and regulations.
Credit risk management begins with initial underwriting and
continues throughout the borrowers credit cycle.
Management judgment in conjunction with statistical analysis is
used in underwriting, credit decisions, product pricing, risk
appetite and setting credit limits, operating processes and
metrics to limit the risks inherent in the loan portfolio and
returns. Tolerance levels are set to decrease the percentage of
approvals as the risk profile of the customer increases.
Statistical models are based on detailed behavioral information
from external sources such as credit bureaus, external credit
scores
and/or
internal historical experience. These models are an integral
part of our credit management process and are used in the
assessment of both new and existing credit decisions, portfolio
management strategies, collection practices and in the
determination of the allowance for loan and lease losses. The
Company has also established an internal risk rating system and
internal classifications which provide timely identification of
potential deterioration in loan quality attributes in the loan
portfolio. In addition, the Company has independent Loan Review
and Internal Audit departments, each of which conduct monitoring
and evaluation of loan portfolio quality, loan administration,
and other related activities.
The risks involved in a loan decision are thoroughly analyzed
prior to approval. Certain characteristics are indicators of
risk, such as loan amount, purpose, product type, property type,
loan amount in relation to the borrowers previous credit
experience and loan to value, cash out of the transaction, time
of occupancy, and others. Many lending risks can be mitigated by
requiring higher levels of borrower equity, risk pricing,
additional documentation or collateral or other compensating
factors.
The Company follows the established guidelines and requirements
for government insured or guaranteed loans such as FHA, VA,
Rural and Government subsidies, as well as conforming loans sold
to FHLMC and FNMA. The Company also provides conventional loans
for borrowers that do not qualify for a conforming loan.
Dorals underwriting policies focus primarily on the
borrowers ability to pay and secondarily on collateral
value. The maximum loan to value ratio on conventional first
mortgages generally does not exceed 80%. Loans with higher loan
to value ratios may require private mortgage insurance.
Due to the current economic conditions, the Company has limited
new lending activities in Puerto Rico in the construction,
commercial and consumer (excluding mortgage) markets. The
strategy adopted by the Company in relation to its loan
exposures is to maintain a strong collection process that will
ensure the orderly recovery of all loans by means of normal
collection efforts or restructuring of the loan. Lending
activities in the United States increased in 2010 as management
determined that the U.S. market was improving. Loans in the
U.S. increased $399.3 million as of December 31,
2010 compared to December 31, 2009, while loans in P.R.
decreased $326.5 million over the same periods.
Delinquency is the primary indicator of credit quality the
Company uses to monitor the credit quality of its portfolios,
and is the basis for internal risk rating of loans. Refreshed
LTVs and, to a lesser extent, FICO scores are also considered in
analyzing credit quality. On a daily basis, Doral monitors the
delinquency of its loan portfolios and uses this information to
calibrate its collection, restructuring and foreclosure targets.
Portfolios are managed by different teams with expertise in
their assigned tranches. For example, loans are segregated
geographically, P.R. vs. U.S.; by portfolio, residential
mortgage, small commercial, consumer, large commercial and
construction and land loans; and by overlapping delinquency
buckets, less than 90 days past due, over 90 days past
due, loss mitigation, foreclosure and OREO.
F-39
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The Company has various classes of consumer loans that present
unique credit risks. For the consumer loan portfolio the Company
uses historical delinquency data to arrive at a probability of
default for delinquency buckets starting at inception through
240 and over days past due with higher delinquency buckets
resulting in higher loss severities until the time they are
charged-off. For the residential mortgage portfolio the Company
also considers refreshed LTVs (or original LTVs in the absence
of updated valuations) in determining the severity of loss. The
aging of the delinquent residential mortgage portfolio in the
table below is a result of the prolonged foreclosure process and
the Companys efforts to help customers stay in their homes
through various loss mitigation programs.
For large commercial loans (including commercial real estate,
commercial and industrial, construction and land loan
portfolios), the Company uses workout agents, collection
specialists, attorneys and third party service providers to
supplement the management of the portfolio, including the credit
quality and loss mitigation alternatives. In the case of
residential construction projects, the workout function is
primarily handled by a third party servicer that monitors the
end-to-end process including, but not limited to, completion of
construction, necessary restructuring, pricing, marketing and
unit sales. For large commercial and construction loans the
initial risk rating is driven by performance and delinquency. On
an ongoing basis, the risk rating of large credits is managed by
the portfolio management and collections function and reviewed
and validated by the loan review function. Commercial loans over
90 days past due are evaluated individually for impairment
with loans under $1.0 million monitored quarterly and
individually evaluated for impairment on an annual basis. There
is a high level of surveillance and monitoring in place to
manage these assets and mitigate any loss exposure.
As a result of the economic situation in P.R., Doral has created
a number of loan modification programs to help borrowers stay in
their homes and operate their businesses which also optimizes
borrower performance and returns to Doral (refer to the
discussion on loan modifications and troubled debt
restructurings below for further information on the programs).
Residential, other consumer or commercial loan modifications can
result in returning a loan to accrual status when the criteria
for doing so are met, resulting in increasing interest income
and cash flows as previously non-performing loans begin to
perform, and decreases in foreclosure and OREO costs by
decreasing the number of foreclosed properties.
Detailed below is a table of the recorded investment in loans
(including FHA/VA loans and loans held for sale) by the
delinquency buckets the Company uses to monitor the credit
quality of its loans as of December 31, 2010 and 2009:
As of
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 89 Days
|
|
|
90 to 179 Days
|
|
|
180 to 240 Days
|
|
|
Over 240 Days
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Past
Due(1)
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total
|
|
|
|
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
3,425,774
|
|
|
$
|
106,608
|
|
|
$
|
78,545
|
|
|
$
|
|
|
|
$
|
72,097
|
|
|
$
|
1,624
|
|
|
$
|
27,651
|
|
|
$
|
38
|
|
|
$
|
326,671
|
|
|
$
|
507
|
|
|
$
|
3,930,738
|
|
|
$
|
108,777
|
|
|
$
|
4,039,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing receivables
|
|
|
4,187
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,807
|
|
|
|
|
|
|
|
4,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer
|
|
|
50,616
|
|
|
|
26
|
|
|
|
1,341
|
|
|
|
|
|
|
|
2,225
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
54,354
|
|
|
|
26
|
|
|
|
54,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3,480,577
|
|
|
|
106,634
|
|
|
|
80,120
|
|
|
|
|
|
|
|
74,708
|
|
|
|
1,624
|
|
|
|
27,762
|
|
|
|
38
|
|
|
|
326,732
|
|
|
|
507
|
|
|
|
3,989,899
|
|
|
|
108,803
|
|
|
|
4,098,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
428,616
|
|
|
|
59,903
|
|
|
|
35,307
|
|
|
|
|
|
|
|
65,690
|
|
|
|
|
|
|
|
6,962
|
|
|
|
|
|
|
|
120,231
|
|
|
|
|
|
|
|
656,806
|
|
|
|
59,903
|
|
|
|
716,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
29,653
|
|
|
|
597,056
|
|
|
|
3,901
|
|
|
|
|
|
|
|
607
|
|
|
|
|
|
|
|
360
|
|
|
|
|
|
|
|
2,118
|
|
|
|
|
|
|
|
36,639
|
|
|
|
597,056
|
|
|
|
633,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
200,943
|
|
|
|
107,225
|
|
|
|
2,281
|
|
|
|
|
|
|
|
8,136
|
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
138,144
|
|
|
|
1,610
|
|
|
|
349,899
|
|
|
|
108,835
|
|
|
|
458,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
659,212
|
|
|
|
764,184
|
|
|
|
41,489
|
|
|
|
|
|
|
|
74,433
|
|
|
|
|
|
|
|
7,717
|
|
|
|
|
|
|
|
260,493
|
|
|
|
1,610
|
|
|
|
1,043,344
|
|
|
|
765,794
|
|
|
|
1,809,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,139,789
|
|
|
$
|
870,818
|
|
|
$
|
121,609
|
|
|
$
|
|
|
|
$
|
149,141
|
|
|
$
|
1,624
|
|
|
$
|
35,479
|
|
|
$
|
38
|
|
|
$
|
587,225
|
|
|
$
|
2,117
|
|
|
$
|
5,033,243
|
|
|
$
|
874,597
|
|
|
$
|
5,907,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
As of
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 89 Days
|
|
|
90 to 179 Days
|
|
|
180 to 240 Days
|
|
|
Over 240 Days
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Past
Due(1)
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
PR
|
|
|
US
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
3,453,912
|
|
|
$
|
59,744
|
|
|
$
|
94,669
|
|
|
$
|
|
|
|
$
|
163,588
|
|
|
$
|
|
|
|
$
|
74,617
|
|
|
$
|
|
|
|
$
|
268,959
|
|
|
$
|
102
|
|
|
$
|
4,055,745
|
|
|
$
|
59,846
|
|
|
$
|
4,115,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing receivables
|
|
|
10,822
|
|
|
|
|
|
|
|
894
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,702
|
|
|
|
|
|
|
|
12,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer
|
|
|
69,284
|
|
|
|
1
|
|
|
|
1,888
|
|
|
|
|
|
|
|
2,588
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
73,828
|
|
|
|
1
|
|
|
|
73,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3,534,018
|
|
|
|
59,745
|
|
|
|
97,451
|
|
|
|
|
|
|
|
167,162
|
|
|
|
|
|
|
|
74,669
|
|
|
|
|
|
|
|
268,975
|
|
|
|
102
|
|
|
|
4,142,275
|
|
|
|
59,847
|
|
|
|
4,202,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
556,381
|
|
|
|
54,057
|
|
|
|
31,157
|
|
|
|
|
|
|
|
19,653
|
|
|
|
|
|
|
|
21,035
|
|
|
|
|
|
|
|
89,164
|
|
|
|
|
|
|
|
717,390
|
|
|
|
54,057
|
|
|
|
771,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
50,949
|
|
|
|
257,506
|
|
|
|
625
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
237
|
|
|
|
|
|
|
|
1,337
|
|
|
|
|
|
|
|
53,752
|
|
|
|
257,506
|
|
|
|
311,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
150,918
|
|
|
|
82,311
|
|
|
|
20,230
|
|
|
|
|
|
|
|
1,365
|
|
|
|
|
|
|
|
251,571
|
|
|
|
20,000
|
|
|
|
23,906
|
|
|
|
1,610
|
|
|
|
447,990
|
|
|
|
103,921
|
|
|
|
551,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
758,248
|
|
|
|
393,874
|
|
|
|
52,012
|
|
|
|
|
|
|
|
21,622
|
|
|
|
|
|
|
|
272,843
|
|
|
|
20,000
|
|
|
|
114,407
|
|
|
|
1,610
|
|
|
|
1,219,132
|
|
|
|
415,484
|
|
|
|
1,634,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,292,266
|
|
|
$
|
453,619
|
|
|
$
|
149,463
|
|
|
$
|
|
|
|
$
|
188,784
|
|
|
$
|
|
|
|
$
|
347,512
|
|
|
$
|
20,000
|
|
|
$
|
383,382
|
|
|
$
|
1,712
|
|
|
$
|
5,361,407
|
|
|
$
|
475,331
|
|
|
$
|
5,836,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
modifications and troubled debt restructurings
Doral has created a number of loan modification programs to help
borrowers stay in their homes and operate their businesses which
also optimizes borrower performance and returns to Doral. In
these cases, the restructure or loan modification fits the
definition of TDR. The programs are designed to provide
temporary relief and, if necessary, longer term financial relief
to the consumer loan customer. Dorals consumer loan loss
mitigation program (including consumer loan products and
residential mortgage loans), grants a concession for economic or
legal reasons related to the borrowers financial
difficulties that Doral would not otherwise consider.
Dorals loss mitigation programs can provide for one or a
combination of the following: movement of unpaid principal and
interest to the end of the loan, extension of the loan term for
up to ten years, deferral of principal payments for a period of
time, and reduction of interest rates either permanently
(feature discontinued in 2010) or for a period of up to two
years. No programs adopted by Doral provide for the forgiveness
of contractually due principal or interest. Deferred principal
and uncollected interest are added to the end of the loan term
at the time of the restructuring and uncollected interest is not
recognized as income until collected or when the loan is paid
off. Doral wants to make these programs available only to those
borrowers who have defaulted, or are likely to default,
permanently on their loan and would lose their homes in
foreclosure action absent some lender concession. However, Doral
will move borrowers and properties to foreclosure if the Company
is not reasonably assured that the borrower will be able to
repay all contractual principal or interest (which is not
forgiven in part or whole in any current or contemplated
program).
Regarding the commercial loan loss mitigation programs
(including commercial real estate, commercial and industrial,
land and construction loan portfolios), the determination is
made on a loan by loan basis at the time of restructuring as to
whether a concession was made for economic or legal reasons
related to the borrowers financial difficulty that Doral
would not otherwise consider. Concessions made for commercial
loans could include reductions in interest rates, extensions of
maturity, waiving of borrower covenants, or other contract
changes that would be considered a concession. Doral mitigates
loan defaults for its commercial loan portfolios through its
Collections function. The functions objective is to
minimize both early stage delinquencies and losses upon default
of commercial assets. The group utilizes existing collections
infrastructure of front-end dialers, doorknockers, work-out
agents, and third-party consultants. In the case of residential
construction projects, the function utilizes third-party vendors
to manage the projects.
Residential, other consumer or commercial loan modifications can
result in returning a loan to accrual status when the criteria
for returning a loan to performing status are met (refer to
Dorals non-accrual policies
F-41
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
previously described). Loan modifications also increase
Dorals interest income by returning a non-performing loan
to performing status, and cash flows by providing for payments
to be made by the borrower, and decreases foreclosure and real
estate owned costs by decreasing the number of foreclosed
properties. Doral continues to consider a modified loan as a
non-performing asset for purposes of estimating its allowance
for loan and lease losses until the borrower has made at least
six consecutive contractual payments. At such time the loan will
be treated as any other performing loan for purposes of
estimating the allowance for loan and lease losses.
Loan modifications that are considered TDRs completed during the
years ended December 31, 2010, 2009 and 2008 were as
follows (all loan modifications related to loans to Puerto Rico
residents):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
#
|
|
|
Recorded
|
|
|
Recorded
|
|
|
#
|
|
|
Recorded
|
|
|
Recorded
|
|
|
#
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
|
(Dollars in thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non FHA/VA residential
|
|
|
3,825
|
|
|
$
|
473,920
|
|
|
$
|
468,305
|
|
|
|
2,717
|
|
|
$
|
320,274
|
|
|
$
|
319,745
|
|
|
|
1,494
|
|
|
$
|
161,012
|
|
|
$
|
160,839
|
|
Other consumer
|
|
|
56
|
|
|
|
500
|
|
|
|
500
|
|
|
|
170
|
|
|
|
1,301
|
|
|
|
1,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
3,881
|
|
|
|
474,420
|
|
|
|
468,805
|
|
|
|
2,887
|
|
|
|
321,575
|
|
|
|
321,046
|
|
|
|
1,494
|
|
|
|
161,012
|
|
|
|
160,839
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
146
|
|
|
$
|
34,537
|
|
|
$
|
34,111
|
|
|
|
135
|
|
|
$
|
28,800
|
|
|
$
|
28,741
|
|
|
|
73
|
|
|
$
|
18,538
|
|
|
$
|
18,215
|
|
Commercial and industrial
|
|
|
3
|
|
|
|
3,103
|
|
|
|
3,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
14
|
|
|
|
40,589
|
|
|
|
40,329
|
|
|
|
20
|
|
|
|
63,974
|
|
|
|
62,945
|
|
|
|
11
|
|
|
|
66,040
|
|
|
|
65,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
163
|
|
|
|
78,229
|
|
|
|
77,542
|
|
|
|
155
|
|
|
|
92,774
|
|
|
|
91,686
|
|
|
|
84
|
|
|
|
84,578
|
|
|
|
83,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan modifications
|
|
|
4,044
|
|
|
$
|
552,649
|
|
|
$
|
546,347
|
|
|
|
3,042
|
|
|
$
|
414,349
|
|
|
$
|
412,732
|
|
|
|
1,578
|
|
|
$
|
245,590
|
|
|
$
|
244,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recidivism, or the borrower defaulting on its obligation
pursuant to a modified loan, results in the loan once again
becoming a non-accrual loan. Recidivism occurs at a notably
higher rate than do defaults on new origination loans, so
modified loans present a higher risk of loss than do new
origination loans.
F-42
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Loan modifications considered troubled debt restructurings made
during the twelve months previous to December 31, 2010,
2009 or 2008, respectively, that defaulted during the years
ending December 31, 2010, 2009 and 2008, respectively were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Recorded
|
|
|
#
|
|
|
Recorded
|
|
|
|
|
|
Recorded
|
|
|
|
# Contracts
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
# Contracts
|
|
|
Investment
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage non FHA/VA
|
|
|
755
|
|
|
$
|
95,238
|
|
|
|
1,357
|
|
|
$
|
158,601
|
|
|
|
824
|
|
|
$
|
88,885
|
|
Other consumer
|
|
|
10
|
|
|
|
87
|
|
|
|
14
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
765
|
|
|
|
95,325
|
|
|
|
1,371
|
|
|
|
158,700
|
|
|
|
824
|
|
|
|
88,885
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
34
|
|
|
$
|
8,995
|
|
|
|
77
|
|
|
$
|
20,326
|
|
|
|
46
|
|
|
$
|
12,202
|
|
Construction and land
|
|
|
2
|
|
|
|
9,674
|
|
|
|
14
|
|
|
|
44,308
|
|
|
|
8
|
|
|
|
62,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
36
|
|
|
|
18,669
|
|
|
|
91
|
|
|
|
64,634
|
|
|
|
54
|
|
|
|
74,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recidivism
|
|
|
801
|
|
|
$
|
113,994
|
|
|
|
1,462
|
|
|
$
|
223,334
|
|
|
|
878
|
|
|
$
|
163,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, 2009 and 2008, the
Company would have recognized $7.8 million,
$10.5 million and $6.2 million, respectively, in
additional interest income had all TDR loans been accounted for
on an accrual basis.
As of December 31, 2010 and 2009, construction TDRs include
an outstanding principal balance of $40.4 million and
$35.5 million with commitments to disburse additional funds
of $9.3 million and $5.5 million, respectively.
|
|
11.
|
Allowance
for Loan and Lease Losses and Impaired Loans
|
Dorals allowance for loan and lease losses
(ALLL) is managements estimate of credit
losses inherent in the reported loan investment balance as of
the financial statement date. Management estimates the ALLL
separately for each product category (non-FHA/VA residential
mortgage loans, other consumer, commercial real estate,
construction and land, and commercial and industrial) and
geography (Puerto Rico and U.S. mainland), and combines the
amounts in reaching its estimate for the full portfolio.
Changes in the allowance for loan and lease losses were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
140,774
|
|
|
$
|
132,020
|
|
|
$
|
124,733
|
|
Provision for loan and lease losses
|
|
|
98,975
|
|
|
|
53,663
|
|
|
|
48,856
|
|
Losses charged to the allowance
|
|
|
(117,916
|
)
|
|
|
(47,531
|
)
|
|
|
(42,580
|
)
|
Recoveries
|
|
|
1,819
|
|
|
|
2,622
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
123,652
|
|
|
$
|
140,774
|
|
|
$
|
132,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The activity of Dorals allowance for loan and lease losses
account for the years ending December 31, 2010 and 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
FHA/VA
|
|
|
Other
|
|
|
Total
|
|
|
Commercial
|
|
|
and
|
|
|
and
|
|
|
Total
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Industrial
|
|
|
Land
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
51,814
|
|
|
$
|
8,338
|
|
|
$
|
60,152
|
|
|
$
|
21,883
|
|
|
$
|
4,281
|
|
|
$
|
54,458
|
|
|
$
|
80,622
|
|
|
$
|
140,774
|
|
Provision for loan and lease losses
|
|
|
35,530
|
|
|
|
6,902
|
|
|
|
42,432
|
|
|
|
24,901
|
|
|
|
5,139
|
|
|
|
26,503
|
|
|
|
56,543
|
|
|
|
98,975
|
|
Losses charged to the allowance
|
|
|
(31,010
|
)
|
|
|
(10,334
|
)
|
|
|
(41,344
|
)
|
|
|
(17,122
|
)
|
|
|
(3,393
|
)
|
|
|
(56,057
|
)
|
|
|
(76,572
|
)
|
|
|
(117,916
|
)
|
Recoveries
|
|
|
153
|
|
|
|
1,368
|
|
|
|
1,521
|
|
|
|
50
|
|
|
|
126
|
|
|
|
122
|
|
|
|
298
|
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
56,487
|
|
|
$
|
6,274
|
|
|
$
|
62,761
|
|
|
$
|
29,712
|
|
|
$
|
6,153
|
|
|
$
|
25,026
|
|
|
$
|
60,891
|
|
|
$
|
123,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of
loans(1)
|
|
$
|
3,560,536
|
|
|
$
|
56,327
|
|
|
$
|
3,616,863
|
|
|
$
|
688,946
|
|
|
$
|
633,695
|
|
|
$
|
458,734
|
|
|
$
|
1,781,375
|
|
|
$
|
5,398,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL for loans individually evaluated for impairment
|
|
$
|
27,529
|
|
|
$
|
|
|
|
$
|
27,529
|
|
|
$
|
22,086
|
|
|
$
|
1,060
|
|
|
$
|
18,200
|
|
|
$
|
41,346
|
|
|
$
|
68,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans individually evaluated for impairment
|
|
$
|
732,314
|
|
|
$
|
|
|
|
$
|
732,314
|
|
|
$
|
263,019
|
|
|
$
|
7,505
|
|
|
$
|
191,124
|
|
|
$
|
461,648
|
|
|
$
|
1,193,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL of loans collectively evaluated for impairment
|
|
$
|
28,958
|
|
|
$
|
6,274
|
|
|
$
|
35,232
|
|
|
$
|
7,626
|
|
|
$
|
5,093
|
|
|
$
|
6,826
|
|
|
$
|
19,545
|
|
|
$
|
54,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans collectively evaluated for impairment
|
|
$
|
2,828,222
|
|
|
$
|
56,327
|
|
|
$
|
2,884,549
|
|
|
$
|
425,927
|
|
|
$
|
626,190
|
|
|
$
|
267,610
|
|
|
$
|
1,319,727
|
|
|
$
|
4,204,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes reported balance of FHA/VA
guaranteed loans and loans on savings deposits.
|
F-44
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
FHA/VA
|
|
|
Other
|
|
|
Total
|
|
|
Commercial
|
|
|
and
|
|
|
and
|
|
|
Total
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Industrial
|
|
|
Land
|
|
|
Commercial
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
33,026
|
|
|
$
|
9,276
|
|
|
$
|
42,302
|
|
|
$
|
27,076
|
|
|
$
|
4,290
|
|
|
$
|
58,352
|
|
|
$
|
89,718
|
|
|
$
|
132,020
|
|
Provision (recovery) for loan and lease losses
|
|
|
23,241
|
|
|
|
9,250
|
|
|
|
32,491
|
|
|
|
(560
|
)
|
|
|
5,967
|
|
|
|
15,765
|
|
|
|
21,172
|
|
|
|
53,663
|
|
Losses charged to the allowance
|
|
|
(4,455
|
)
|
|
|
(11,096
|
)
|
|
|
(15,551
|
)
|
|
|
(5,133
|
)
|
|
|
(6,000
|
)
|
|
|
(20,847
|
)
|
|
|
(31,980
|
)
|
|
|
(47,531
|
)
|
Recoveries
|
|
|
2
|
|
|
|
908
|
|
|
|
910
|
|
|
|
500
|
|
|
|
24
|
|
|
|
1,188
|
|
|
|
1,712
|
|
|
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
51,814
|
|
|
$
|
8,338
|
|
|
$
|
60,152
|
|
|
$
|
21,883
|
|
|
$
|
4,281
|
|
|
$
|
54,458
|
|
|
$
|
80,622
|
|
|
$
|
140,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of
loans(1)
|
|
$
|
3,658,701
|
|
|
$
|
83,282
|
|
|
$
|
3,741,983
|
|
|
$
|
738,838
|
|
|
$
|
311,258
|
|
|
$
|
551,911
|
|
|
$
|
1,602,007
|
|
|
$
|
5,343,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL for loans individually evaluated for impairment
|
|
$
|
14,785
|
|
|
$
|
|
|
|
$
|
14,785
|
|
|
$
|
2,564
|
|
|
$
|
254
|
|
|
$
|
38,907
|
|
|
$
|
41,725
|
|
|
$
|
56,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans individually evaluated for impairment
|
|
$
|
384,826
|
|
|
$
|
|
|
|
$
|
384,826
|
|
|
$
|
160,646
|
|
|
$
|
256
|
|
|
$
|
328,806
|
|
|
$
|
489,708
|
|
|
$
|
874,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL of loans collectively evaluated for impairment
|
|
$
|
37,029
|
|
|
$
|
8,338
|
|
|
$
|
45,367
|
|
|
$
|
19,319
|
|
|
$
|
4,027
|
|
|
$
|
15,551
|
|
|
$
|
38,897
|
|
|
$
|
84,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported balance of loans collectively evaluated for impairment
|
|
$
|
3,273,875
|
|
|
$
|
83,282
|
|
|
$
|
3,357,157
|
|
|
$
|
578,192
|
|
|
$
|
311,002
|
|
|
$
|
223,105
|
|
|
$
|
1,112,299
|
|
|
$
|
4,469,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes reported balance of FHA/VA
guaranteed loans and loans on savings deposits.
|
Doral sold certain construction loans totaling
$95.6 million in exchange for cash and a note receivable
during the third quarter of 2010 (total assets sold included
$4.8 million of other real estate owned). During the second
quarter of 2010, the Company transferred the loans to be sold to
the held for sale portfolio resulting in total charge-offs
against the allowance for loan and lease losses of
$35.8 million to reduce the loans to lower of cost or
market. The transfer of the loans to held for sale resulted in
additional provisions for loan and lease losses of
$12.6 million for the second quarter of 2010. Loans
collateralized by land are under regulatory review in the
U.S. and its territories. As of December 31, 2010 land
collateralized loans totalled to $143.6 million. In
addition, Doral has outstanding a few construction loans with
remnant land totaling $25.3 million. Should our estimated
land value change significantly, it may be necessary to record
additional provisions for loan losses or charge-offs that may be
material to the Companys financial statements.
F-45
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The following table provides Dorals recorded investment in
impaired loans which reflects partial charge-offs and other
amounts which reduce credit risk, the contractual unpaid
principal balance (UPB) and the related allowance in
impaired loans as of December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Recorded
|
|
|
Related
|
|
|
Gross
|
|
|
|
|
|
Recorded
|
|
|
Related
|
|
|
Gross
|
|
|
|
|
|
|
UPB
|
|
|
Investment
|
|
|
Allowance
|
|
|
Reserve
%(1)
|
|
|
UPB
|
|
|
Investment
|
|
|
Allowance
|
|
|
Reserve
%(1)
|
|
|
|
|
|
|
(In thousands)
|
|
|
With no allowance recorded at the report date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential
|
|
$
|
199,840
|
|
|
$
|
197,251
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
145,426
|
|
|
$
|
145,426
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
199,840
|
|
|
|
197,251
|
|
|
|
|
|
|
|
|
%
|
|
|
145,426
|
|
|
|
145,426
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Commercial real estate
|
|
|
145,099
|
|
|
|
131,078
|
|
|
|
|
|
|
|
|
%
|
|
|
85,660
|
|
|
|
80,420
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Construction and land
|
|
|
96,357
|
|
|
|
85,252
|
|
|
|
|
|
|
|
|
%
|
|
|
117,965
|
|
|
|
117,526
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Commercial and industrial
|
|
|
5,489
|
|
|
|
5,435
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
246,945
|
|
|
|
221,765
|
|
|
|
|
|
|
|
|
%
|
|
|
203,625
|
|
|
|
197,946
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance recorded at the report date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential
|
|
|
539,583
|
|
|
|
535,063
|
|
|
|
27,529
|
|
|
|
5.15
|
%
|
|
|
239,337
|
|
|
|
239,400
|
|
|
|
14,785
|
|
|
|
6.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
539,583
|
|
|
|
535,063
|
|
|
|
27,529
|
|
|
|
5.15
|
%
|
|
|
239,337
|
|
|
|
239,400
|
|
|
|
14,785
|
|
|
|
6.18
|
%
|
|
|
|
|
Commercial real estate
|
|
|
138,827
|
|
|
|
131,941
|
|
|
|
22,086
|
|
|
|
16.74
|
%
|
|
|
80,644
|
|
|
|
80,226
|
|
|
|
2,564
|
|
|
|
3.20
|
%
|
|
|
|
|
Construction and land
|
|
|
118,966
|
|
|
|
105,872
|
|
|
|
18,200
|
|
|
|
17.19
|
%
|
|
|
227,168
|
|
|
|
211,280
|
|
|
|
38,907
|
|
|
|
18.41
|
%
|
|
|
|
|
Commercial and industrial
|
|
|
2,069
|
|
|
|
2,070
|
|
|
|
1,060
|
|
|
|
51.21
|
%
|
|
|
254
|
|
|
|
256
|
|
|
|
254
|
|
|
|
99.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
259,862
|
|
|
|
239,883
|
|
|
|
41,346
|
|
|
|
17.24
|
%
|
|
|
308,066
|
|
|
|
291,762
|
|
|
|
41,725
|
|
|
|
14.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential
|
|
|
739,423
|
|
|
|
732,314
|
|
|
|
27,529
|
|
|
|
3.76
|
%
|
|
|
384,763
|
|
|
|
384,826
|
|
|
|
14,785
|
|
|
|
3.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
739,423
|
|
|
|
732,314
|
|
|
|
27,529
|
|
|
|
3.76
|
%
|
|
|
384,763
|
|
|
|
384,826
|
|
|
|
14,785
|
|
|
|
3.84
|
%
|
|
|
|
|
Commercial real estate
|
|
|
283,926
|
|
|
|
263,019
|
|
|
|
22,086
|
|
|
|
8.40
|
%
|
|
|
166,304
|
|
|
|
160,646
|
|
|
|
2,564
|
|
|
|
1.60
|
%
|
|
|
|
|
Construction and land
|
|
|
215,323
|
|
|
|
191,124
|
|
|
|
18,200
|
|
|
|
9.52
|
%
|
|
|
345,133
|
|
|
|
328,806
|
|
|
|
38,907
|
|
|
|
11.83
|
%
|
|
|
|
|
Commercial and industrial
|
|
|
7,558
|
|
|
|
7,505
|
|
|
|
1,060
|
|
|
|
14.12
|
%
|
|
|
254
|
|
|
|
256
|
|
|
|
254
|
|
|
|
99.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
506,807
|
|
|
|
461,648
|
|
|
|
41,346
|
|
|
|
8.96
|
%
|
|
|
511,691
|
|
|
|
489,708
|
|
|
|
41,725
|
|
|
|
8.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,246,230
|
|
|
$
|
1,193,962
|
|
|
$
|
68,875
|
|
|
|
5.77
|
%
|
|
$
|
896,454
|
|
|
$
|
874,534
|
|
|
$
|
56,510
|
|
|
|
6.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross reserve percent represents
the amount of the allowance to the recorded investment and
indicates the total estimated loss on the remaining balance of
impaired assets.
|
F-46
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The following table provides Dorals average recorded
investment in impaired loans and the related interest income
recognized during the time within that period that the loans
were impaired for the years ended December 31, 2010, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
(In thousands)
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential
|
|
$
|
369,469
|
|
|
$
|
41,591
|
|
|
$
|
94,494
|
|
|
$
|
15,887
|
|
|
$
|
35,147
|
|
|
$
|
10,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
369,469
|
|
|
|
41,591
|
|
|
|
94,494
|
|
|
|
15,887
|
|
|
|
35,147
|
|
|
|
10,316
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
186,623
|
|
|
|
4,696
|
|
|
|
81,180
|
|
|
|
2,629
|
|
|
|
51,770
|
|
|
|
1,839
|
|
Construction and land
|
|
|
251,415
|
|
|
|
1,861
|
|
|
|
317,881
|
|
|
|
2,766
|
|
|
|
262,816
|
|
|
|
1,084
|
|
Commercial and industrial
|
|
|
3,074
|
|
|
|
244
|
|
|
|
460
|
|
|
|
21
|
|
|
|
248
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
441,112
|
|
|
|
6,801
|
|
|
|
399,521
|
|
|
|
5,416
|
|
|
|
314,834
|
|
|
|
3,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
810,581
|
|
|
$
|
48,392
|
|
|
$
|
494,015
|
|
|
$
|
21,303
|
|
|
$
|
349,981
|
|
|
$
|
13,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Related
Party Transactions
|
The following table summarizes certain information regarding
Doral Financials loans outstanding to officers, directors
and common stockholders controlling 5% or more for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
2,840
|
|
|
$
|
2,579
|
|
New loans
|
|
|
|
|
|
|
3,178
|
|
Repayments
|
|
|
(96
|
)
|
|
|
(2,129
|
)
|
Loans of former officers
|
|
|
(1,444
|
)
|
|
|
(788
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of
period(1)
|
|
$
|
1,300
|
|
|
$
|
2,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
At December 31, 2010 and 2009,
none of the loans outstanding to officers, directors and 5% or
more stockholders were delinquent.
|
At December 31, 2010 and 2009, the amount of loans
outstanding to officers, directors and 5% or more stockholders
secured by mortgages on real estate amounted to
$1.2 million and $2.7 million, respectively.
Since 2000, Doral Financial has conducted business with an
entity that provides property inspection services and is
co-owned by the spouse of a former Executive VP (employed
through third quarter of 2010) of the Company. The amount
paid by the Company to this entity for the nine month period
ended September 30, 2010 amounted to $1.7 million,
compared to $1.8 million for the year ended
December 31, 2009.
For the year ended December 31, 2010, the Company assumed
approximately $0.6 million of the professional services
expense related to Doral Holdings compared to $0.3 million
for 2009.
At December 31, 2010 and 2009, Doral Financials
banking subsidiaries had deposits from officers, directors,
employees and principal stockholders of the Company amounting to
approximately $5.7 million and $3.0 million,
respectively. The increase in deposits from officers, directors,
employees and principal stockholders was driven primarily by the
opening of new accounts during 2010.
F-47
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
13.
|
Accounts
Receivable and Other Assets
|
The Company reported accounts receivable of $28.7 million
and $60.5 million as of December 31, 2010 and 2009,
respectively. Total accounts receivable included
$12.5 million and $15.6 million related to claims of
loans foreclosed to FHA and VA as of December 31, 2010 and
2009, respectively. Accounts receivable also included
$21.7 million as of December 31, 2009, related to the
Lehman Brothers Transaction described below.
Lehman
Brothers Transaction
Doral Financial and Doral Bank PR (combined Doral),
had counterparty exposure to Lehman Brothers, Inc.
(LBI) in connection with repurchase financing
agreements and forward To-Be-Announced (TBA)
agreements. LBI was placed in a Securities Investor Protection
Corporation (SIPC) liquidation proceeding after the
filing for bankruptcy of its parent Lehman Brothers Holdings,
Inc. The filing of the SIPC liquidation proceeding was an event
of default under the repurchase agreements and the forward TBA
agreements resulting in their termination as of
September 19, 2008.
The termination of the agreements led to a reduction in the
Companys total assets and total liabilities of
approximately $509.8 million and caused Doral to recognize
a previously unrealized loss on the value of the securities
subject to the agreements, resulting in a $4.2 million
charge during the third quarter of 2008. In January 2009, Doral
timely filed customer claims against LBI in the SIPC liquidation
proceeding for LBI that it is owed approximately
$43.3 million, representing the excess of the value of the
securities held by LBI above the amounts owed by Doral under the
agreements, plus ancillary expenses and interest. Doral fully
reserved ancillary expenses and interest.
On August 19, 2009, the SIPC trustee issued notices of
determination to Doral (i) denying Dorals claims for
treatment as a customer with respect to the cash
and/or
securities held by LBI under the repurchase financing agreements
and forward TBA agreements between Doral and LBI, and
(ii) converting Dorals claims to general creditor
claims. On September 18, 2009, Doral timely filed its
objections in bankruptcy court to these determinations by the
SIPC trustee, which objections remain pending.
In December 2008, the SIPC trustee announced that it expected to
have enough assets to cover customer claims, but stated that it
could not determine at that point what would be available to pay
general creditors. Based on the information available in the
fourth quarter of 2008, Doral determined that the process would
likely take more than a year and that mounting legal and
operating costs would likely impair the ability of LBI to pay
100% of the claims filed against it, especially for general
creditors. The fourth quarter of 2008 also saw the continued
decline in asset values, and management concluded that it was
likely that LBI assets would also decline in value. As a result,
Doral accrued as of December 31, 2008, a loss of
$21.6 million against the $43.3 million owed by LBI.
On October 5, 2009, the SIPC trustee filed a motion in
bankruptcy court seeking leave to allocate property within the
LBI estate entirely to customer claims in which it asserted that
the colorable customer claims will approach
and, depending on how certain disputed issues are resolved,
could exceed- the assets available to the SIPC trustee for
distribution. Based on the information available in the
second quarter of 2010, Doral determined that there was further
impairment in the likely ability of LBI to pay 100% of the
claims filed against it. As a result, Doral recognized an
additional loss of $10.8 million against the
$43.3 million owed by LBI. A net receivable of
$10.9 million was recorded in Accounts
Receivable on the Companys consolidated statements
of financial condition.
During the fourth quarter of 2010, Doral sold and assigned to a
third party all of Dorals rights, title, and interest in
and to its claims in the SIPC proceeding, including all of its
rights to prosecute its claims, as a result of which Doral
recognized a loss of $1.5 million on financial disposition
the net receivable.
F-48
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The Company routinely originates, securitizes and sells mortgage
loans into the secondary market. The Company generally retains
the servicing rights and, in the past, also retained IOs. MSRs
represent the estimated present value of the normal servicing
fees (net of related servicing costs) expected to be received on
a loan being serviced over the expected term of the loan. MSRs
entitle Doral Financial to a future stream of cash flows based
on the outstanding principal balance of the loans serviced and
the contractual servicing fee. The annual servicing fees
generally range between 25 and 50 basis points, less, in
certain cases, any corresponding guarantee fee. In addition,
MSRs may entitle Doral Financial, depending on the contract
language, to ancillary income including late charges, float
income, and prepayment penalties net of the appropriate expenses
incurred for performing the servicing functions. In certain
instances, the Company also services loans with no contractual
servicing fee. The servicing asset or liability associated with
such loans is evaluated based on ancillary income, including
float, late fees, prepayment penalties and costs.
The components of net servicing income (loss) are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Servicing fees (net of guarantee fees)
|
|
$
|
27,961
|
|
|
$
|
29,179
|
|
|
$
|
31,572
|
|
Late charges
|
|
|
10,110
|
|
|
|
8,482
|
|
|
|
9,058
|
|
Prepayment penalties
|
|
|
774
|
|
|
|
341
|
|
|
|
417
|
|
Interest loss
|
|
|
(6,764
|
)
|
|
|
(6,067
|
)
|
|
|
(6,733
|
)
|
Other servicing fees
|
|
|
912
|
|
|
|
533
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income, gross
|
|
|
32,993
|
|
|
|
32,468
|
|
|
|
34,942
|
|
Changes in fair value of mortgage servicing rights
|
|
|
(12,087
|
)
|
|
|
(3,131
|
)
|
|
|
(42,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net servicing income (loss)
|
|
$
|
20,906
|
|
|
$
|
29,337
|
|
|
$
|
(7,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in servicing assets measured using the fair value
method for the years ended December 31, 2010, 2009 and 2008
are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
118,493
|
|
|
$
|
114,396
|
|
|
$
|
150,238
|
|
Capitalization of servicing assets
|
|
|
8,128
|
|
|
|
7,387
|
|
|
|
7,387
|
|
Sales of servicing
asset(1)
|
|
|
(192
|
)
|
|
|
(159
|
)
|
|
|
|
|
Servicing release due to
repurchase(2)
|
|
|
(1,414
|
)
|
|
|
(2,289
|
)
|
|
|
(587
|
)
|
Change in fair value
|
|
|
(10,673
|
)
|
|
|
(842
|
)
|
|
|
(42,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of
period(3)
|
|
$
|
114,342
|
|
|
$
|
118,493
|
|
|
$
|
114,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents MSRs sales
related to $24.0 million and $7.1 million in principal
balance of mortgage loans for the corresponding years ended
December 31, 2010 and 2009, respectively.
|
|
(2) |
|
Amount represents the adjustment of
MSR fair value related to the repurchase of $102.8 million,
$178.7 million and $64.0 million in principal balance
of mortgage loans serviced for others for the years ended
December 31, 2010, 2009 and 2008, respectively.
|
|
(3) |
|
Outstanding balance of loans
serviced for third parties amounted to $8.2 billion,
$8.7 billion and $9.5 billion as of December 31,
2010, 2009 and 2008, respectively, which includes
$2.8 million, $3.1 million and $3.4 million,
respectively, of loans being serviced under
sub-servicing
arrangements.
|
The Company recognizes as assets the rights to service loans for
others and records these assets at fair value. The fair value of
the Companys MSRs is determined based on a combination of
market information on
F-49
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
trading activity (servicing asset trades and broker valuations),
benchmarking of servicing assets (valuation surveys) and cash
flow modeling. The valuation of the Companys servicing
assets incorporates two sets of assumptions: (i) market
derived assumptions for discount rates, servicing costs, escrow
earnings rate, float earnings rate and cost of funds and
(ii) market derived assumptions adjusted for the
Companys loan characteristics and portfolio behavior for
escrow balances, delinquencies and foreclosures, late fees,
prepayments and prepayment penalties. The constant prepayment
rate (CPR) assumptions employed for the valuation of
the Companys servicing assets for the year ended
December 31, 2010 was 8.1% compared to 9.1% for the
corresponding 2009 period.
Discount rate assumptions (weighted average) for the
Companys servicing assets were stable for the years ended
December 31, 2010 and 2009, which were 11.3% and 11.4%,
respectively.
Based on recent prepayment experience, the expected
weighted-average remaining life of the Companys servicing
assets at December 31, 2010 and 2009 was 7.0 years and
6.6 years, respectively. Any projection of the expected
weighted-average remaining life of servicing assets is limited
by conditions that existed at the time the calculations were
performed.
At December 31, 2010 and 2009, fair values of the
Companys retained interest were based on valuation models
that incorporate market driven assumptions, such as discount
rates, prepayment speeds and implied forward LIBOR rates (in the
case of variable IOs), adjusted by the particular
characteristics of the Companys servicing portfolio.
The weighted-averages of the key economic assumptions used by
the Company in its valuation models and the sensitivity of the
current fair value of residual cash flows to immediate
10 percent and 20 percent adverse changes in those
assumptions for mortgage loans at December 31, 2010, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Interest-Only
|
|
|
|
Assets
|
|
|
Strips
|
|
|
|
(Dollars in thousands)
|
|
|
Carrying amount of retained interest
|
|
$
|
114,342
|
|
|
$
|
44,250
|
|
Weighted-average expected life (in years)
|
|
|
7.0
|
|
|
|
5.5
|
|
Constant prepayment rate (weighted-average annual rate)
|
|
|
8.1
|
%
|
|
|
9.0
|
%
|
Decrease in fair value due to 10% adverse change
|
|
$
|
(3,969
|
)
|
|
$
|
(1,196
|
)
|
Decrease in fair value due to 20% adverse change
|
|
$
|
(7,697
|
)
|
|
$
|
(2,365
|
)
|
Residual cash flow discount rate (weighted-average annual
rate)
|
|
|
11.3
|
%
|
|
|
13.0
|
%
|
Decrease in fair value due to 10% adverse change
|
|
$
|
(4,712
|
)
|
|
$
|
(1,475
|
)
|
Decrease in fair value due to 20% adverse change
|
|
$
|
(9,036
|
)
|
|
$
|
(2,849
|
)
|
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on
a 10 percent variation in assumptions generally cannot be
extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also,
in this table, the effect of a variation in a particular
assumption on the fair value of the retained interest is
calculated without changing any other assumption. In reality,
changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower
prepayments), which may magnify or offset the sensitivities.
To determine the value of its portfolio of variable IOs, Doral
Financial uses a valuation model that forecasts expected cash
flows using forward LIBOR rates derived from the LIBOR/Swap
yield curve at the date of the valuation. The characteristics of
the variable IOs result in an increase in cash flows when LIBOR
rates fall and a reduction in cash flows when LIBOR rates rise.
This provides a mitigating effect on the impact of prepayment
speeds on the cash flows, with prepayment expected to rise when
long-term interest rates fall reducing the amount of expected
cash flows and the opposite when long-term interest rates rise.
Prepayment assumptions incorporated into the valuation model for
variable and fixed IOs are based on publicly available,
F-50
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
independently verifiable, prepayment assumptions for FNMA
mortgage pools and statistically derived prepayment adjusters
based on observed relationships between the Companys and
the FNMAs U.S. mainland mortgage pool prepayment
experiences.
This methodology resulted in a CPR of 9.0% and 10.4% for the
years ended December 31, 2010 and 2009, respectively. The
change in the CPR between 2010 and 2009 was due mostly to a
general decrease in market interest rates.
For IOs, Doral Financial recognizes as interest income (through
the life of the IO) the excess of all estimated cash flows
attributable to these interests over their recorded balance
using the effective yield method. Doral Financial recognizes as
interest income the excess of the cash collected from the
borrowers over the yield payable to investors, up to an amount
equal to the yield on the IOs. Doral Financial accounts for any
excess retained spread as amortization to the gross IO
capitalized at inception. The Company updates its estimates of
expected cash flows periodically and recognizes changes in
calculated effective yield on a prospective basis.
The activity of interest-only strips is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
45,723
|
|
|
|
|
|
|
$
|
52,179
|
|
|
|
|
|
|
$
|
51,928
|
|
Amortization
|
|
|
(10,284
|
)
|
|
|
|
|
|
|
(9,236
|
)
|
|
|
|
|
|
|
(5,398
|
)
|
Gain on the IO value
|
|
|
8,811
|
|
|
|
|
|
|
|
2,780
|
|
|
|
|
|
|
|
5,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
44,250
|
|
|
|
|
|
|
$
|
45,723
|
|
|
|
|
|
|
$
|
52,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gain on the valuation of the IO for the year ended
December 31, 2010, when compared to the corresponding 2009
period, resulted mainly from a decrease in LIBOR rates and
slower prepayment speed assumptions. The increase in value of
the variable IO was offset by the decrease in value of embedded
caps.
The following table presents a detail of the cash flows received
on Doral Financials portfolio of IOs for 2010, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total cash flows received on IO portfolio
|
|
$
|
16,470
|
|
|
$
|
15,378
|
|
|
$
|
12,560
|
|
Amortization of IOs, as offset to cash flows
|
|
|
(10,284
|
)
|
|
|
(9,236
|
)
|
|
|
(5,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows recognized as interest income
|
|
$
|
6,186
|
|
|
$
|
6,142
|
|
|
$
|
7,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the estimated change in the fair
value of the Companys IOs, the constant prepayment rate
and the weighted-average expected life under the Companys
valuation model, given several hypothetical (instantaneous and
parallel) increases or decreases in interest rates. As of
December 31, 2010, all
F-51
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
of the mortgage loan sales contracts underlying the
Companys floating rate IOs were subject to interest rate
caps.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Change in Interest Rates
|
|
Prepayment
|
|
|
Expected Life
|
|
|
Change in Fair
|
|
|
Percentage
|
|
(Basis Points)
|
|
Rate
|
|
|
(Years)
|
|
|
Value of IOs
|
|
|
of Change
|
|
|
|
(Dollars in thousands)
|
|
|
200
|
|
|
6.2
|
%
|
|
|
6.6
|
|
|
$
|
(5,042
|
)
|
|
|
(11.4
|
)%
|
100
|
|
|
7.5
|
%
|
|
|
6.0
|
|
|
|
(2,920
|
)
|
|
|
(6.6
|
)%
|
50
|
|
|
8.4
|
%
|
|
|
5.6
|
|
|
|
(1,827
|
)
|
|
|
(4.1
|
)%
|
Base
|
|
|
9.0
|
%
|
|
|
5.5
|
|
|
|
|
|
|
|
|
%
|
50
|
|
|
10.0
|
%
|
|
|
5.2
|
|
|
|
1,193
|
|
|
|
2.7
|
%
|
100
|
|
|
11.1
|
%
|
|
|
4.8
|
|
|
|
1,690
|
|
|
|
3.8
|
%
|
200
|
|
|
12.4
|
%
|
|
|
4.5
|
|
|
|
3,140
|
|
|
|
7.1
|
%
|
|
|
15.
|
Sale
and Securitization of Mortgage Loans
|
As disclosed in Note 14, the Company routinely originates,
securitizes and sells mortgage loans into the secondary market.
As a result of this process, the Company typically retains the
servicing rights and, in the past, also retained IOs. The
Companys retained interests are subject to prepayment and
interest rate risk.
Key prepayment and discount rate assumptions used in determining
the fair value at the time of sale for MSRs ranged as follows:
|
|
|
|
|
|
|
|
|
|
|
Servicing Assets
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
2010
|
|
|
|
|
|
|
|
|
Constant prepayment rate:
|
|
|
|
|
|
|
|
|
Government guaranteed mortgage loans
|
|
|
6.88
|
%
|
|
|
6.88
|
%
|
Conventional conforming mortgage loans
|
|
|
8.55
|
%
|
|
|
8.76
|
%
|
Conventional non-conforming mortgage loans
|
|
|
7.16
|
%
|
|
|
8.63
|
%
|
Residual cash flow discount rate:
|
|
|
|
|
|
|
|
|
Government guaranteed mortgage loans
|
|
|
10.50
|
%
|
|
|
10.50
|
%
|
Conventional conforming mortgage loans
|
|
|
9.04
|
%
|
|
|
9.18
|
%
|
Conventional non-conforming mortgage loans
|
|
|
13.84
|
%
|
|
|
14.07
|
%
|
2009
|
|
|
|
|
|
|
|
|
Constant prepayment rate:
|
|
|
|
|
|
|
|
|
Government guaranteed mortgage loans
|
|
|
7.55
|
%
|
|
|
7.55
|
%
|
Conventional conforming mortgage loans
|
|
|
7.87
|
%
|
|
|
9.69
|
%
|
Conventional non-conforming mortgage loans
|
|
|
8.85
|
%
|
|
|
10.23
|
%
|
Residual cash flow discount rate:
|
|
|
|
|
|
|
|
|
Government guaranteed mortgage loans
|
|
|
10.50
|
%
|
|
|
10.50
|
%
|
Conventional conforming mortgage loans
|
|
|
9.04
|
%
|
|
|
9.20
|
%
|
Conventional non-conforming mortgage loans
|
|
|
14.05
|
%
|
|
|
14.19
|
%
|
F-52
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
Servicing Assets
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
2008
|
|
|
|
|
|
|
|
|
Constant prepayment rate:
|
|
|
|
|
|
|
|
|
Government guaranteed mortgage loans
|
|
|
11.88
|
%
|
|
|
11.88
|
%
|
Conventional conforming mortgage loans
|
|
|
10.76
|
%
|
|
|
13.94
|
%
|
Conventional non-conforming mortgage loans
|
|
|
14.90
|
%
|
|
|
23.34
|
%
|
Residual cash flow discount rate:
|
|
|
|
|
|
|
|
|
Government guaranteed mortgage loans
|
|
|
10.50
|
%
|
|
|
10.50
|
%
|
Conventional conforming mortgage loans
|
|
|
9.04
|
%
|
|
|
9.22
|
%
|
Conventional non-conforming mortgage loans
|
|
|
14.05
|
%
|
|
|
14.23
|
%
|
The Companys mortgage servicing portfolio amounted to
approximately $12.6 billion, $13.1 billion and
$13.7 billion at December 31, 2010, 2009 and 2008,
respectively, including $4.4 billion, $4.4 billion and
$4.2 billion, respectively, of mortgage loans owned by the
Company for which no servicing asset has been recognized.
For the years ended December 31, 2010 and 2009, the unpaid
principal balance of loan sales and securitizations totaled to
$475.2 million and $465.9 million, respectively, while
the servicing released or derecognized due to repurchases
amounted to $102.8 million and $178.7 million,
respectively.
Under most of the servicing agreements, the Company is required
to advance funds to make scheduled payments to investors, if
payments due have not been received from the mortgagors. At
December 31, 2010 and 2009, mortgage servicing advances
amounted to $51.5 million and $19.6 million,
respectively, net of a reserve of $9.0 million and
$8.8 million, respectively.
In general, Doral Financials servicing agreements are
terminable by the investors for cause. The Companys
servicing agreements with FNMA permit FNMA to terminate the
Companys servicing rights if FNMA determines that changes
in the Companys financial condition have materially
adversely affected the Companys ability to satisfactorily
service the mortgage loans. Approximately 28% of Doral
Financials mortgage loan servicing on behalf of third
parties relates to mortgage servicing for FNMA. Termination of
Doral Financials servicing rights with respect to FNMA or
other parties for which it provides servicing could have a
material adverse effect on the results of operations and
financial condition of Doral Financial.
|
|
16.
|
Servicing
Related Matters
|
At December 31, 2010 and 2009, escrow funds and custodial
accounts included approximately $85.4 million and
$206.6 million, respectively, deposited with Doral Bank PR.
These funds are included in the Companys consolidated
financial statements. At December 31, 2010 and 2009, escrow
funds and custodial accounts also included approximately
$27.6 million and $17.9 million, respectively,
deposited with other banks, which were excluded from the
Companys assets and liabilities. The Company had fidelity
bond and errors and omissions coverage of $30.0 million and
$17.0 million, respectively, as of December 31, 2010
and 2009 to cover these amounts.
F-53
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
17.
|
Premises
and Equipment
|
Premises and equipment and useful lives used in computing
depreciation consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
December 31,
|
|
|
|
in Years
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
Office buildings
|
|
|
30-40
|
|
|
$
|
73,510
|
|
|
$
|
67,248
|
|
Office furniture and equipment
|
|
|
3-5
|
|
|
|
78,556
|
|
|
|
69,057
|
|
Leasehold and building improvements
|
|
|
5-10
|
|
|
|
54,127
|
|
|
|
56,500
|
|
Automobiles
|
|
|
5
|
|
|
|
320
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,513
|
|
|
|
193,125
|
|
Less Accumulated depreciation
|
|
|
|
|
|
|
(117,257
|
)
|
|
|
(106,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,256
|
|
|
|
86,640
|
|
Land
|
|
|
|
|
|
|
14,797
|
|
|
|
14,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104,053
|
|
|
$
|
101,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 31,311 square feet are leased to tenants
unrelated to Doral Financial. As of December 31, 2010 and
2009, the amount of accumulated depreciation on property held
for leasing purposes amounted to $2.5 million and
$2.2 million, respectively.
For the years ended December 31, 2010, 2009 and 2008,
depreciation and amortization expenses amounted to
$12.4 million, $12.4 million and $15.0 million,
respectively.
|
|
18.
|
Other
Real Estate Owned (OREO)
|
The Company acquires real estate through foreclosure
proceedings. Legal fees and other direct costs incurred in a
foreclosure are expensed as incurred. Real estate held for sale
totaled to $100.3 million and $94.2 million as of
December 31, 2010 and 2009, respectively.
The following tables provide the balances and activity of other
real estate held owned for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Residential
|
|
$
|
63,794
|
|
|
$
|
76,461
|
|
Commercial
|
|
|
17,599
|
|
|
|
14,283
|
|
Construction and land
|
|
|
18,880
|
|
|
|
3,475
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
100,273
|
|
|
$
|
94,219
|
|
|
|
|
|
|
|
|
|
|
F-54
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The following table presents activity of OREO for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
94,219
|
|
|
$
|
61,340
|
|
|
$
|
38,154
|
|
Additions
|
|
|
93,077
|
|
|
|
85,274
|
|
|
|
49,514
|
|
Sales
|
|
|
(58,808
|
)
|
|
|
(35,271
|
)
|
|
|
(23,460
|
)
|
Retirements
|
|
|
(2,724
|
)
|
|
|
(3,370
|
)
|
|
|
(1,662
|
)
|
Lower of cost or market adjustments
|
|
|
(25,491
|
)
|
|
|
(13,754
|
)
|
|
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
100,273
|
|
|
$
|
94,219
|
|
|
$
|
61,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2010, the Company established an
additional provision of $17.0 million to recognize the
effect of managements strategic decision to reduce pricing
in order to accelerate OREO sales.
During 2009, the Company improved its foreclosure functions
resulting in shorter foreclosure periods, and units are entering
the OREO portfolio at faster rates than in previous years, which
together with the deteriorating economic conditions in Puerto
Rico, resulted in a higher level of real estate owned.
Retirements represent properties transferred to loan portfolio
or claims receivable.
At both December 31, 2010 and 2009, goodwill amounted to
$4.4 million and was assigned principally to the mortgage
banking segment. Goodwill is recorded in Other
assets on the Consolidated Statements of Financial
Condition.
The Company performed impairment tests of its goodwill for the
years ended December 31, 2010, 2009 and 2008 using a
discounted cash flow analysis and determined that there was no
impairment.
At December 31, 2010, the scheduled aggregate annual
contractual maturities (or estimates in the case of loans
payable and a note payable with a local institution) of the
Companys borrowings were approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
|
|
|
from
|
|
|
Loans
|
|
|
Notes
|
|
|
|
|
|
|
Deposits
|
|
|
Agreements(1)(3)
|
|
|
FHLB(1)
|
|
|
Payable(2)
|
|
|
payable
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
2,943,784
|
|
|
$
|
|
|
|
$
|
423,420
|
|
|
$
|
35,713
|
|
|
$
|
7,591
|
|
|
$
|
3,410,508
|
|
2012
|
|
|
660,559
|
|
|
|
269,500
|
|
|
|
339,000
|
|
|
|
32,536
|
|
|
|
38,047
|
|
|
|
1,339,642
|
|
2013
|
|
|
319,748
|
|
|
|
697,800
|
|
|
|
139,000
|
|
|
|
29,633
|
|
|
|
8,802
|
|
|
|
1,194,983
|
|
2014
|
|
|
208,224
|
|
|
|
174,500
|
|
|
|
|
|
|
|
26,980
|
|
|
|
1,570
|
|
|
|
411,274
|
|
2015
|
|
|
251,164
|
|
|
|
35,000
|
|
|
|
|
|
|
|
24,557
|
|
|
|
1,655
|
|
|
|
312,376
|
|
2016 and thereafter
|
|
|
234,996
|
|
|
|
|
|
|
|
|
|
|
|
154,616
|
|
|
|
456,293
|
|
|
|
845,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,618,475
|
|
|
$
|
1,176,800
|
|
|
$
|
901,420
|
|
|
$
|
304,035
|
|
|
$
|
513,958
|
|
|
$
|
7,514,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $100.0 million of
repurchase agreements with a rate of 2.98% and
$80.0 million in advances from FHLB with a rate of 5.04%,
which the lenders have the right to call before their
contractual maturities beginning in February 2011.
|
|
(2) |
|
Secured borrowings with local
financial institutions, collateralized by real estate mortgages
at fixed and variable interest rates tied to
3-month
LIBOR. These loans are not subject to scheduled principal
payments, but are payable according to the regular schedule
|
F-55
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
amortization and prepayments of the
underlying mortgage loans. For purposes of the table above the
Company used a CPR of 9.0% to estimate the repayments.
|
|
(3) |
|
The Company has a policy and
procedures to manage counterparty risk associated to securities
sold under agreements to repurchase and subsequent monitoring
controls related to approved limits, concentration and exposure.
|
At December 31, deposits and their weighted-average
interest rates are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Brokered certificates of deposit
|
|
$
|
2,359,254
|
|
|
|
2.83
|
|
|
$
|
2,652,409
|
|
|
|
2.54
|
|
Certificates of deposit
|
|
|
703,473
|
|
|
|
2.25
|
|
|
|
507,987
|
|
|
|
3.57
|
|
Regular savings
|
|
|
410,418
|
|
|
|
1.25
|
|
|
|
356,488
|
|
|
|
1.57
|
|
NOW accounts and other transactions accounts
|
|
|
411,633
|
|
|
|
1.04
|
|
|
|
364,469
|
|
|
|
0.96
|
|
Money market accounts
|
|
|
475,467
|
|
|
|
1.85
|
|
|
|
408,152
|
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
4,360,245
|
|
|
|
2.31
|
|
|
|
4,289,505
|
|
|
|
2.43
|
|
Non-interest-bearing deposits
|
|
|
258,230
|
|
|
|
|
|
|
|
353,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,618,475
|
|
|
|
2.18
|
|
|
$
|
4,643,021
|
|
|
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At both, December 31, 2010 and 2009, the Company
reclassified from deposit accounts to loan balances
$0.6 million of overdrafts.
At December 31, 2010 and 2009, certificates of deposit over
$100,000 amounted to approximately $2.8 billion and
$2.9 billion, respectively. Also at December 31, 2010
and 2009, certificates of deposits over $250,000 amounted to
approximately $2.6 billion and $2.8 billion,
respectively.
The banking subsidiaries had brokered certificate of deposits
maturing as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Within 12 months
|
|
$
|
796,608
|
|
|
$
|
1,266,057
|
|
12 to 24 months
|
|
|
580,661
|
|
|
|
626,881
|
|
24 to 36 months
|
|
|
297,613
|
|
|
|
397,623
|
|
36 to 48 months
|
|
|
206,532
|
|
|
|
137,508
|
|
48 to 60 months
|
|
|
243,116
|
|
|
|
67,118
|
|
60 months and thereafter
|
|
|
234,724
|
|
|
|
157,222
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,359,254
|
|
|
$
|
2,652,409
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
|
Securities
Sold Under Agreements to Repurchase
|
As part of its financing activities the Company enters into
sales of securities under agreements to repurchase the same or
substantially similar securities. The Company retains control
over such securities. Accordingly, the amounts received under
these agreements represent borrowings, and the securities
underlying the agreements remain in the Companys asset
accounts. These transactions are carried at the amounts at which
transactions will be settled. The counterparties to the
contracts generally have the right to repledge the securities
received as collateral. Those securities are presented in the
Consolidated Statements of Financial Condition as part of
pledged investment securities.
F-56
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The following summarizes significant data about securities sold
under agreements to repurchase for the years ended
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Carrying amount as of December 31,
|
|
$
|
1,176,800
|
|
|
$
|
2,145,262
|
|
|
|
|
|
|
|
|
|
|
Average daily aggregate balance outstanding
|
|
$
|
1,645,805
|
|
|
$
|
1,894,329
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end
|
|
$
|
2,245,262
|
|
|
$
|
2,145,262
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate during the year
|
|
|
3.20
|
%
|
|
|
3.73
|
%
|
Weighted-average interest rate at year end
|
|
|
3.10
|
%
|
|
|
3.32
|
%
|
Securities sold under agreements to repurchase as of
December 31, 2010, grouped by counterparty, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Repurchase
|
|
|
Maturity
|
|
|
|
Liabilty
|
|
|
(In months)
|
|
|
|
(Dollars in thousands)
|
|
|
Counterparty
|
|
|
|
|
|
|
|
|
Credit Suisse
|
|
$
|
561,800
|
|
|
|
27
|
|
Merrill Lynch, Pierce, Fenner & Smith, Inc.
|
|
|
100,000
|
|
|
|
38
|
|
Federal Home Loan Bank of New York
|
|
|
515,000
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,176,800
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
The following table presents the carrying and market values of
securities available for sale pledged as collateral at
December 31, shown by maturity of the repurchase agreement.
The information in this table excludes repurchase agreement
transactions which were collateralized with securities or other
assets held for trading or which have been obtained under
agreement to resell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Carrying
|
|
|
Market
|
|
|
Repurchase
|
|
|
Repo
|
|
|
Carrying
|
|
|
Market
|
|
|
Repurchase
|
|
|
Repo
|
|
|
|
Value
|
|
|
Value
|
|
|
Liability
|
|
|
Rate
|
|
|
Value
|
|
|
Value
|
|
|
Liability
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
Agency MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term over 30 to 90 days
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
145,399
|
|
|
$
|
149,650
|
|
|
$
|
141,056
|
|
|
|
3.44
|
%
|
Term over 90 days
|
|
|
1,039,208
|
|
|
|
1,045,626
|
|
|
|
971,050
|
|
|
|
3.03
|
%
|
|
|
652,334
|
|
|
|
665,815
|
|
|
|
633,285
|
|
|
|
3.14
|
%
|
CMO Government Sponsored Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term over 30 to 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
133,935
|
|
|
|
132,462
|
|
|
|
115,206
|
|
|
|
1.51
|
%
|
Term over 90 days
|
|
|
217,868
|
|
|
|
221,519
|
|
|
|
190,100
|
|
|
|
3.34
|
%
|
|
|
1,250,128
|
|
|
|
1,255,973
|
|
|
|
1,158,700
|
|
|
|
3.73
|
%
|
Obligations U.S. Government Sponsored Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term over 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
2,056
|
|
|
|
2,073
|
|
|
|
2,015
|
|
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,257,076
|
|
|
$
|
1,267,145
|
|
|
$
|
1,161,150
|
|
|
|
3.08
|
%
|
|
$
|
2,183,852
|
|
|
$
|
2,205,973
|
|
|
$
|
2,050,262
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Advances from FHLB consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Non-callable advances with maturities ranging from January 2011
to May 2013 (2009 January 2010 to May 2013) at
various fixed rates averaging 3.64% and 3.25%, at
December 31, 2010 and 2009,
respectively.(1)
|
|
$
|
747,420
|
|
|
$
|
1,022,920
|
|
Non-callable advances with maturities ranging from September
2011 to November 2012 (2009- September 2010 to November 2012),
tied to
1-month
LIBOR adjustable monthly, at various variable rates of 0.28% and
0.25%, at December 31, 2010 and 2009, respectively
|
|
|
74,000
|
|
|
|
105,000
|
|
Non-callable advances due on July 6, 2010, tied to
3-month
LIBOR adjustable quarterly, at a rate of 0.25% at
December 31, 2009
|
|
|
|
|
|
|
200,000
|
|
Putable structured advances due on March 2012 (2009
maturities ranging from June 2010 to March 2012), at a fixed
rate of 5.04% and at various fixed rates averaging 5.41% at
December 31, 2010 and 2009, respectively, putable at March
2011 (2009 various dates beginning February 2010)
|
|
|
80,000
|
|
|
|
279,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
901,420
|
|
|
$
|
1,606,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes one structured advance
with an outstanding balance of $50.0 million.
|
Maximum advances outstanding at any month end during the year
ended December 31, 2010 were $1.6 billion. The
approximate average daily outstanding balance of advances from
FHLB for the year ended December 31, 2010 was
$1.2 billion. The weighted-average interest of such
advances, computed on a daily basis was 4.0% for the year ended
December 31, 2010.
At December 31, 2010, the Company had pledged qualified
collateral in the form of residential mortgage loans with an
estimated market value of $1.4 billion to secure the above
advances from FHLB, which generally the counterparty is not
permitted to sell or repledge.
The FHLB advances are subject to early termination fees.
In January 2011, the Company entered into an agreement with the
FHLB to restructure $555.4 million of its non-callable term
advances, reducing the average interest rate on those
restructured advances to 1.7% from 4.1% and extending the
average maturities to 39 months from 14 months. This
transaction resulted in a $22.0 million fee paid to the
FHLB.
|
|
24.
|
Other
Short-Term Borrowings
|
There were no borrowings outstanding at any month end during
2010. The approximate average daily outstanding balance of
short-term borrowings during the year ended December 31,
2010 was $5.0 million. The weighted-average interest rate
of such borrowings, computed on a daily basis, was 0.30% for the
year ended December 31, 2010.
As of December 31, 2009 other short-term borrowings with
the Federal Reserve Bank, collaterized by securities at a fixed
rate of 0.25%, amounted to $110.0 million. These borrowings
matured on January 14, 2010.
F-58
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
At December 31, 2010 and 2009, loans payable consisted of
financing agreements with local financial institutions secured
by mortgage loans.
Outstanding loans payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Secured borrowings with local financial institutions, at
variable interest rates tied to
3-month
LIBOR averaging 1.74% and 1.99% at December 31, 2010 and
2009, respectively, collateralized by residential mortgage loans
|
|
$
|
287,511
|
|
|
$
|
318,180
|
|
Secured borrowings with local financial institutions, at fixed
interest rates averaging 7.40% and 7.41% at December 31,
2010 and 2009, respectively, collateralized by residential
mortgage loans
|
|
|
16,524
|
|
|
|
18,856
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,035
|
|
|
$
|
337,036
|
|
|
|
|
|
|
|
|
|
|
The expected maturity date of secured borrowings based on
collateral is from present to December 2025.
Maximum borrowings outstanding at any month end during the year
ended December 31, 2010 were $334.7 million. The
approximate average daily outstanding balance of loans payable
for the year ended December 31, 2010 was
$320.3 million. The weighted-average interest of such
borrowings, computed on a daily basis was 2.10% for the year
ended December 31, 2010.
At December 31, 2010 and 2009, the Company had
$122.0 million and $143.1 million, respectively, of
loans held for sale and $180.4 million and
$192.7 million, respectively, of loans receivable that were
pledged to secure financing agreements with local financial
institutions. Such loans can be repledged by the counterparty.
F-59
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
$100.0 million notes, net of discount, bearing interest at
7.65%, due on March 26, 2016, paying interest monthly
|
|
$
|
98,801
|
|
|
$
|
98,623
|
|
$30.0 million notes, net of discount, bearing interest at
7.00%, due on April 26, 2012, paying interest monthly
|
|
|
29,875
|
|
|
|
29,789
|
|
$40.0 million notes, net of discount, bearing interest at
7.10%, due on April 26, 2017, paying interest monthly
|
|
|
39,492
|
|
|
|
39,431
|
|
$30.0 million notes, net of discount, bearing interest at
7.15%, due on April 26, 2022, paying interest monthly
|
|
|
29,499
|
|
|
|
29,472
|
|
Bonds payable secured by mortgage on building at fixed rates
ranging from 6.75% to 6.90%, with maturities ranging from June
2011 to December 2029 (2009 December 2014 to December
2029), paying interest monthly
|
|
|
38,445
|
|
|
|
39,420
|
|
Bonds payable at a fixed rate of 6.25%, with maturities ranging
from June 2011 to December 2029 (2009 December 2010
to December 2029), paying interest monthly
|
|
|
7,400
|
|
|
|
7,600
|
|
Note payable with a local financial institution, collateralized
by IOs, at a fixed rate of 7.75%, due on December 25, 2013,
paying principal and interest monthly
|
|
|
20,624
|
|
|
|
26,503
|
|
$250.0 million notes, net of discount, bearing interest at
a variable interest rate
(3-month
LIBOR plus 1.85%), due on July 21, 2020, paying interest
quarterly comencing in January 2011
|
|
|
249,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
513,958
|
|
|
$
|
270,838
|
|
|
|
|
|
|
|
|
|
|
On July 8, 2010, the Company, through its subsidiary, Doral
Money, entered into a collateralized loan obligation
(CLO) arrangement with a third party in which up to
$450.0 million of largely U.S. mainland based
commercial loans are pledged to collateralize AAA rated debt of
$250.0 million paying three month LIBOR plus
1.85 percent issued by Doral CLO I, Ltd. Doral
CLO I, Ltd. is a variable interest entity created to hold
the commercial loans and issue the previously noted debt and
$200.0 million of subordinated notes to the Company whereby
the Company receives any excess proceeds after payment of the
senior debt interest and other fees and charges specified in the
indenture agreement. The Company also serves as collateral
manager of the assets of Doral CLO I, Ltd. Doral
CLO I, Ltd. is consolidated with the Company in these
financial statements.
DLAM, LLC, is a subsidiary of Doral Money and holds the
$200.0 million of subordinated notes issued by Doral
CLO I, Ltd. DLAM, LLC, is consolidated with the Company.
Doral Financial is the guarantor of various unregistered serial
and term bonds issued by Doral Properties, a wholly-owned
subsidiary, through the Puerto Rico Industrial, Tourist,
Educational, Medical and Environmental Control Facilities
Financing Authority (AFICA). The bonds were issued
to finance the construction and development of the Doral
Financial Plaza building, the headquarters facility of Doral
Financial. As of December 31, 2010, the outstanding
principal balance of the bonds was $45.8 million with fixed
interest rates, ranging from 6.25% to 6.90%, and maturities
ranging from June 2011 to December 2029. Certain series of the
bonds are secured by a mortgage on the building and underlying
real property.
F-60
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
27.
|
Accrued
Expenses and Other Liabilities
|
Accrued expenses and other liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
GNMA defaulted loans buy-back option (Note 10)
|
|
$
|
153,406
|
|
|
$
|
128,650
|
|
Accrued interest payable
|
|
|
17,541
|
|
|
|
22,210
|
|
Accrued salaries and benefits payable
|
|
|
6,841
|
|
|
|
8,331
|
|
Customer mortgages and closing expenses payable
|
|
|
3,237
|
|
|
|
4,128
|
|
Recourse obligation
|
|
|
10,264
|
|
|
|
9,440
|
|
Swap fair value on cash flow hedges
|
|
|
4,644
|
|
|
|
9,302
|
|
Trading liabilities
|
|
|
741
|
|
|
|
1,905
|
|
Other accrued expenses
|
|
|
20,467
|
|
|
|
15,946
|
|
Unrecognized tax benefit
|
|
|
805
|
|
|
|
3,508
|
|
Tax payable
|
|
|
|
|
|
|
633
|
|
Dividends payable
|
|
|
17,309
|
|
|
|
8,199
|
|
Deferred rent obligation
|
|
|
2,284
|
|
|
|
2,051
|
|
Other liabilities
|
|
|
31,932
|
|
|
|
29,528
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
269,471
|
|
|
$
|
243,831
|
|
|
|
|
|
|
|
|
|
|
Background
Income taxes include Puerto Rico income taxes as well as
applicable U.S. federal and state taxes. As Puerto Rico
corporations, Doral Financial and all of its Puerto Rico
subsidiaries are generally required to pay U.S. income
taxes only with respect to their income derived from the active
conduct of a trade or business in the United States (excluding
Puerto Rico) and certain investment income derived from
U.S. assets. Any such tax is creditable, with certain
limitations, against Puerto Rico income taxes. Except for the
operations of Doral Bank US and Doral Money, substantially all
of the Companys operations are conducted through
subsidiaries in Puerto Rico. Doral Bank US and Doral Money are
U.S. corporations and are subject to U.S. income-tax
on their income derived from all sources.
Under Puerto Rico Income Tax Law, the Company and its
subsidiaries are treated as separate taxable entities and do not
file consolidated tax returns.
The maximum statutory corporate income tax rate in Puerto Rico
is 39.00%. On March 9, 2009, the Governor of Puerto Rico
signed into law the Special Act Declaring a State of Fiscal
Emergency and Establishing an Integral Plan of Fiscal
Stabilization to Save Puerto Ricos Credit, Act No. 7
(the Act). Pursuant to the Act, Section 1020A
was introduced to the Code to impose a 5% surtax over the total
tax determined for corporations, partnerships, trusts, estates,
as well as individuals whose combined gross income exceeds
$100,000 or married individuals filing jointly whose gross
income exceeds $150,000. This surtax is effective for tax years
commenced after December 31, 2008 and before
January 1, 2012. This increases the Companys income
tax rate from 39.00% to 40.95% for tax years from 2009 through
2011.
On November 15, 2010, certain amendments to the Puerto Rico
Income Tax Act were approved which, among other things,
increased the NOL carry forward period from seven to ten years
for NOLs generated between 2005 and 2011.
F-61
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
On January 31, 2011, the Governor signed into law the
Internal Revenue Code of 2011 (2011 Code) making the
PR Code ineffective, for the most part, for years commenced
after December 31, 2010. Under the provisions of the 2011
Code, the maximum statutory corporate income tax rate is 30% for
years commenced after December 31, 2010 and ending before
January 1, 2014; if the Government meets its income
generation and expense control goals, for years commenced after
December 31, 2013, the maximum corporate tax rate will be
25%. The 2011 Code, however, eliminated the special 5% surtax on
corporations for tax year 2011. In general, the 2011 Code
maintains the increase in carry forward periods for net
operating losses generated between 2005 and 2011 from 7 to
10 years as provided for in Act 171; maintains the concept
of the alternative minimum tax although it changed the way it is
computed; and specifies what types of auditors report will
be acceptable when audited financial statements are required to
be filed with the income tax return. Notwithstanding, a
corporation may be subject to the provisions of the PR Code if
it so elects it by the time it files its income tax return for
the first year commenced after December 31, 2010 and ending
before January 1, 2012. Once the election is made, it will
be effective for such year and the next 4 succeeding years. The
Company is evaluating the impact of the tax reform on its
results of operations, however the change in the statutory tax
rate will result in a reduction in the net deferred tax asset
with a corresponding charge to deferred tax expense.
Doral Financials interest income derived from FHA and VA
mortgage loans financing the original acquisition of newly
constructed housing in Puerto Rico and securities backed by such
mortgage loans is exempt from Puerto Rico income taxes. Doral
Financial also invests in U.S. Treasury and agency
securities that are exempt from Puerto Rico taxation and are not
subject to federal income taxation because of the portfolio
interest deduction to which Doral Financial is entitled as a
foreign corporation.
Income
Tax Expense (Benefit)
The components of income tax expense (benefit) for the years
ended December 31, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico
|
|
$
|
|
|
|
$
|
(18,618
|
)
|
|
$
|
1,642
|
|
United States
|
|
|
7,431
|
|
|
|
7,170
|
|
|
|
2,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense (benefit)
|
|
|
7,431
|
|
|
|
(11,448
|
)
|
|
|
4,240
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico
|
|
|
6,838
|
|
|
|
(7,300
|
)
|
|
|
281,616
|
|
United States
|
|
|
614
|
|
|
|
(2,729
|
)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense (benefit)
|
|
|
7,452
|
|
|
|
(10,029
|
)
|
|
|
281,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
14,883
|
|
|
$
|
(21,477
|
)
|
|
$
|
286,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current income tax expense of $7.4 million as of
December 31, 2010, was related to taxes on U.S. source
income. The deferred income tax expense of $7.5 million was
related to the recognition of additional deferred tax assets,
primarily NOLs, net of amortization of existing DTAs and net of
an increase in the valuation allowance.
The recognition of income tax benefit of $21.5 million for
the year ended December 31, 2009 is composed of a current
tax benefit of $11.4 million and a deferred tax benefit of
$10.0 million. The current tax benefit is primarily related
to the release of unrecognized tax benefits due to the
expiration of the statute of limitations on certain tax
positions net of the recognition of certain unrecognized tax
benefits during that year. This net benefit was partially offset
by the recognition of tax expense related to intercompany
transactions in the federal tax jurisdiction which had not been
previously recognized, net of current tax benefit related to the
F-62
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Companys U.S. affiliates. The deferred tax benefit is
primarily due to the effect of entering into an agreement with
the Puerto Rico Treasury Department during the third quarter of
2009 (please refer to the Deferred Tax Components
below), net of the amortization of existing deferred tax asset
(DTAs).
The tax expense recognized for the year ended December 31,
2008 was primarily related to a charge through earnings of an
additional valuation allowance on its deferred tax asset of
approximately $295.9 million.
The provision for income taxes of the Company differs from
amounts computed by applying the applicable Puerto Rico
statutory rate to income before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Loss before income taxes
|
|
|
$(277,011)
|
|
|
|
$(42,621)
|
|
|
|
$(32,258)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pre-Tax
|
|
|
|
|
|
Pre-Tax
|
|
|
|
|
|
Pre-Tax
|
|
|
|
Amount
|
|
|
Loss
|
|
|
Amount
|
|
|
Loss
|
|
|
Amount
|
|
|
Loss
|
|
|
Tax at statutory rates
|
|
$
|
108,034
|
|
|
|
39.0
|
|
|
$
|
16,622
|
|
|
|
39.0
|
|
|
$
|
12,581
|
|
|
|
39.0
|
|
Tax effect of deductions related to tax agreements
|
|
|
|
|
|
|
|
|
|
|
(12,520
|
)
|
|
|
(29.4
|
)
|
|
|
(10,613
|
)
|
|
|
(32.9
|
)
|
Net income from the international banking entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,728
|
|
|
|
17.8
|
|
Net (increase) decrease in deferred tax valuation
allowance(1)
|
|
|
(121,866
|
)
|
|
|
(44.0
|
)
|
|
|
245
|
|
|
|
0.6
|
|
|
|
(295,887
|
)
|
|
|
(917.3
|
)
|
Adjustments for unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
|
14,525
|
|
|
|
34.1
|
|
|
|
(1,394
|
)
|
|
|
(4.3
|
)
|
Other, net
|
|
|
(1,051
|
)
|
|
|
(0.4
|
)
|
|
|
2,605
|
|
|
|
6.1
|
|
|
|
3,584
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
$
|
(14,883
|
)
|
|
|
(5.4
|
)
|
|
$
|
21,477
|
|
|
|
50.4
|
|
|
$
|
(286,001
|
)
|
|
|
(886.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the change in the
valuation allowance for unrealized losses on cash flow hedges.
|
Deferred
Tax Components
The Companys DTA consists primarily of the differential in
the tax basis of IOs sold, net operating loss carry-forwards and
other temporary differences arising from the daily operations of
the Company.
The Company has entered into several agreements with the Puerto
Rico Treasury Department related to the intercompany transfers
of IOs (The IO Tax Asset or IO) and its
tax treatment thereon. Under the agreements, the Company
established the tax basis of all the IO transfers, clarified
that for Puerto Rico income tax purpose, the IO Tax Asset is a
stand-alone intangible asset subject to straight-line
amortization based on a useful life of 15 years, and
established that the IO Tax Asset could be transferred to any
entity within the Doral Financial corporate group, including the
Puerto Rico banking subsidiary. During the third quarter of
2009, the Company entered into an agreement with the Puerto Rico
Treasury Department that granted the Company a two year
moratorium of the amortization of the IO Tax Asset. This
agreement resulted in a benefit of $11.2 million for the
third quarter of 2009 and was effective for the taxable year
beginning January 1, 2009. The realization of the deferred
tax asset related to the differential in the tax basis of IOs
sold is dependent upon the existence of, or generation of,
taxable income during the remaining 12 year (15 year
original amortization period, 17 year original amortization
period including the two year moratorium) period in which the
amortization of the IO Tax Asset is available. The IOs expire in
2022. Any IO amortization in excess of all legal entities
taxable income would become an NOL subject to the 7 or
10 year carry-over period. Upon a business combination,
which is not
F-63
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
structured as a purchase of assets, the IOs should survive and
be available to be used by the groups legal entities.
During the first quarter of 2008, the Company entered into an
agreement with the Puerto Rico Treasury Department with respect
to the allocation method (and period) of expenses incurred
related to a settlement agreement (Settlement
Expenses) that resulted from litigation related to the
Companys restatement. This agreement was effective as of
December 31, 2007 and permits the total expense related to
the settlement of the lawsuit ($96.0 million) to be
allocated to any entity within the Company over a period of
three years.
NOLs generated between 2005 and 2011 can be carried forward for
a period of 10 years (there is no carry-back allowed in
Puerto Rico). The NOLs creating deferred tax assets as of
December 31, 2010, expire beginning in 2016 until 2020 for
Puerto Rico entities and 2025 through 2028 for United States
entities. Since each legal entity files a separate income tax
return, the NOLs can only be used to offset future taxable
income of the entity that incurred it. In case of a business
combination, which is not structured as an asset sale, the NOLs
should survive and be available to offset future taxable income
of the originating entity. Following a business combination, and
under certain circumstances, the entity having the NOLs could
utilize these NOLs relative to some business activities that
created the NOLs and may be precluded from using the NOLs to
offset income from new business activities.
The Company evaluates its deferred tax asset for realizability,
and are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not (a likelihood
of more than 50%) that some portion or all of the deferred tax
asset will not be realized. The valuation allowance should be
sufficient to reduce the deferred tax asset to the amount that
is more likely than not to be realized.
In assessing the realization of deferred tax assets, the Company
considers the expected reversal of its deferred tax assets and
liabilities, projected future taxable income, cumulative losses
in recent years, and tax planning strategies. The determination
of a valuation allowance on deferred tax assets requires
judgment based on the weight of all available evidence and
considering the relative impact of negative and positive
evidence.
As of December 31, 2010, the Company had two Puerto Rico
entities which were in a cumulative loss position. For purposes
of assessing the realization of the DTAs, the cumulative taxable
loss position for these two entities is considered significant
negative evidence that has caused management to conclude that
the Company will not be able to fully realize the deferred tax
assets related to these two entities in the future. Accordingly,
as of December 31, 2010 and 2009, the Company determined
that it was more likely than not that $462.7 million and
$385.9 million, respectively, of its gross deferred tax
asset would not be realized and maintained a valuation allowance
for those amounts. As of December 31, 2010 and 2009, the
Companys deferred tax assets were as follows:
Components of the Companys DTAs at December 31, were
as follow:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred income tax asset resulting from:
|
|
|
|
|
|
|
|
|
Differential in tax basis of IOs sold
|
|
$
|
237,912
|
|
|
$
|
237,324
|
|
Net operating loss carry-forwards
|
|
|
193,322
|
|
|
|
128,710
|
|
Allowance for loan and lease losses
|
|
|
48,635
|
|
|
|
55,175
|
|
Capital loss carry-forward
|
|
|
26,783
|
|
|
|
6,791
|
|
Reserve for losses on OREO
|
|
|
17,340
|
|
|
|
7,391
|
|
Other
|
|
|
44,445
|
|
|
|
81,739
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
568,437
|
|
|
|
517,130
|
|
Valuation allowance
|
|
|
(462,725
|
)
|
|
|
(385,929
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
105,712
|
|
|
$
|
131,201
|
|
|
|
|
|
|
|
|
|
|
F-64
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Net operating loss carry-forwards outstanding at
December 31, 2010 expire as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2016
|
|
$
|
41,382
|
|
2017
|
|
|
45,452
|
|
2018
|
|
|
24,489
|
|
2019
|
|
|
8,861
|
|
2020
|
|
|
72,309
|
|
2028
|
|
|
829
|
|
|
|
|
|
|
|
|
$
|
193,322
|
|
|
|
|
|
|
The decrease in the DTA is primarily due to the tax effect of
the sale of non-agency CMOs that did not have a valuation
allowance.
As of December 31, 2010 and 2009, the deferred tax asset
valuation allowance off-set the following deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Differential in tax basis of IOs sold
|
|
$
|
143,550
|
|
|
$
|
143,259
|
|
Net operating loss carry-forwards
|
|
|
186,447
|
|
|
|
114,284
|
|
Allowance for loan and lease losses
|
|
|
45,950
|
|
|
|
53,382
|
|
Capital loss carry-forward
|
|
|
26,779
|
|
|
|
6,788
|
|
Reserve for losses on OREO
|
|
|
17,294
|
|
|
|
7,391
|
|
Other
|
|
|
42,705
|
|
|
|
60,825
|
|
|
|
|
|
|
|
|
|
|
Total valuation allowance
|
|
$
|
462,725
|
|
|
$
|
385,929
|
|
|
|
|
|
|
|
|
|
|
For Puerto Rico taxable entities with positive core earnings, a
valuation allowance on deferred tax assets was not recorded
since they are expected to continue to be profitable. At
December 31, 2010, the net deferred tax asset associated
with these two companies was $9.0 million, compared to
$14.4 million at December 31, 2009. In addition,
approximately, $94.4 million of the IO tax asset maintained
at the holding company would be realized through these entities.
In managements opinion, for these companies, the positive
evidence of profitable core earnings outweighs any negative
evidence.
The valuation allowance also includes $1.3 million and
$3.0 million related to deferred taxes on unrealized losses
on cash flow hedges as of December 31, 2010 and 2009,
respectively.
Management did not establish a valuation allowance on the
deferred tax assets generated on the unrealized gains and losses
of its securities available for sale as of December 31,
2010 and 2009, because the Company had the positive intent and
the ability to hold the securities until maturity or recovery of
value. In April 2010, the Company sold non-agency CMOs with a
market value of $253.5 million as of March 31, 2010,
and recognized a loss of $138.3 million. As of
March 31, 2010, these securities reflected an unrealized
pre-tax loss of $129.4 million and had a DTA of
$19.5 million.
Failure to achieve sufficient projected taxable income in the
entities and deferred tax assets where a valuation allowance has
not been established, might affect the ultimate realization of
the net deferred tax assets.
Management assesses the realization of its deferred tax assets
at each reporting period. To the extent that earnings improve
and the deferred tax assets become realizable, the Company may
be able to reduce the valuation allowance through earnings.
F-65
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Accounting
for Uncertainty in Income Taxes
As of December 31, 2010, the Company did not have
unrecognized tax benefits and had accrued interest of
$0.8 million on previously unrecognized tax benefits. As of
December 31, 2009 and 2008, the Company had unrecognized
tax benefits of $3.5 million and $13.7 million,
respectively, and accrued interest of $0.6 million and
$5.2 million, respectively. The Company classifies all
interest related to tax uncertainties as income tax expense. For
the years ended December 31, 2010, 2009 and 2008, the
Company recognized interest and penalties of $0.2 million,
$0.6 million and $1.4 million, respectively.
The amount of unrecognized tax benefits may increase or decrease
in the future for various reasons including adding amounts for
current tax year positions, expiration of open income tax
returns due to the expiration of statutes of limitation, changes
in managements judgment about the level of uncertainty,
status of examinations, litigation and legislative activity, and
the addition or elimination of uncertain tax positions. During
the third quarter of 2010, the Company settled its uncertain tax
positions. As of December 31, 2010, the following years
remain subject to examination: U.S. Federal
jurisdictions 2004 through 2008 and Puerto
Rico 2005 through 2008.
The following presents the beginning and ending amounts of
accruals for uncertain income tax positions:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
3,475
|
|
|
$
|
13,709
|
|
Additions for tax positions of prior years
|
|
|
280
|
|
|
|
2,892
|
|
Additions for tax positions of current year
|
|
|
|
|
|
|
583
|
|
Release of contingencies
|
|
|
(3,755
|
)
|
|
|
(13,709
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
|
|
|
$
|
3,475
|
|
|
|
|
|
|
|
|
|
|
In the ordinary course of the business, Doral Financial makes
certain representations and warranties to purchasers and
insurers of mortgage loans at the time of the loan sales to
third parties regarding the characteristics of the loans sold,
and in certain circumstances, such as in the event of early or
first payment default. To the extent the loans do not meet
specified characteristics, if there is a breach of contract of a
representation or warranty or if there is an early payment
default, Doral Financial may be required to repurchase the
mortgage loan and bear any subsequent loss related to the loan.
For the year ended December 31, 2010, repurchases amounted
to $1.0 million, compared to $13.7 million for the
corresponding 2009 period. These repurchases were at fair value
and no significant losses were incurred.
In the past, in relation to its asset securitizations and loan
sale activities, the Company sold pools of delinquent FHA, VA
and conventional mortgage loans on a servicing retained basis.
Following these transactions, the loans are not reflected on
Doral Financials Consolidated Statement of Financial
Condition. Under these arrangements, as part of its servicing
responsibilities, Doral Financial is required to advance the
scheduled payments of principal, interest and taxes whether or
not collected from the underlying borrower. While Doral
Financial expects to recover a significant portion of the
amounts advanced through foreclosure or, in the case of FHA and
VA loans, under the applicable FHA and VA insurance and
guarantee programs, the amounts advanced tend to be greater than
normal arrangements because of the delinquent status of the
loans. As of December 31, 2010 and 2009, the outstanding
principal balance of such delinquent loans was
$139.6 million and $154.2 million, respectively.
In addition, Doral Financials loan sale activities in the
past included certain mortgage loan sale and securitization
transactions subject to recourse arrangements that require Doral
Financial to repurchase or
F-66
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
substitute the loan if the loans are 90
120 days or more past due or otherwise in default. The
Company is also required to pay interest on delinquent loans in
the form of servicing advances. Under certain of these
arrangements, the recourse obligation is terminated upon
compliance with certain conditions, which generally involve:
(i) the lapse of time (normally from four to seven years),
(ii) the lapse of time combined with certain other
conditions such as the unpaid principal balance of the mortgage
loans falling below a specific percentage (normally less than
80%) of the appraised value of the underlying property, or
(iii) the amount of loans repurchased pursuant to recourse
provisions reaching a specific percentage of the original
principal amount of loans sold (generally from 10% to 15%). As
of December 31, 2010 and 2009, the Companys records
reflected that the outstanding principal balance of loans sold
subject to full or partial recourse was $0.8 billion and
$0.9 billion, respectively. As of such dates, the
Companys records also reflected that the maximum
contractual exposure to Doral Financial if it were required to
repurchase all loans subject to recourse was $0.7 billion
and $0.8 billion, respectively. Doral Financials
contingent obligation with respect to its recourse provision is
not reflected on the Companys Consolidated Financial
Statements, except for a liability of estimated losses from such
recourse agreements, which is included in Accrued expenses
and other liabilities. The Company discontinued the
practice of selling loans with recourse obligations in 2005.
Doral Financials current strategy is to sell loans on a
non-recourse basis, except recourse for certain early payment
defaults and industry standard representations and warranties.
For the years ended December 31, 2010 and 2009, the Company
repurchased at fair value $28.6 million and
$27.3 million, respectively, pursuant to recourse
provisions.
Doral Financials reserve for its exposure to recourse
amounted to $10.3 million and $9.4 million and the
reserve for other credit-enhanced transactions explained above
amounted to $9.0 million and $8.8 million as of
December 31, 2010 and 2009, respectively.
The following table shows the changes in the Companys
liability for estimated losses from recourse agreements,
included in the Statement of Financial Condition, for each of
the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
9,440
|
|
|
$
|
8,849
|
|
Net charge-offs / termination
|
|
|
(3,115
|
)
|
|
|
(3,218
|
)
|
Provision for recourse liability
|
|
|
3,939
|
|
|
|
3,809
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
10,264
|
|
|
$
|
9,440
|
|
|
|
|
|
|
|
|
|
|
|
|
30.
|
Unused
lines of credit
|
At December 31, 2010 and 2009, the Company had an
uncommitted line of credit of up to 30% of the assets reflected
in the Consolidated Statement of Financial Condition of Doral
Bank Puerto Rico and Doral Bank US. As of December 31, 2010
and 2009, the Company could draw an additional $2.4 billion
and $2.2 billion, respectively. As a condition of drawing
these additional amounts, the Company is required to pledge
collateral for the amount of the draw plus a required
over-collateralization amount. As of December 31, 2010 and
2009, the Company had pledgeable excess collateral of
$0.7 billion and $0.3 billion, respectively.
F-67
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
31.
|
Financial
Instruments with Off-Balance Sheet Risk
|
The following tables summarize Doral Financials
commitments to extend credit, commercial and performance standby
letters of credit and commitments to sell loans.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Commitments to extend credit
|
|
$
|
139,791
|
|
|
$
|
85,124
|
|
Commitments to sell loans
|
|
|
64,751
|
|
|
|
76,176
|
|
Performance standby letter of credit
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
204,567
|
|
|
$
|
161,325
|
|
|
|
|
|
|
|
|
|
|
The Company enters into financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
may include commitments to extend credit and sell loans. The
contractual amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
Commitments to extend credit are agreements to lend to a
customer as long as the conditions established in the contract
are met. Commitments generally have fixed expiration dates or
other termination clauses. Generally, the Company does not enter
into interest rate lock agreements with borrowers.
The Company purchases mortgage loans and simultaneously enters
into a sale and securitization agreement with the same
counterparty, essentially a forward contract that meets the
definition of a derivative during the period between trade and
settlement date.
A letter of credit is an arrangement that represents an
obligation on the part of the Company to a designated third
party, contingent upon the failure of the Companys
customer to perform under the terms of the underlying contract
with a third party. The amount of the letter of credit
represents the maximum amount of credit risk in the event of
non-performance by these customers. Under the terms of a letter
of credit, an obligation arises only when the underlying event
fails to occur as intended, and the obligation is generally up
to a stipulated amount and with specified terms and conditions.
Letters of credit are used by the customer as a credit
enhancement and typically expire without having been drawn upon.
The Company evaluates each customers credit worthiness on
a
case-by-case
basis. The amount of collateral, if deemed necessary by the
Company upon extension of credit, is based on managements
credit evaluation of the counterparty.
|
|
32.
|
Commitments
and Contingencies
|
Total minimum rental and operating commitments for leases in
effect at December 31, 2010, were as follow:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
6,503
|
|
2012
|
|
|
5,426
|
|
2013
|
|
|
6,487
|
|
2014
|
|
|
5,120
|
|
2015
|
|
|
5,013
|
|
2016 and thereafter
|
|
|
25,340
|
|
|
|
|
|
|
|
|
$
|
53,889
|
|
|
|
|
|
|
F-68
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Total rent expense for the years ended December 31, 2010,
2009 and 2008 amounted to approximately $7.7 million,
$7.2 million and $7.4 million, respectively.
Doral Financial and its subsidiaries are defendants in various
lawsuits or arbitration proceedings arising in the ordinary
course of business, including employment related matters.
Management believes, based on the opinion of legal counsel, that
the aggregated liabilities, if any, arising from such actions
will not have a material adverse effect on the financial
statements of Doral Financial.
Since 2005, Doral Financial became a party to various legal
proceedings, including regulatory and judicial investigations
and civil litigation, arising as a result of the Companys
restatement.
Legal
Matters
On August 24, 2005, the U.S. Attorneys Office
for the Southern District of New York served Doral Financial
with a grand jury subpoena seeking the production of certain
documents relating to issues arising from the restatement,
including financial statements and corporate, auditing and
accounting records prepared during the period from
January 1, 2000 to the date of the subpoena. Doral
Financial is cooperating with the U.S. Attorneys
Office in this matter. Doral Financial cannot predict the
outcome of this matter and is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact to
Doral Financial of this matter.
On August 13, 2009, Mario S. Levis, the former Treasurer of
Doral, filed a complaint against the Company in the Supreme
Court of the State of New York. The complaint alleges that the
Company breached a contract with the plaintiff and the
Companys by-laws by failing to advance payment of certain
legal fees and expenses that Mr. Levis has incurred in
connection with a criminal indictment filed against him in the
U.S. District Court for the Southern District of New York.
Further, the complaint claims that Doral Financial fraudulently
induced the plaintiff to enter into agreements concerning the
settlement of a civil litigation arising from the restatement of
the Companys financial statements for fiscal years 2000
through 2004. The complaint seeks declaratory relief, damages,
costs and expenses. On December 18, 2009, the parties
entered into a Settlement Agreement. On December 17, 2009,
Mr. Levis motion for a preliminary injunction was
denied as moot, and all further proceedings were stayed, but the
procedures for future disputes between the parties and outlined
in the Settlement Agreement were not affected by the stay.
Banking
Regulatory Matters
On March 16, 2006, Doral Financial entered into a consent
cease and desist order with the Federal Reserve. The mutually
agreed upon order required Doral Financial to conduct reviews of
its mortgage portfolio, and to submit plans regarding the
maintenance of capital adequacy and liquidity. The consent order
contains restrictions on Doral Financial from obtaining
extensions of credit from, or entering into certain asset
purchase and sale transactions with its banking subsidiaries,
without the prior approval of the Federal Reserve. The consent
order restricts Doral Financial from receiving dividends from
the banking subsidiaries without the approval of the respective
primary banking regulatory agency. Doral Financial is also
required to request permission from the Federal Reserve for the
payment of dividends on its common stock and preferred stock not
less than 30 days prior to a proposed dividend declaration
date and requires Doral Financial and Doral Bank PR to submit
plans regarding the maintenance of minimum levels of capital and
liquidity. Doral Financial has complied with these requirements
and no fines or civil money penalties were assessed against the
Company under the order.
As a result of an examination conducted during the third quarter
of 2008, on July 8, 2009, Doral Bank PR consented with the
FDIC and paid civil monetary penalties of $38,030 related to
deficiencies in compliance with the National Flood Insurance Act
as a result of flood insurance coverage, failure to maintain
continuous flood insurance protection and failure to ensure that
borrowers obtain flood insurance in a timely manner.
F-69
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
On February 19, 2008, Doral Bank PR entered into a consent
order with the FDIC relating to failure to comply with certain
requirements of the Bank Secrecy Act (BSA). The
regulatory findings that resulted in the order were based on an
examination conducted for the period ended December 31,
2006, and were related to findings that had initially occurred
in 2005 prior to the Companys change in management and the
Recapitalization. The order replaced the Memorandum of
Understanding with the FDIC and the Office of the Commissioner
dated August 23, 2006. Doral Bank PR was not required to
pay any civil monetary penalties in connection with this order.
The order required Doral Bank PR to correct certain violations
of law, within the timeframes set forth in the order (generally
120 days) including certain violations regarding the BSA,
failure to maintain an adequate BSA/Anti-Money Laundering
Compliance Program (a BSA/AML Compliance Program)
and failure to operate with an effective compliance program to
ensure compliance with the regulations promulgated by the United
States Department of Treasurys Office of Foreign Asset
Control (OFAC). The order further required Doral
Bank PR to, among other things, amend its policies, procedures
and processes and training programs to ensure full compliance
with the BSA and OFAC; conduct an expanded BSA/AML risk
assessment of its operations, enhance its due diligence and
account monitoring procedures, review its BSA/AML staffing and
resource needs, amend its policies and procedures for internal
and external audits to include periodic reviews for BSA/AML
compliance, OFAC compliance and perform annual independent
testing programs for BSA/AML and OFAC requirements. The order
also required Doral Bank PR to engage an independent consultant
to review account and transaction activity from April 1,
2006 through March 31, 2007 to determine compliance with
suspicious activity reporting requirements (the Look Back
Review). On September 15, 2008, the FDIC terminated
this consent order. As the Look Back Review was in process,
Doral Bank PR and the FDIC agreed to a Memorandum of
Understanding that covered the remaining portion of the Look
Back Review. On June 30, 2009, the FDIC terminated this
Memorandum of Understanding because the Look Back Review had
been completed.
Doral Financial and Doral Bank PR have undertaken specific
corrective actions to comply with the requirements of the
terminated enforcement actions and the single remaining
enforcement action, but cannot give assurance that such actions
are sufficient to prevent further enforcement actions by the
banking regulatory agencies.
|
|
33.
|
Retirement
and compensation plans
|
The Company maintains a profit-sharing plan with a cash or
deferred arrangement named the Doral Financial Corporation
Retirement Savings and Incentive Plan (the Plan).
The Plan is available to all employees of Doral Financial who
have attained age 18 and complete one year of service with
the Company. Participants in the Plan have the option of making
pre-tax or after-tax contributions. The Company makes a matching
contribution equal to $0.50 for every dollar of pre-tax
contribution made by participants to the Plan with an annual
compensation exceeding $30,000, up to 3% of the
participants basic compensation, as defined. For those
participants in the Plan with an annual compensation up to
$30,000, the Company makes a matching contribution equal to
$1.00 for every dollar of pre-tax contribution, up to 3% of the
participants basic compensation, as defined. Company
matching contributions are invested following the employees
investment direction for their own money. The Company is also
able to make fully discretionary profit-sharing contributions to
the Plan. The Companys expense related to its retirement
plan during the years ended December 31, 2010, 2009 and
2008, amounted to approximately $436,000, $459,000 and $294,000,
respectively.
As of December 31, 2010, 2009 and 2008 the Company had no
defined benefit or post-employment benefit plans.
|
|
34.
|
Capital
Stock and Additional Paid-In Capital
|
On September 29, 2003, and October 8, 2003, the
Company issued 1,200,000 shares and 180,000 shares,
respectively, of its 4.75% perpetual cumulative convertible
preferred stock (the convertible preferred stock)
F-70
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
having a liquidation preference of $250 per share in a private
offering to qualified institutional buyers pursuant to
Rule 144A. Each share of convertible preferred stock is
currently convertible into 0.31428 shares of common stock,
subject to adjustment under specific conditions. As of
December 31, 2010 and 2009, there were 813,526 and
872,160 shares issued and outstanding, respectively. The
convertible preferred stock ranks on parity with the
Companys 7.00% non-cumulative non-convertible monthly
income preferred stock, Series A (the 7% preferred
stock), 8.35% non-cumulative non-convertible monthly
income preferred stock, Series B (the 8.35% preferred
stock) and 7.25% non-cumulative non-convertible monthly
income preferred stock, Series C (the 7.25% preferred
stock), with respect to dividend rights and rights upon
liquidation, winding up or dissolution (see description below).
On March 20, 2009, the Board of Directors of Doral
Financial announced that it had suspended the declaration and
payment of all dividends on all of Doral Financials
outstanding series of convertible and non-convertible preferred
stock. The suspension of dividends was effective and commenced
with the dividends for the month of April 2009 for Doral
Financials three outstanding series of non-convertible
preferred stock, and the dividends for the second quarter of
2009 for Doral Financials one outstanding series of
convertible preferred stock.
During 2008, the Company paid dividends of $11.875 per share (an
aggregate of $16.4 million), on the convertible preferred
stock.
During the second quarter of 2002, the Company issued
4,140,000 shares of its 7.25% preferred stock at a price of
$25.00 per share, its liquidation preference. As of
December 31, 2010 and 2009, there were 2,716,005 and
3,579,202 shares issued and outstanding, respectively. The
7.25% preferred stock may be redeemed at the option of the
Company beginning on May 31, 2007, at varying redemption
prices starting at $25.50 per share.
On August 31, 2000, the Company issued
2,000,000 shares of its 8.35% preferred stock at a price of
$25.00 per share, its liquidation preference. As of
December 31, 2010 and 2009, there were 1,331,694 and
1,782,661 shares issued and outstanding, respectively. The
8.35% preferred stock may be redeemed at the option of the
Company beginning on September 30, 2005, at varying
redemption prices that start at $25.50 per share.
On February 22, 1999, the Company issued
1,495,000 shares of its 7% preferred stock at a price of
$50.00 per share, its liquidation preference. As of
December 31, 2010 and 2009, there were 950,166 and
1,266,827 shares issued and outstanding, respectively. The
7% preferred stock may be redeemed at the option of the Company
beginning February 28, 2004, at varying redemption prices
that start at $51.00 per share.
On May 7, 2009, the Company announced the commencement of
an offer to exchange a stated amount of its shares of common
stock and a cash payment in exchange for a limited number of its
shares of outstanding preferred stock. The offer to exchange
commenced on May 7, 2009 and expired on June 8, 2009.
Each of the series of outstanding preferred stock of Doral
Financial were eligible to participate in the exchange offer,
subject to all terms and conditions set forth in the Tender
Offer Statement that was filed with the SEC on May 7, 2009,
as amended. The transaction was settled on June 11, 2009.
On October 20, 2009, the Company announced the commencement
of an offer to exchange a stated amount of its shares of common
stock for a limited number of its Convertible Preferred Stock.
The offer to exchange commenced on October 20, 2009 and
expired on December 9, 2009. The transaction was settled on
December 14, 2009.
On March 15, 2010, the Company filed a registration
statement on
Form S-4
announcing its offer to exchange a stated amount of common stock
for a limited number of its Convertible and Non-convertible
Preferred Stocks. The transaction commenced on February 10,
2010 and expired on March 19, 2010. The transaction was
settled on March 24, 2010.
F-71
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The exchange by holders of shares of the non-convertible
preferred stock for shares of common stock and payment of a cash
premium resulted in the extinguishment and retirement of such
shares of non-convertible preferred stock and an issuance of
common stock. The carrying (liquidation) value of each share of
non-convertible preferred stock retired was reduced and common
stock and additional
paid-in-capital
increased in the amount of the fair value of the common stock
issued. Upon the cancellation of such shares of non-convertible
preferred stock acquired by the Company pursuant to the offer to
exchange, the difference between the carrying (liquidation)
value of shares of non-convertible preferred stock retired and
the fair value of the exchange offer consideration exchanged
(cash plus fair value of common stock) was treated as an
increase to retained earnings and income available to common
shareholders for earnings per share purposes.
The exchange by holders of convertible preferred stock for
common stock and a cash premium was accounted for as an induced
conversion. Common stock and additional
paid-in-capital
was increased by the carrying (liquidation) value of the amount
of convertible preferred stock exchanged. The fair value of
common stock issued and the cash premium in excess of the fair
value of securities issuable pursuant to the original exchange
terms was treated as a reduction to retained earnings and net
income available to common shareholders for earnings per share
purposes.
On April 19, 2010, the Company announced that it had
entered into a definitive Stock Purchase Agreement with various
purchasers of the Companys common stock, including certain
direct and indirect investors in Doral Holdings Delaware LLC
(Doral Holdings), the Companys parent company,
to raise up to $600.0 million of new equity capital for the
Company through a private placement. Shares were sold in two
tranches: (i) a $180.0 million non-contingent tranche
consisting of approximately 180,000 shares of the
Companys Mandatorily Convertible Non-Cumulative Non-Voting
Preferred Stock (the Preferred Stock),
$1.00 par value and $1,000 liquidation preference per share
and (ii) a $420.0 million contingent tranche
consisting of approximately 13.0 million shares of the
Companys common stock and approximately
359,000 shares of non-voting Preferred Stock. In addition,
as part of the non-contingent tranche, the Company issued into
escrow 105,002 shares of Preferred Stock with a liquidation
value of $105.0 million, to be released to purchasers if
the Company did not complete an FDIC assisted transaction.
Doral used the net proceeds from the placement of the shares in
the Non-Contingent Tranche to provide additional capital to the
Company to facilitate the Company (through its wholly owned
subsidiary, Doral Bank PR) qualifying as a bidder for the
acquisition of certain assets and assumption of certain
liabilities of one or more banks from the FDIC, as receiver.
On April 30, 2010, the Company announced that it had not
been selected to acquire the assets and liabilities of any
Puerto Rico bank in an FDIC-assisted transaction. As a result,
pursuant to the Stock Purchase Agreement and the related escrow
agreement, the 105,002 shares of Preferred Stock and the
$420.0 million of contingent funds were released from
escrow to the purchasers and the contingent tranche of
securities was not issued. After giving effect to the release of
the 105,002 shares of Preferred Stock from escrow, the
shares of Preferred Stock issued in the capital raise had an
effective sale price of $3.00 per common share equivalent.
In connection with the Stock Purchase Agreement, the Company
also entered into a Cooperation Agreement with Doral Holdings,
Doral Holdings L.P. and Doral GP Ltd. pursuant to which Doral
Holdings made certain commitments including the commitment to
vote in favor of converting the Preferred Stock to common stock
and registering the shares issued pursuant to this capital raise
and other previously issued unregistered shares of common stock
and to dissolve Doral Holdings pursuant to certain terms and
conditions.
Accordingly, during the third quarter of 2010, the Company
converted 285,002 shares of Preferred Stock into
60,000,386 shares of common stock. In addition, during the
third quarter of 2010, Doral Holdings LLC, previously the
controlling shareholder of Doral Financial, distributed its
shares in Doral Financial to its investors and was dissolved.
The Company is no longer a controlled company as a result of
this conversion and the dissolution of Doral Holdings LLC.
F-72
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The Company had the following series of preferred stock prior to
the settlement of the exchange offers:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Outstanding
|
|
|
Book Value
|
|
|
|
(Dollars in thousands)
|
|
|
Non-convertible preferred stock:
|
|
|
|
|
|
|
|
|
Series A
|
|
|
1,495,000
|
|
|
$
|
74,750
|
|
Series B
|
|
|
2,000,000
|
|
|
|
50,000
|
|
Series C
|
|
|
4,140,000
|
|
|
|
103,500
|
|
Convertible preferred stock
|
|
|
1,380,000
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,015,000
|
|
|
$
|
573,250
|
|
|
|
|
|
|
|
|
|
|
Results of the 2009 preferred stock exchange offers were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
Book Value of
|
|
|
|
Shares
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
|
Exchange
|
|
|
After Exchange
|
|
|
After Exchange
|
|
|
|
(Dollars in thousands)
|
|
|
Non-convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
228,173
|
|
|
|
1,266,827
|
|
|
$
|
63,341
|
|
Series B
|
|
|
217,339
|
|
|
|
1,782,661
|
|
|
|
44,567
|
|
Series C
|
|
|
560,798
|
|
|
|
3,579,202
|
|
|
|
89,480
|
|
Convertible preferred stock
|
|
|
507,840
|
|
|
|
872,160
|
|
|
|
218,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,514,150
|
|
|
|
7,500,850
|
|
|
$
|
415,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of the 2010 preferred stock exchange offers were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
Book Value of
|
|
|
|
Shares
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
|
Exchange
|
|
|
After Exchange
|
|
|
After Exchange
|
|
|
|
(Dollars in thousands)
|
|
|
Non-convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
316,661
|
|
|
|
950,166
|
|
|
$
|
47,508
|
|
Series B
|
|
|
450,967
|
|
|
|
1,331,694
|
|
|
|
33,292
|
|
Series C
|
|
|
863,197
|
|
|
|
2,716,005
|
|
|
|
67,900
|
|
Convertible preferred stock
|
|
|
58,634
|
|
|
|
813,526
|
|
|
|
203,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,689,459
|
|
|
|
5,811,391
|
|
|
$
|
352,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ability of the Company to pay dividends in the future is
limited by the consent order entered into with the Federal
Reserve and by various restrictive covenants contained in the
debt agreements of the Company, the earnings, cash position and
capital needs of the Company, general business conditions and
other factors deemed relevant by the Companys Board of
Directors.
Current regulations limit the amount in dividends that Doral
Bank PR and Doral Bank US may pay. Payment of such dividends is
prohibited if, among other things, the effect of such payment
would cause the capital of Doral Bank PR or Doral Bank US to
fall below the regulatory capital requirements. The Federal
Reserve Board has issued a policy statement that provides that
insured banks and financial holding companies should generally
pay dividends only out of current operating earnings. In
addition, the Companys consent order with the Federal
Reserve does not permit the Company to receive dividends from
Doral Bank PR unless the payment of such dividends has been
approved by the FDIC.
F-73
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Dividends paid from a U.S. subsidiary to certain qualifying
corporations such as the Company are generally subject to a 10%
withholding tax under the provisions of the U.S. Internal
Revenue Code.
|
|
35.
|
Stock
Option and Other Incentive Plans
|
Since 2003 Doral Financial commenced expensing the fair value of
stock options granted to employees using the modified
prospective method. Using this method, the Company has
expensed the fair value of all employee stock options and
restricted stock granted after January 1, 2003, as well as
the unvested portions of previously granted stock options. The
Company estimates the pre-vesting forfeiture rate, for grants
that are forfeited prior to vesting, beginning on the grant date
and to
true-up
forfeiture estimates through the vesting date so that
compensation expense is recognized only for grants that vest.
When unvested grants are forfeited, any compensation expense
previously recognized on the forfeited grants is reversed in the
period of the forfeiture. Accordingly, periodic compensation
expense will include adjustments for actual and estimated
pre-vesting forfeitures and changes in the estimated pre-vesting
forfeiture rate. The Company did not change its adjustment for
actual and estimated pre-vesting forfeitures and changes in the
estimated pre-vesting forfeiture rate.
On April 8, 2008, the Companys Board of Directors
approved the 2008 Stock Incentive Plan (the Plan)
subject to shareholder approval, which was obtained at the
annual shareholders meeting held on May 7, 2008. The
Plan replaced the 2004 Omnibus Incentive Plan. Stock options
granted are expensed over the stock option vesting period based
on fair value which is determined using the Black-Scholes
option-pricing method at the date the options are granted.
The Omnibus Plan was in effect from April 21, 2004
throughout 2008, and provided for equity-based compensation
incentives (the awards) through the grant of stock
options, stock appreciation rights, restricted stock, restricted
stock units and dividend equivalents, as well as cash and
equity-based performance awards. The Compensation Committee had
full authority and absolute discretion to determine those
eligible to receive awards and to establish the terms and
conditions of any awards; however, the Omnibus Plan had various
limits and vesting restrictions that applied to individual and
aggregate awards.
The aggregate number of shares of common stock which the Company
may issue under the Plan is limited to 6,750,000. No options
were granted by the Company for the year ended December 31,
2010 and 2009.
On July 22, 2008, four independent directors were each
granted 2,000 shares of restricted stock and stock options
to purchase 20,000 shares of common stock at an exercise
price equal to the closing price of the stock on the grant date.
The restricted stock became 100% vested during the third quarter
of 2009. The stock options vest ratably over a five year period
commencing with the grant date.
On June 25, 2010, the Board of Directors of Doral Financial
Corporation approved and adopted a retention program for six of
the Companys officers (the Retention Program).
Pursuant to the Retention Program, the Company granted
3,000,000 shares of the Companys common stock as
restricted stock to such officers. The restricted stock will
vest in installments as long as at the time of vesting the
employee has been continuously employed by the Company from the
date of grant, as follows: 33% will vest 12 calendar months
after the grant date, an additional 33% will vest 24 calendar
months after the grant date, and the remaining 33% will vest 36
calendar months after the grant date. Notwithstanding the
foregoing, 100% of the restricted stock will vest (i) upon
the occurrence of a change of control of the Company;
(ii) if the Company terminates the employees
employment without cause or the employee terminates his or her
employment for good reason (as defined in the agreement); or
(iii) upon such employees death.
F-74
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Stock-based compensation recognized was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Stock-based compensation recognized, net
|
|
$
|
1,510
|
|
|
$
|
94
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
178
|
|
|
$
|
250
|
|
|
$
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
$
|
6,781
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in stock options for 2010, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
options
|
|
|
price
|
|
|
options
|
|
|
price
|
|
|
options
|
|
|
price
|
|
|
|
(In thousands)
|
|
|
Beginning of year
|
|
|
60,000
|
|
|
$
|
13.70
|
|
|
|
80,000
|
|
|
$
|
13.70
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
13.70
|
|
Pre-vesting forfeitures
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
13.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
60,000
|
|
|
$
|
13.70
|
|
|
|
60,000
|
|
|
$
|
13.70
|
|
|
|
80,000
|
|
|
$
|
13.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at period end
|
|
|
24,000
|
|
|
|
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the options granted in 2008 was estimated
using the Black-Scholes option-pricing model, with the following
assumptions:
|
|
|
|
|
|
|
|
|
Weighted-average exercise price
|
|
|
|
|
|
$
|
13.70
|
|
Stock option estimated fair value
|
|
|
|
|
|
$
|
5.88
|
|
Expected stock option term (years)
|
|
|
|
|
|
|
6.50
|
|
Expected volatility
|
|
|
|
|
|
|
39.00
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
3.49
|
%
|
Expected volatility is based on the historical volatility of the
Companys common stock over a ten-year period. The Company
uses empirical research data to estimate options exercise and
employee termination within the valuation model; separate groups
of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The risk-free rate
for periods within the contractual life of the option is based
on the U.S. Treasury yield curve in effect at the time of
grant. The expected dividend yield is based on managements
expectation that the Company will not resume dividend payments
on its Common Stock for the foreseeable future.
Doral Financials nonvested restricted shares activity for
the year ended December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date Fair
|
|
Nonvested Restricted Shares
|
|
Shares
|
|
|
Value
|
|
|
Nonvested at December 31, 2009
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
3,000,000
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
3,000,000
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
F-75
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
During 2010, 2009 and 2008, no options were exercised.
As of December 31, 2010, the total amount of unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the Plan was approximately
$7.0 million related to stock options and restricted stock
granted. That cost is expected to be recognized over a period of
3 years for the stock options and the restricted stock. As
of December 31, 2010, the total fair value of shares and
restricted stock was $8.8 million.
|
|
36.
|
Losses
Per Share Data
|
The reconciliation of the numerator and denominator of the
losses per share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
Non-convertible preferred stock dividend
|
|
|
|
|
|
|
(4,228
|
)
|
|
|
(16,388
|
)
|
Convertible preferred stock dividend
|
|
|
(9,109
|
)
|
|
|
(11,613
|
)
|
|
|
(16,911
|
)
|
Effect of conversion of preferred
stock(1)
|
|
|
26,585
|
|
|
|
(8,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(274,418
|
)
|
|
$
|
(45,613
|
)
|
|
$
|
(351,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Number of Common
Shares Outstanding(2)
|
|
|
92,657,003
|
|
|
|
56,232,027
|
|
|
|
53,810,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Common
Share(3)
|
|
$
|
(2.96
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(6.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The carrying value of the
non-convertible preferred stock exceeded the fair value of
consideration transferred and, accordingly, the difference
between the liquidation preference of the preferred stock
retired and the market value of the common stock issued and the
cash tendered (in 2009) amounted to $31.6 million and
$23.9 million for the years ended December 31, 2010
and 2009, respectively, and was credited to retained earnings.
In the case of the convertible preferred stock, the fair value
of stock exchanged for the preferred stock converted exceeded
the fair value of the stock issuable pursuant to the original
conversion terms and, accordingly, this excess or inducement
amounted to $5.1 million and $32.5 million for the
years ended December 31, 2010 and 2009, respectively, was
charged to retained earnings. As a result, both transactions
impacted the net loss attributable to common shareholders.
|
|
(2) |
|
Potential common shares consist of
common stock issuable under the assumed exercise of stock
options and unvested shares of restricted stock using the
treasury stock method. This method assumes that the potential
common shares are issued and the proceeds from exercise in
addition to the amount of compensation cost attributed to future
services are used to purchase common stock at the exercise date.
The difference between the number of potential shares issued and
the shares purchased is added as incremental shares to the
actual number of shares outstanding to compute diluted earnings
per share. Stock options and unvested shares of restricted stock
that result in lower potential shares issued than shares
purchased under the treasury stock method are not included in
the computation of dilutive (loss) earnings per share since
their inclusion would have an antidilutive effect in earnings
per share. As of December 31, 2010, there were granted
60,000 stock options and 3,000,000 shares of restricted
stock that were also excluded from this computation for its
antidilutive effect.
|
|
(3) |
|
For the years ended
December 31, 2010, 2009 and 2008, net loss per common share
represents both the basic and diluted loss per common share,
respectively, for each of the periods presented.
|
On March 20, 2009, the Board of Directors of Doral
Financial announced that it had suspended the declaration and
payment of all dividends on all of Doral Financials
outstanding series of convertible and non-convertible preferred
stock. The suspension of dividends was effective and commenced
with the dividends for the month of April 2009 for Doral
Financials three outstanding series of non-convertible
preferred stock, and the dividends for the second quarter of
2009 for Doral Financials one outstanding series of
convertible preferred stock.
For the year ended December 31, 2010, there were
813,526 shares of the Companys 4.75% perpetual
cumulative convertible preferred stock that were excluded from
the computation of diluted earnings per share because their
effect would have been antidilutive, compared to 872,160 for the
corresponding 2009 period. Each share of convertible preferred
stock is currently convertible into 0.31428 shares of
common stock, subject
F-76
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
to adjustment under specific conditions. The option of the
purchasers to convert the convertible preferred stock into
shares of the Companys common stock is exercisable only
(a) if during any fiscal quarter after September 30,
2003, the closing sale price of the Companys common stock
for at least 20 trading days in a period of 30 consecutive
trading days ending on the last trading date of the preceding
fiscal quarter exceeds 120% of the conversion price of the
convertible preferred stock (currently 120% of $795.47, or
$954.56); (b) upon the occurrence of certain corporate
transactions; or (c) upon the delisting of the
Companys common stock. On or after September 30,
2008, the Company may, at its option, cause the convertible
preferred stock to be converted into the number of shares of
common stock that are issuable at the conversion price. The
Company may only exercise its conversion right if the closing
sale price of the Companys common stock exceeds 130% of
the conversion price of the convertible preferred stock
(currently 130% of $795.47, or $1,034.11) in effect for 20
trading days within any period of 30 consecutive trading days
ending on a trading day not more than two trading days prior to
the date the Company gives notice of conversion.
|
|
37.
|
Regulatory
Requirements
|
Holding
Company Requirements
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, Doral Financials
activities and those of its banking and non-banking subsidiaries
are limited to banking activities and such other activities the
Federal Reserve has determined to be closely related to the
business of banking.
Banking
Charters
Doral Bank PR is a commercial bank chartered under the laws of
the Commonwealth of Puerto Rico regulated by the Office of the
Commissioner of Financial Institutions (the Office of the
Commissioner), pursuant to the Puerto Rico Banking Act of
1933, as amended, and subject to supervision and examination by
the Federal Deposit Insurance Corporation (FDIC).
Its deposits are insured by the FDIC.
Doral Bank US is a federally chartered savings bank regulated by
the Office of Thrift Supervision (OTS). Its deposit
accounts are also insured by the FDIC.
Regulatory
Capital Requirements
The Companys banking subsidiaries are subject to various
regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements
can result in certain mandatory actions against Doral
Financials banking subsidiaries, as well as additional
discretionary actions, by regulators that, if undertaken, could
have a direct material effect on the Company. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and its banking subsidiaries must
meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance
sheet items. The Companys and its banking
subsidiaries capital amounts and classifications are also
subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures, established by regulation to ensure
capital adequacy, require the Companys banking
subsidiaries to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average
assets (as defined).
As of December 31, 2010, Doral Bank PR and Doral Bank US
exceeded the thresholds for well-capitalized banks as set forth
in the prompt corrective action regulations adopted by the FDIC
pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991. The thresholds for a well capitalized
F-77
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
institution prescribed by the FDICs regulations are, a
Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at
least 6% and a Total Capital Ratio of at least 10% and the
institution must not be subject to any written agreement or
directive to meet a specific capital ratio.
Failure to meet minimum regulatory capital requirements could
result in the initiation of certain mandatory and additional
discretionary actions by banking regulators against Doral
Financial and its banking subsidiaries that, if undertaken,
could have a material adverse effect on the Company.
On March 17, 2006, the Company entered into a consent order
with the Federal Reserve. Pursuant to the requirements of the
existing cease and desist order, the Company submitted a capital
plan to the Federal Reserve in which it has agreed to maintain
minimum leverage ratios of at least 5.5% and 6.0% for Doral
Financial and Doral Bank PR, respectively. While the Tier 1
and Total capital ratios have risk weighting components that
take into account the low level of risk associated with the
Companys mortgage and securities portfolios, the Leverage
Ratio is significantly lower because it is based on total
average assets without any risk weighting.
As of December 31, 2010, Doral Bank PR exceeded the
well-capitalized threshold under the regulatory
framework for prompt corrective action. To exceed the
well-capitalized threshold, Doral Bank PR must
maintain Total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the following table.
Doral Bank US is subject to substantially the same regulatory
capital requirements of Doral Bank PR as set forth above. As of
December 31, 2010, Doral Bank US was in compliance with the
capital threshold for a well-capitalized institution.
On March 19, 2009, the Board of Directors of Doral
Financial approved a capital infusion of up to
$75.0 million to Doral Bank PR, of which $19.8 million
was made during the first quarter of 2009. On November 20,
2009, the Board of Directors approved an additional capital
contribution of up to $100.0 million to Doral Bank PR,
which was made during November and December 2009. During the
second and third quarter of 2010, the Board of Directors of
Doral Financial approved capital contributions to Doral Bank PR
totaling $194.0 million.
Doral Financials, Doral Bank PRs and Doral Bank
USs actual capital amounts and ratios are presented in the
following table. Approximately $117.6 million
(2009 $124.1 million), $21.5 million
(2009 $24.1 million), and $1.7 million
(2009 $1.9 million) representing non-qualifying
perpetual preferred stock
F-78
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
and non-allowable assets such as deferred tax asset, goodwill
and other intangible assets, were deducted from the capital of
Doral Financial, Doral Bank PR and Doral Bank US, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Well Capitalized Threshold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Prompt Corrective Action
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital Adequacy Purposes
|
|
|
Provisions
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Ratio (%)
|
|
|
Amount
|
|
|
Ratio (%)
|
|
|
Amount
|
|
|
Ratio (%)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial Consolidated
|
|
$
|
811,046
|
|
|
|
14.5
|
|
|
$
|
447,156
|
|
|
|
³8.0
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Doral Bank PR
|
|
$
|
677,670
|
|
|
|
15.6
|
|
|
$
|
346,676
|
|
|
|
³8.0
|
|
|
$
|
433,345
|
|
|
|
³10.0
|
|
|
|
|
|
|
|
|
|
Doral Bank US
|
|
$
|
14,532
|
|
|
|
11.0
|
|
|
$
|
10,546
|
|
|
|
³8.0
|
|
|
$
|
13,183
|
|
|
|
³10.0
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial Consolidated
|
|
$
|
740,387
|
|
|
|
13.3
|
|
|
$
|
223,578
|
|
|
|
³4.0
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Doral Bank PR
|
|
$
|
622,772
|
|
|
|
14.4
|
|
|
$
|
173,338
|
|
|
|
³4.0
|
|
|
$
|
260,007
|
|
|
|
³6.0
|
|
|
|
|
|
|
|
|
|
Doral Bank US
|
|
$
|
14,058
|
|
|
|
10.7
|
|
|
$
|
5,273
|
|
|
|
³4.0
|
|
|
$
|
7,910
|
|
|
|
³6.0
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial Consolidated
|
|
$
|
740,387
|
|
|
|
8.6
|
|
|
$
|
345,996
|
|
|
|
³4.0
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Doral Bank PR
|
|
$
|
622,772
|
|
|
|
8.0
|
|
|
$
|
311,915
|
|
|
|
³4.0
|
|
|
$
|
389,894
|
|
|
|
³5.0
|
|
|
|
|
|
|
|
|
|
Doral Bank US
|
|
$
|
14,058
|
|
|
|
6.5
|
|
|
$
|
8,718
|
|
|
|
³4.0
|
|
|
$
|
10,897
|
|
|
|
³5.0
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial Consolidated
|
|
$
|
941,333
|
|
|
|
15.1
|
|
|
$
|
499,294
|
|
|
|
³8.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Doral Bank PR
|
|
$
|
749,192
|
|
|
|
15.3
|
|
|
$
|
391,985
|
|
|
|
³8.0
|
|
|
$
|
489,982
|
|
|
|
³10.0
|
|
|
|
|
|
|
|
|
|
Doral Bank US
|
|
$
|
14,261
|
|
|
|
16.6
|
|
|
$
|
6,870
|
|
|
|
³8.0
|
|
|
$
|
8,587
|
|
|
|
³10.0
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial Consolidated
|
|
$
|
862,427
|
|
|
|
13.8
|
|
|
$
|
249,647
|
|
|
|
³4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Doral Bank PR
|
|
$
|
687,075
|
|
|
|
14.0
|
|
|
$
|
195,993
|
|
|
|
³4.0
|
|
|
$
|
293,989
|
|
|
|
³6.0
|
|
|
|
|
|
|
|
|
|
Doral Bank US
|
|
$
|
13,865
|
|
|
|
16.2
|
|
|
$
|
3,435
|
|
|
|
³4.0
|
|
|
$
|
5,152
|
|
|
|
³6.0
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial Consolidated
|
|
$
|
862,427
|
|
|
|
8.4
|
|
|
$
|
409,336
|
|
|
|
³4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Doral Bank PR
|
|
$
|
687,075
|
|
|
|
7.4
|
|
|
$
|
373,234
|
|
|
|
³4.0
|
|
|
$
|
466,542
|
|
|
|
³5.0
|
|
|
|
|
|
|
|
|
|
Doral Bank US
|
|
$
|
13,865
|
|
|
|
13.0
|
|
|
$
|
4,262
|
|
|
|
³4.0
|
|
|
$
|
5,327
|
|
|
|
³5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 US.
|
F-79
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Housing
and Urban Development Requirements
The Companys mortgage operation is a U.S. Department
of Housing and Urban Development (HUD) approved
non-supervised mortgagee and is required to maintain an excess
of current assets over current liabilities and minimum net
worth, as defined by the various regulatory agencies. Such
equity requirement is tied to the size of the Companys
servicing portfolio and ranged up to $1.0 million. The
Company is also required to maintain fidelity bonds and errors
and omissions insurance coverage based on the balance of its
servicing portfolio. Non-compliance with these requirements
could derive in actions from the regulatory agencies such as
monetary penalties, the suspension of the license to originate
loans, among others.
As of December 31, 2010 and December 31, 2009, Doral
Mortgage maintained $27.2 million and $24.4 million,
respectively, in excess of the required minimum level for
adjusted net worth required by HUD.
Registered
Broker-Dealer Requirements
During the third quarter of 2007, Doral Securities voluntarily
withdrew its license as broker dealer with the SEC and its
membership with FINRA. As a result of this decision, Doral
Securities operations during 2008 were limited to acting
as a co-investment manager to a local fixed-income investment
company. Doral Securities provided notice to the investment
company in December 2008 of its intent to assign its rights and
obligations under the investment advisory agreement to Doral
Bank PR. The assignment was completed in January 2009 and Doral
Securities did not conduct any other operations in 2009. During
the third quarter of 2009, this investment advisory agreement
was terminated by the investment company. Effective on
December 31, 2009, Doral Securities was merged with and
into its holding company, Doral Financial Corporation.
|
|
38.
|
Fair
Value of Assets and Liabilities
|
The Company uses fair value measurements to state certain assets
and liabilities at fair value and to support fair value
disclosures. Securities held for trading, securities available
for sale, derivatives and servicing assets are recorded at fair
value on a recurring basis. Additionally, from time to time,
Doral may be required to record other financial assets at fair
value on a nonrecurring basis, such as loans held for sale,
loans receivable and certain other assets. These nonrecurring
fair value adjustments typically involve application of
lower-of-cost-or-market
accounting or write-downs of individual assets.
The Company discloses for interim and annual reporting periods
the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not in
the statement of financial position.
Fair
Value Hierarchy
The Company categorizes its financial instruments based on the
priority of inputs to the valuation technique into a three level
hierarchy described below.
|
|
|
|
|
Level 1 Valuation is based upon
unadjusted quoted prices for identical instruments traded in
active markets.
|
|
|
|
Level 2 Valuation is based upon quoted
prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all
significant assumptions are observable in the market, or are
derived principally from or corroborated by observable market
data, by correlation or by other means.
|
|
|
|
Level 3 Valuation is generated from
model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions reflect
the Companys estimates of assumptions that market
participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
|
F-80
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Determination
of Fair Value
The Company bases fair values on the price that would be
received upon sale of an asset, or paid to transfer a liability,
in an orderly transaction between market participants at the
measurement date. It is Doral Financials intent to
maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements, in
accordance with the fair value hierarchy.
Fair value measurements for assets and liabilities where there
is limited or no observable market data are based primarily upon
the Companys estimates, and are generally calculated based
on current pricing policy, the economic and competitive
environment, the characteristics of the asset or liability and
other such factors. Therefore, the fair values represent
managements estimates and may not be realized in an actual
sale or immediate settlement of the asset or liability.
Additionally, there may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions
used, including discount rates and estimates of future cash
flows, could significantly affect the results of current or
future values.
The Company relies on appraisals for valuation of collateral
dependent impaired loans and other real estate owned. An
appraisal of value is obtained at the time the loan is
originated. New estimates of collateral value are obtained when
a loan that has been performing becomes delinquent and is
determined to be collateral dependent, and at the time an asset
is acquired through foreclosure. Updated reappraisals are
requested at least every two years for collateral dependent
loans and other real estate owned.
Residential mortgage loans are considered collateral dependent
when they are 180 days past due (collateral dependent
residential mortgage loans are those past due loans whose
borrowers financial condition has deteriorated to the
point that Doral considers only the collateral when determining
its allowance for loan loss estimate). An updated estimate of
the propertys value is obtained when the loan in
180 days past due, and a second assessment of value is
obtained when the loan is 360 days past due. The Company
generally uses broker price opinions (BPOs) as an
assessment of value of collateral dependent residential mortgage
loans.
As it takes a period of time for commercial loan appraisals to
be completed once they are ordered, Doral must at times estimate
its allowance for loan and lease losses for an impaired loan
using a dated, or stale, appraisal. As Puerto Rico has
experienced some decrease in property values during its extended
recession, the reported values of the stale appraisals must be
adjusted to recognize the fade in market value. In
order to estimate the value of collateral with stale appraisals,
Doral has developed separate collateral price indices for small
commercial loans and large commercial loans that are used to
measure the market value fade in appraisals completed in one
year to the current year. The indices provide a measure of how
much the property value has changed from the year in which the
most recent appraisal was received to the current year. In
estimating its allowance for loan and lease losses on collateral
dependent loans using outdated appraisals, Doral uses the
original appraisal as adjusted for the estimated fade in
property value less selling costs to estimate the current fair
value of the collateral. That current adjusted estimated fair
value is then compared to the reported investment, and if the
adjusted fair value is less than reported investment, that
amount is included in the allowance for loan and lease loss
estimate.
Residential development construction loans that are collateral
dependent present unique challenges to estimating the fair value
of the underlying collateral. Residential development
construction loans are partially completed with additional
construction costs to be incurred, have units being sold and
released from the construction loan, and may have additional
land collateralizing the loan on which the developer hopes or
expects to build additional units. Therefore, the value of the
collateral is regularly changing and any appraisal has a limited
useful life. Doral uses an internally developed estimate of
value that considers Dorals exit strategy of foreclosing
and completing the construction started and selling the
individual units constructed for residential buildings, and
separately uses the most recent appraised value for any remnant
land adjusted for the fade in value since the appraisal date as
described above. This internally developed estimate is prepared
in conjunction with a third party servicer of the portfolio who
validates and determines the inputs used to arrive at the
estimate of value (e.g. units sold, expected sales, cost to
complete, etc.)
F-81
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Once third party appraisals are obtained the previously
estimated property values are updated with the actual values
reflected in the appraisal and any additional loss incurred is
recognized in the period when the appraisal is received. The
internally developed collateral price index is also updated and
any changes resulting from the update in the index are also
recognized in the period.
Following is a description of valuation methodologies used for
financial instruments recorded at fair value, including the
general classification of such instruments pursuant to the
valuation hierarchy.
Securities held for trading: Securities held
for trading are reported at fair value and consist primarily of
securities and derivatives held for trading purposes. The
valuation method for trading securities is the same as the
methodology used for securities classified as Available for
Sale. The valuation methodology for IOs
(Level 3) and derivatives (Level 2) are
described in the Servicing assets and interest-only strips,
and Derivatives sections, respectively.
For residual CMO certificates included in trading securities,
the Company uses a cash flow model to value the securities.
Doral utilizes the collaterals statistics available on
Bloomberg such as forecasted prepayment speed, weighted-average
remaining maturity, weighted-average coupon and age. Based on
Bloomberg information, the Company forecasts the cash flows and
then discounts it at the discount rate used for the period. For
purposes of discounting, the Company uses the same Z-spread
methodology used for the valuations of Dorals floating
rate IOs.
Securities available for sale: Securities
available for sale are recorded at fair value on a recurring
basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are
measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash
flows, adjusted for the securitys credit rating,
prepayment assumptions and other factors such as credit loss
assumptions, expected defaults and loss severity. Level 1
securities (held for trading) include those securities that are
traded by dealers or brokers in active
over-the-counter
markets. Level 2 securities include agency CMOs, municipal
bonds, and agency MBS. Level 3 securities include
non-agency and agency CMOs for which quoted market prices are
not available. For determining the fair value of Level 3
securities available for sale, the Company uses a valuation
model that calculates the present value of estimated future cash
flows. The model incorporates the Companys own estimates
of assumptions market participants use in determining the fair
value, including prepayment speeds, loss assumptions and
discount rates.
Loans held for sale: Loans held for sale are
carried at the lower of net cost or market value on an aggregate
portfolio basis. The amount, by which cost exceeds market value,
if any, is accounted for as a loss through a valuation
allowance. Loans held for sale consist primarily of mortgage
loans held for sale. The market value of mortgage loans held for
sale is generally based on quoted market prices for MBS adjusted
to reflect particular characteristics of the asset such as
guarantee fees, servicing fees, actual delinquency and credit
risk. Loans held for sale are classified as Level 2, except
for loans where management makes certain adjustments to the
model based on unobservable inputs that are significant. These
loans are classified as Level 3. Loans held for sale were
carried at cost as of December 31, 2010.
Loans receivable: Loans receivable are those
held principally for investment purposes. These consist of
construction loans for new housing development, certain
residential mortgage loans which the Company does not expect to
sell in the near future, commercial real estate, commercial and
industrial, leases, land, and consumer loans. Loans receivable
are carried at their unpaid principal balance, less unearned
interest, net of deferred loan fees or costs (including premiums
and discounts), undisbursed portion of construction loans and an
allowance for loan and lease losses. Loans receivable include
collateral dependent loans for which the repayment of the loan
is expected to be provided solely by the underlying collateral.
The Company does not record loans receivable at fair value on a
recurring basis. However, from time to time, the Company records
nonrecurring fair value adjustments to collateral dependent
loans to reflect (i) partial write-downs that are based on
the fair value of the collateral, or (ii) the full
charge-off of the loan carrying value. The fair value of the
collateral is mainly derived from appraisals that take into
consideration prices in observed transactions
F-82
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
involving similar assets in similar locations. The Company
classifies loans receivable subject to nonrecurring fair value
adjustments as Level 3.
For the fair value of loans receivable, not reported at fair
value, loans are classified by type such as residential mortgage
loans, commercial real estate, commercial and industrial,
leases, land, and consumer loans. The fair value of residential
mortgage loans is based on quoted market prices for MBS adjusted
by particular characteristics like guarantee fees, servicing
fees, actual delinquency and the credit risk associated to the
individual loans. For the syndicated commercial loans, the
Company engages a third party specialist to assist with its
valuation. The fair value of syndicated commercial loans is
determined based on market information on trading activity. For
all other loans, the fair value is estimated using discounted
cash flow analyses, based on LIBOR and with adjustments that the
Company believes a market participant would consider in
determining fair value for like assets.
Servicing assets and interest-only strips: The
Company routinely originates, securitizes and sells mortgage
loans into the secondary market. As a result of this process,
the Company typically retains the servicing rights and, in the
past, also retained IOs. Servicing assets retained in a sale or
securitization arise from contractual agreements between the
Company and investors in mortgage securities and mortgage loans.
Since 2007, the Company records mortgage servicing assets at
fair value on a recurring basis. Considerable judgment is
required to determine the fair value of the Companys
servicing assets. Unlike highly liquid investments, the market
value of servicing assets cannot be readily determined because
these assets are not actively traded in securities markets. The
fair value of the servicing assets is determined based on a
combination of market information on trading activity (servicing
asset trades and broker valuations), benchmarking of servicing
assets (valuation surveys) and cash flow modeling. The valuation
of the Companys servicing assets incorporates two sets of
assumptions: (i) market derived assumptions for discount
rates, servicing costs, escrow earnings rate, float earnings
rate and cost of funds and (ii) market derived assumptions
adjusted for the Companys loan characteristics and
portfolio behavior for escrow balances, delinquencies and
foreclosures, late fees, prepayments and prepayment penalties.
For IOs the Company uses a valuation model that calculates the
present value of estimated future cash flows. The model
incorporates the Companys own estimates of assumptions
market participants use in determining the fair value, including
estimates of prepayment speeds, discount rates, defaults and
contractual fee income. IOs are recorded as securities held for
trading. Fair value measurements of servicing assets and IOs use
significant unobservable inputs and, accordingly, are classified
as Level 3.
Real estate held for sale: The Company
acquires real estate through foreclosure proceedings. These
properties are held for sale and are stated at the lower of cost
or fair value (after deduction of estimated disposition costs).
A loss is recognized for any initial write down to fair value
less costs to sell. The fair value of the properties is derived
from appraisals that take into consideration prices in observed
transactions involving similar assets in similar locations but
adjusted for specific characteristics and assumptions of the
properties, which are not market observable. The Company records
nonrecurring fair value adjustments to reflect any losses in the
carrying value arising from periodic appraisals of the
properties charged to expense in the period incurred. The
Company classifies real estate held for sale subject to
nonrecurring fair value adjustments as Level 3.
Other assets: The Company may be required to
record certain assets at fair value on a nonrecurring basis.
These assets include premises and equipment, goodwill, and
certain assets that are part of CB, LLC. CB, LLC is an entity
formed to manage a residential real estate project that Doral
Bank PR received in lieu of foreclosure. Fair value measurements
of these assets use significant unobservable inputs and,
accordingly, are classified as Level 3.
Premises and equipment: Premises and equipment
are carried at cost. However, whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable, the Company recognizes an impairment loss
based on the fair value of the property, which is generally
obtained from
F-83
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
appraisals. Property impairment losses are recorded as part of
occupancy expenses in the Consolidated Statement of Operations.
Goodwill: Goodwill is not amortized, but is
tested for impairment at least annually or more frequently if
events or circumstances indicate possible impairment. In
determining the fair value of a reporting unit the Company uses
discounted cash flow analysis. Goodwill impairment losses are
recorded as part of other expenses in the Consolidated Statement
of Operations.
CB, LLC: Events or changes in
circumstances may indicate that the carrying amount of certain
assets may not be recoverable, such as for land and the
remaining housing units. Impairment losses are recorded as part
of occupancy expenses in the Consolidated Statement of
Operations.
Derivatives: Substantially all of the
Companys derivatives are traded in
over-the-counter
markets where quoted market prices are not readily available.
For those derivatives, Doral Financial measures fair value using
internally developed models that use primarily market observable
inputs, such as yield curves and volatility surfaces.
The non-performance risk is evaluated internally considering
collateral held, remaining term and the creditworthiness of the
entity that bears the risk. These derivatives are classified as
Level 2. Level 2 derivatives consist of interest rate
swaps and interest rate caps.
Following is a description of valuation methodologies used for
instruments not recorded at fair value.
Cash and due from banks and other interest-earning
assets: Valued at the carrying amounts in the
Consolidated Statements of Financial Condition. The carrying
amounts are reasonable estimates of fair value due to the
relatively short period to maturity.
Deposits: Fair value is calculated considering
the discounted cash flows based on brokered certificates of
deposit curve and internally generated decay assumptions.
Loans payable: These loans represent secured
lending arrangements with local financial institutions that are
generally floating rate instruments, and therefore their fair
value has been determined to be par.
Notes payable, advances from FHLB, other short-term
borrowings and securities sold under agreements to
repurchase: Valued utilizing discounted cash flow analysis
over the remaining term of the obligation using market rates for
similar instruments.
F-84
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Financial
Assets and Liabilities Recorded at Fair Value on a Recurring
Basis
The tables below present the balance of assets and liabilities
measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held for Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$
|
766
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
766
|
|
|
$
|
893
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
893
|
|
IOs
|
|
|
44,250
|
|
|
|
|
|
|
|
|
|
|
|
44,250
|
|
|
|
45,723
|
|
|
|
|
|
|
|
|
|
|
|
45,723
|
|
Derivatives
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Held for Trading
|
|
|
45,029
|
|
|
|
|
|
|
|
13
|
|
|
|
45,016
|
|
|
|
47,726
|
|
|
|
|
|
|
|
1,110
|
|
|
|
46,616
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
|
|
|
1,142,973
|
|
|
|
|
|
|
|
1,141,281
|
|
|
|
1,692
|
|
|
|
918,271
|
|
|
|
|
|
|
|
916,441
|
|
|
|
1,830
|
|
CMO Government Sponsored Agencies
|
|
|
312,831
|
|
|
|
|
|
|
|
305,442
|
|
|
|
7,389
|
|
|
|
1,488,013
|
|
|
|
|
|
|
|
1,480,312
|
|
|
|
7,701
|
|
Non-Agency CMOs
|
|
|
7,192
|
|
|
|
|
|
|
|
|
|
|
|
7,192
|
|
|
|
270,600
|
|
|
|
|
|
|
|
|
|
|
|
270,600
|
|
Obligations U.S. Government Sponsored Agencies
|
|
|
34,992
|
|
|
|
|
|
|
|
34,992
|
|
|
|
|
|
|
|
48,222
|
|
|
|
|
|
|
|
48,222
|
|
|
|
|
|
P.R. Housing Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,678
|
|
|
|
|
|
|
|
2,678
|
|
|
|
|
|
Other
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
|
|
7,077
|
|
|
|
61,393
|
|
|
|
|
|
|
|
59,743
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities Available for Sale
|
|
|
1,505,065
|
|
|
|
|
|
|
|
1,481,715
|
|
|
|
23,350
|
|
|
|
2,789,177
|
|
|
|
|
|
|
|
2,507,396
|
|
|
|
281,781
|
|
Servicing Assets
|
|
|
114,342
|
|
|
|
|
|
|
|
|
|
|
|
114,342
|
|
|
|
118,493
|
|
|
|
|
|
|
|
|
|
|
|
118,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,664,436
|
|
|
$
|
|
|
|
$
|
1,481,728
|
|
|
$
|
182,708
|
|
|
$
|
2,955,396
|
|
|
$
|
|
|
|
$
|
2,508,506
|
|
|
$
|
446,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(1)
|
|
$
|
5,418
|
|
|
$
|
|
|
|
$
|
5,418
|
|
|
$
|
|
|
|
$
|
12,596
|
|
|
$
|
|
|
|
$
|
12,596
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included as part of accrued
expenses and other liabilities in the Consolidated Statement of
Financial Condition
|
F-85
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The changes in Level 3 of assets for the years ended
December 31, 2010 and 2009, measured at fair value on a
recurring basis are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
Net Losses
|
|
|
Net Gains (Losses)
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
Included
|
|
|
Included in Other
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
in the Statement
|
|
|
Comprehensive
|
|
|
Other
|
|
|
Balance, End
|
|
|
|
of Year
|
|
|
of Operations
|
|
|
Income
|
|
|
Adjustments(4)
|
|
|
of Year
|
|
|
|
(In thousands)
|
|
|
Securities held for
trading:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$
|
893
|
|
|
$
|
(127
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
766
|
|
IOs
|
|
|
45,723
|
|
|
|
(1,473
|
)
|
|
|
|
|
|
|
|
|
|
|
44,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held for trading
|
|
|
46,616
|
|
|
|
(1,600
|
)
|
|
|
|
|
|
|
|
|
|
|
45,016
|
|
Securities available for
sale:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
|
|
|
1,830
|
|
|
|
|
|
|
|
63
|
|
|
|
(201
|
)
|
|
|
1,692
|
|
CMO Government Sponsored Agencies
|
|
|
7,701
|
|
|
|
|
|
|
|
(114
|
)
|
|
|
(198
|
)
|
|
|
7,389
|
|
Non-Agency CMOs
|
|
|
270,600
|
|
|
|
(150,685
|
)
|
|
|
143,783
|
|
|
|
(256,506
|
)
|
|
|
7,192
|
|
Other
|
|
|
1,650
|
|
|
|
|
|
|
|
224
|
|
|
|
5,203
|
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
281,781
|
|
|
|
(150,685
|
)
|
|
|
143,956
|
|
|
|
(251,702
|
)
|
|
|
23,350
|
|
Servicing
Assets(3)
|
|
|
118,493
|
|
|
|
(12,087
|
)
|
|
|
|
|
|
|
7,936
|
|
|
|
114,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
446,890
|
|
|
$
|
(164,372
|
)
|
|
$
|
143,956
|
|
|
$
|
(243,766
|
)
|
|
$
|
182,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
Net Gains (Losses)
|
|
|
Net Gains (Losses)
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
Included in the
|
|
|
Included in Other
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Statement of
|
|
|
Comprehensive
|
|
|
Other
|
|
|
Balance, at
|
|
|
|
of Year
|
|
|
Operations
|
|
|
Loss
|
|
|
Adjustments(4)
|
|
|
End of year
|
|
|
|
(In thousands)
|
|
|
Securities held for
trading:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$
|
731
|
|
|
$
|
162
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
893
|
|
IOs
|
|
|
52,179
|
|
|
|
(6,456
|
)
|
|
|
|
|
|
|
|
|
|
|
45,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held for trading
|
|
|
52,910
|
|
|
|
(6,294
|
)
|
|
|
|
|
|
|
|
|
|
|
46,616
|
|
Securities available for
sale:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
|
|
|
28,916
|
|
|
|
171
|
|
|
|
199
|
|
|
|
(27,456
|
)
|
|
|
1,830
|
|
CMO Government Sponsored Agencies
|
|
|
7,689
|
|
|
|
|
|
|
|
252
|
|
|
|
(240
|
)
|
|
|
7,701
|
|
Non-Agency CMOs
|
|
|
352,079
|
|
|
|
(27,577
|
)
|
|
|
(7,901
|
)
|
|
|
(46,001
|
)
|
|
|
270,600
|
|
Other
|
|
|
1,950
|
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
390,634
|
|
|
|
(27,406
|
)
|
|
|
(7,750
|
)
|
|
|
(73,697
|
)
|
|
|
281,781
|
|
Servicing
Assets(3)
|
|
|
114,396
|
|
|
|
(3,131
|
)
|
|
|
|
|
|
|
7,228
|
|
|
|
118,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
557,940
|
|
|
$
|
(36,831
|
)
|
|
$
|
(7,750
|
)
|
|
$
|
(66,469
|
)
|
|
$
|
446,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Securities held for trading
classified as Level 3 include IOs and residual CMO
certificates. Change in fair value is recognized as part of
non-interest income in the Companys Consolidated Statement
of Operations as net gain (loss) on trading activities, which
includes
|
F-86
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
$8.8 million and
$2.8 million of changes in fair value of IOs and
$0.1 million of changes in fair value of residual CMO
certificates for the years ended December 31, 2010 and
2009, respectively. Amortization of IO is recognized as part of
interest income on interest-only strips and includes
$10.3 million and $9.3 million for the years ended
December 31, 2010 and 2009, respectively.
|
|
(2)
|
|
Level 3 securities available
for sale include non-agency and agency CMOs, certain agency
mortgage-backed securities and other securities not actively
traded. OTTI is recognized as part of non-interest income in the
Companys Consolidated Statement of Operations.
Amortization of premium and discount is recognized as part of
interest income as mortgage-backed securities, which includes
$1.3 million and $0.3 million for the years ended
December 31, 2010 and 2009, respectively.
|
|
(3)
|
|
Change in fair value of servicing
assets is recognized as part of non-interest income in the
Companys Consolidated Statement of Operations as servicing
income for the periods presented. The change in fair value is
net of the adjustment related to the repurchase of
$102.8 million and $178.7 million in principal balance
of mortgage loans serviced for others for the years ended
December 31, 2010 and 2009, respectively. Capitalization of
servicing assets is recognized as part of non-interest income
(loss) as net gain on mortgage loan sales and fees, which
includes $8.2 million and $7.4 million for the years
ended December 31, 2010 and 2009, respectively.
|
|
(4)
|
|
Other adjustments include
purchases, sales, principal repayments, amortization of premium
and discount, and transfers from Level 3 of securities
available for sale. Other adjustments also include the
capitalization of servicing assets.
|
Assets
Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure
certain assets at fair value on a nonrecurring basis in
accordance with GAAP. These adjustments to fair value usually
result from application of
lower-of-cost-or-market
accounting or write-downs of individual assets. The valuation
methodologies used to measure these fair value adjustments are
described above. The following table provides the level of
valuation assumptions used to determine each adjustment and the
carrying value of the related individual assets or portfolios at
period end.
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Loans
receivable(1)
|
|
$
|
266,093
|
|
|
$
|
266,093
|
|
Real estate held for
sale(2)
|
|
|
70,335
|
|
|
|
70,335
|
|
Other
assets(3)
|
|
|
2,275
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
338,703
|
|
|
$
|
338,703
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Loans
receivable(1)
|
|
$
|
196,726
|
|
|
$
|
196,726
|
|
Real estate held for
sale(2)
|
|
|
66,042
|
|
|
|
66,042
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262,768
|
|
|
$
|
262,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the carrying value of
collateral dependent loans for which adjustments are based on
the appraised value of the collateral.
|
|
(2) |
|
Represents the carrying value of
real estate held for sale for which adjustments are based on the
appraised value of the properties.
|
|
(3) |
|
Represents the carrying value of
CB, LLC assets for which adjustments are based on the appraised
value of land and the remaining housing units.
|
F-87
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The following table summarizes total losses relating to assets
(classified as level 3) held at the reporting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
Loss Recognized in the
|
|
Loss For the Year Ended December 31,
|
|
|
|
Statement of Operations
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(In thousands)
|
|
|
Loans receivable
|
|
|
Provision for loan and lease losses
|
|
|
$
|
56,929
|
|
|
$
|
9,433
|
|
Real estate held for sale
|
|
|
Other expenses
|
|
|
$
|
34,622
|
|
|
$
|
13,372
|
|
Other assets
|
|
|
Occupancy expenses
|
|
|
$
|
482
|
|
|
$
|
|
|
Disclosures
about Fair Value of Financial Instruments
The following table discloses the carrying amounts of financial
instruments and their estimated fair values as of
December 31, 2010 and 2009. The amounts in the disclosure
have not been updated since year end, therefore, the valuations
may have changed significantly since that point in time.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions
and/or
estimation methods may have a material effect on the estimated
fair value amounts.
For assets measured at fair value on a nonrecurring basis during
2010 that were still hold on the balance sheet at
December 31, 2010, the following table provides the level
of valuation assumptions used to determine each adjustment and
the carrying value of the related individual assets of
portfolios at period end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
355,819
|
|
|
$
|
355,819
|
|
|
$
|
725,277
|
|
|
$
|
725,277
|
|
Other interest-earning assets
|
|
|
156,607
|
|
|
|
156,607
|
|
|
|
95,000
|
|
|
|
95,000
|
|
Securities held for
trading(1)
|
|
|
45,029
|
|
|
|
45,029
|
|
|
|
47,726
|
|
|
|
47,726
|
|
Securities available for sale
|
|
|
1,505,065
|
|
|
|
1,505,065
|
|
|
|
2,789,177
|
|
|
|
2,789,177
|
|
Loans held for
sale(2)
|
|
|
319,269
|
|
|
|
325,655
|
|
|
|
320,930
|
|
|
|
326,108
|
|
Loans receivable
|
|
|
5,464,919
|
|
|
|
5,179,879
|
|
|
|
5,375,034
|
|
|
|
5,015,141
|
|
Servicing assets
|
|
|
114,342
|
|
|
|
114,342
|
|
|
|
118,493
|
|
|
|
118,493
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,618,475
|
|
|
$
|
4,685,730
|
|
|
$
|
4,643,021
|
|
|
$
|
4,684,443
|
|
Securities sold under agreements to repurchase
|
|
|
1,176,800
|
|
|
|
1,218,280
|
|
|
|
2,145,262
|
|
|
|
2,213,755
|
|
Advances from FHLB
|
|
|
901,420
|
|
|
|
923,266
|
|
|
|
1,606,920
|
|
|
|
1,655,258
|
|
Other short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
110,000
|
|
|
|
110,024
|
|
Loans payable
|
|
|
304,035
|
|
|
|
304,035
|
|
|
|
337,036
|
|
|
|
337,036
|
|
Notes payable
|
|
|
513,958
|
|
|
|
482,441
|
|
|
|
270,838
|
|
|
|
262,585
|
|
Derivatives(3)
|
|
|
5,418
|
|
|
|
5,418
|
|
|
|
12,596
|
|
|
|
12,596
|
|
|
|
|
(1) |
|
Includes derivatives of $13,000 and
$1.1 million for December 31, 2010 and 2009,
respectively.
|
|
(2) |
|
Includes $153.4 million and
$128.6 million for December 31, 2010 and 2009,
respectively, related to GNMA defaulted loans for which the
Company has an unconditional buy-back option.
|
F-88
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
(3) |
|
Includes $0.7 million and
$1.9 million of derivatives held for trading purposes and
$4.7 million and $10.7 million of derivatives held for
purposes other than trading, for December 31, 2010 and
2009, respectively, as part of accrued expenses and other
liabilities in the Consolidated Statement of Financial Condition.
|
Doral Financial uses derivatives to manage its exposure to
interest rate risk. The Company maintains an overall interest
rate risk-management strategy that incorporates the use of
derivative instruments to minimize significant unplanned
fluctuations in earnings that are caused by interest rate
changes. Derivatives include interest rate swaps, interest rate
caps and forward contracts. The Companys goal is to manage
interest rate sensitivity by modifying the repricing or maturity
characteristics of certain balance sheet assets and liabilities
so that net interest margin is not, on a material basis,
adversely affected by movements in interest rates.
Doral Financial accounts for derivatives on a
mark-to-market
basis with gains or losses charged to operations as they occur.
The fair value of derivatives is generally reported net by
counterparty. The fair value of derivatives accounted as hedges
is also reported net of accrued interest and included in other
liabilities in the Consolidated Statement of Financial Position.
Derivatives not accounted as hedges in a net asset position are
recorded as securities held for trading and derivatives in a net
liability position as other liabilities in the Consolidated
Statement of Financial Position.
As of December 31, 2010 and 2009, the Company had the
following derivative financial instruments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Notional
|
|
|
Fair Value
|
|
|
Notional
|
|
|
Fair Value
|
|
|
|
Amount
|
|
|
Asset(1)
|
|
|
Liability(2)
|
|
|
Amount
|
|
|
Asset(1)
|
|
|
Liability(2)
|
|
|
|
(In thousands)
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
74,000
|
|
|
$
|
|
|
|
$
|
(4,677
|
)
|
|
$
|
305,000
|
|
|
$
|
|
|
|
$
|
(10,691
|
)
|
Other Derivatives (non hedges):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
|
210,000
|
|
|
|
13
|
|
|
|
|
|
|
|
270,000
|
|
|
|
777
|
|
|
|
|
|
Forward contracts
|
|
|
100,000
|
|
|
|
|
|
|
|
(741
|
)
|
|
|
210,000
|
|
|
|
333
|
|
|
|
(1,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
384,000
|
|
|
$
|
13
|
|
|
$
|
(5,418
|
)
|
|
$
|
785,000
|
|
|
$
|
1,110
|
|
|
$
|
(12,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair value included as part of
Securities held for trading in the Companys
Statement of Financial Condition.
|
|
(2) |
|
Fair value included as part of
Accrued expenses and other liabilities in the
Companys Statement of Financial Condition.
|
Cash
Flow Hedges
As of December 31, 2010 and 2009, the Company had
$74.0 million and $305.0 million, respectively,
outstanding pay fixed interest rate swaps designated as cash
flow hedges with maturities between September 2011 and November
2012 (2009 July 2010 November 2012). The
Company designated the pay fixed interest rate swaps to hedge
the variability of future interest cash flows of adjustable rate
advances from FHLB. For the year ended December 31, 2010,
the Company recognized $0.3 million of ineffectiveness for
the interest rate swaps designated as cash flow hedges. For the
year ended December 31, 2009 no inefectiveness was
recognized. As of December 31, 2010 and 2009, accumulated
other comprehensive income (loss) included unrealized losses on
cash flow hedges of $3.2 million and $7.6 million,
respectively, of which the Company expects to reclassify
approximately $3.0 million and $7.2 million,
respectively, against earnings during the next twelve months.
Doral Financials interest rate swaps had weighted average
receive rates of 0.29% and 0.25% and weighted average pay rates
of 4.60% and 3.53% at December 31, 2010 and 2009,
respectively.
F-89
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The table below presents the location and effect of cash flow
derivatives on the Companys results of operations and
financial condition for the years ended December 31, 2010
and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Reclassified
|
|
|
|
Location of Loss
|
|
|
|
|
|
|
|
|
|
|
|
from Accumulated
|
|
|
|
Reclassified from
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
Comprehensive
|
|
|
|
Comprehensive Income (Loss)
|
|
|
Notional
|
|
|
Fair
|
|
|
Comprehensive
|
|
|
Income (Loss) to
|
|
|
|
to Income
|
|
|
Amount
|
|
|
Value
|
|
|
Income
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
Interest expense
Advances from FHLB
|
|
|
$
|
74,000
|
|
|
$
|
(4,677
|
)
|
|
$
|
4,375
|
|
|
$
|
(6,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
Interest expense
Advances from FHLB
|
|
|
$
|
305,000
|
|
|
$
|
(10,691
|
)
|
|
$
|
6,063
|
|
|
$
|
(8,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
and Non-Hedging Activities
The following table summarizes the total derivatives positions
at December 31, 2010 and 2009, respectively, and their
different designations. It also includes net gains (losses) on
derivative positions for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
December 31, 2010
|
|
|
|
in the Consolidated
|
|
Notional
|
|
|
Fair
|
|
|
Net Gain (Loss)
|
|
|
|
Statement of Operations
|
|
Amount
|
|
|
Value
|
|
|
for the Year
|
|
|
|
(In thousands)
|
|
|
Derivatives not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Net gain (loss) on
trading activities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15
|
|
Interest rate caps
|
|
Net gain (loss) on
trading activities
|
|
|
210,000
|
|
|
|
13
|
|
|
|
(764
|
)
|
Forward contracts
|
|
Net gain (loss) on
trading activities
|
|
|
100,000
|
|
|
|
(741
|
)
|
|
|
5,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310,000
|
|
|
$
|
(728
|
)
|
|
$
|
4,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
December 31, 2009
|
|
|
|
in the Consolidated
|
|
Notional
|
|
|
Fair
|
|
|
Net Gain
|
|
|
|
Statement of Operations
|
|
Amount
|
|
|
Value
|
|
|
for the Year
|
|
|
|
(In thousands)
|
|
|
Derivatives not designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Net gain (loss) on
trading activities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
247
|
|
Interest rate caps
|
|
Net gain (loss) on
trading activities
|
|
|
270,000
|
|
|
|
777
|
|
|
|
490
|
|
Forward contracts
|
|
Net gain (loss) on
trading activities
|
|
|
210,000
|
|
|
|
(1,572
|
)
|
|
|
2,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
480,000
|
|
|
$
|
(795
|
)
|
|
$
|
3,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doral Financial held $310.0 million and $480.0 million
in notional value of derivatives not designated as hedges at
December 31, 2010 and 2009, respectively.
F-90
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The Company purchases interest rate caps to manage its interest
rate exposure. Interest rate cap agreements generally involve
purchases of out of the money caps to protect the Company from
adverse effects from rising interest rates. These products are
not linked to specific assets and liabilities that appear on the
balance sheet or to a forecasted transaction and, therefore, do
not qualify for hedge accounting. As of December 31, 2010
and 2009, the Company had outstanding interest rate caps with a
notional amount of $210.0 million and $270.0 million,
respectively.
The Company enters into forward contracts to create an economic
hedge on its mortgage warehouse line. During the second quarter
of 2009, the Company entered into an additional forward contract
to create an economic hedge on its MSR. The notional amount of
this additional forward contract as of December 31, 2010
and 2009 was $50.0 million and $165.0 million,
respectively. As of December 31, 2010 and 2009, the Company
had forwards hedging its warehousing line with a notional amount
of $50.0 million and $45.0 million, respectively. For
the years ended December 31, 2010 and 2009, the Company
recorded gains of $5.6 million and $2.8 million,
respectively, on forward contracts which included gains of
$7.5 million and $5.2 million, respectively, related
to the economic hedge on the MSR.
Credit risk related to derivatives arises when amounts
receivable from a counterparty exceed those payable. Because the
notional amount of the instruments only serves as a basis for
calculating amounts receivable or payable, the risk of loss with
any counterparty is limited to a small fraction of the notional
amount. Doral Financials maximum loss related to credit
risk is equal to the gross fair value of its derivative
instruments. Doral Financial deals only with derivative dealers
that are national market makers with strong credit ratings in
their derivatives activities. The Company further controls the
risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other
extensions of credit. In addition, counterparties are required
to provide cash collateral to Doral Financial when their
unsecured loss positions exceed certain negotiated limits.
All derivative contracts to which Doral Financial is a party
settle monthly, quarterly or semiannually. Further, Doral
Financial has netting agreements with the dealers and only does
business with creditworthy dealers. Because of these factors,
Doral Financials credit risk exposure related to
derivatives contracts at December 31, 2010 and 2009 was not
considered material.
|
|
40.
|
Variable
Interest Entities
|
In June 2009, the FASB revised authoritative guidance for
determining the primary beneficiary of a variable interest
entity (VIE). A variable interest entity is an
entity that by design possesses the following characteristics:
|
|
|
|
|
The equity investment at risk is not sufficient for the entity
to finance its activities without additional subordinated
financial support.
|
|
|
|
As a group, the holders of equity investment at risk do not
possess: (i) the power, through voting rights or similar
rights, to direct the activities that most significantly impact
the entitys economic performance; or (ii) the
obligation to absorb expected losses or the right to receive the
expected residual returns of the entity; or (iii) symmetry
between voting rights and economic interests and where
substantially all of the entitys activities either involve
or are conducted on behalf of an investor with
disproportionately fewer voting rights (e.g., structures with
nonsubstantive voting rights).
|
The Company is required to consolidate any VIEs in which it is
deemed to be the primary beneficiary through having
(i) power over the significant activities of the entity and
(ii) having an obligation to absorb losses or the right to
receive benefits from the VIE which are potentially significant
to the VIE.
The Company identified four potential sources of variable
interests: (i) the servicing portfolio, (ii) the
investment portfolio, (iii) the lending portfolio and
(iv) special purpose entities with which the Company is
involved, and performed and assessed each for the existence of
VIEs and determination of possible
F-91
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
consolidation requirements. In all instances where the Company
identified a variable interest in a VIE, a primary beneficiary
analysis was performed.
Servicing Assets: In the ordinary course of
business, the Company transfers financial assets (whole loan
sale/securitizations) in which it has retained the right to
service the assets. The servicing portfolio was considered a
potential source of variable interest and was analyzed to
determine if any VIEs required consolidation. The servicing
portfolio was grouped into three segments: government sponsored
entities (GSEs), governmental agencies and private
investors. Except for two private investors (further analyzed as
investment securities below), the Company concluded that the
servicing fee received from providing this service did not
represent a variable interest as defined by this guidance. The
Company determined that its involvement with these entities is
in the ordinary course of business and the criteria established
to consider the servicing activities as those of a service
provider (fiduciary in nature) and not a decision maker, were
met.
Investment Securities: The Company analyzed
its investment portfolio and determined that it had several
residual interests in non-agency CMOs that required full
analysis to determine the primary beneficiary. For trading
assets and insignificant residual interests as well as
investments in non-profit vehicles, the Company determined that
it was not the primary beneficiary since it does not have power
over the significant activities of the entity. For two residual
interests in non-agency CMOs where the Company is also the
servicer of the underlying assets it was determined that due to:
(i) the unilateral ability of the issuers to remove the
Company from its role as servicer, or role of servicer for loans
more than 90 days past due; (ii) the issuers
right to object to commencement of the foreclosure procedures;
and (iii) the requirement for issuer authorization of the
sales price of all foreclosed property; the Company did not have
power over the significant activities of the entity and
therefore consolidation was not appropriate.
Loans: Through its construction portfolio, the
Company provides financing to legal entities created with the
limited purpose of developing and selling residential or
commercial properties. Often these entities do not have
sufficient equity investment at risk to finance its activities,
and the Company could potentially have a variable interest in
the entities since it may absorb losses related to the loans
granted. In situations where the loan defaults or is
re-structured by the Company, the loan could result in the
Companys potential absorption of losses of the entity.
However, the Company is not involved in the design or operations
of these entities and it has therefore been concluded that the
Company does not have the power over the activities that most
significantly impact the economic performance of the VIEs and is
not considered the primary beneficiary in any of these entities.
The Company will continue to assess this portfolio on an ongoing
basis to determine if there are any changes in its involvement
with these VIEs that could potentially lead to consolidation
treatment.
Special Purpose Entities: The Company is
involved with two special purpose entities that are deemed to be
VIEs:
|
|
|
|
|
The Company sold an asset portfolio to a third party on
July 29, 2010, consisting of performing and non-performing
late-stage residential construction and development loans and
real estate, with carrying amounts at the transfer date of
$33.8 million, $63.4 million and $4.8 million,
respectively. As consideration for the transferred assets, the
Company received a $5.1 million cash payment and a
$96.9 million note receivable which has a
10-year
maturity and a fixed interest rate of 8.0% per annum and permits
interest capitalization for the first 18 months. This
financing provided by the Company is secured by a general pledge
of all of the acquiring entitys assets. As of
December 31, 2010, the carrying amount of the note
receivable was $96.9 million and is classified in loans
receivable in the Consolidated Statement of Financial Condition.
|
Concurrent with this transaction, the Company provided the
acquirer with a $28.0 million construction line of credit
which has a 10- year maturity and a fixed interest rate of 8.0%
per annum. The line of credit will be used by the acquirer of
the assets to provide construction advances on the transferred
loans or to fund construction on foreclosed properties. As of
December 31, 2010, the carrying amount of the line of
credit is $0.8 million and is classified in loans
receivable in the Consolidated Statement of Financial Condition.
F-92
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The Company has determined that the acquirer is a VIE and that
the Company is not its primary beneficiary. The assets of the
acquirer are comprised of the transferred asset portfolio in
addition to $10.2 million of in-kind capital contribution
provided by a single third party. The sole equity holder has
unconditionally committed to contribute an additional
$7.0 million of capital over the next six years.
The primary beneficiary of a VIE is an enterprise that has a
controlling financial interest in the VIE which exists when an
enterprise has both the power to direct the activities that most
significantly impact the VIEs economic performance and the
obligation to absorb losses or the right to receive benefits of
the VIE that could potentially be significant to the VIE. The
rights provided to the Company as creditor are protective in
nature. As the Company does not have the right to manage the
loan portfolio, impact foreclosure proceedings, or manage the
construction and sale of the property, the Company does not have
power over the activities that most significantly impact the
economic performance of the acquirer. The Companys maximum
exposure to loss from the variable interest entity is limited to
the interest and principal outstanding on the note receivable
and the line of credit. Therefore, the Company is not the
primary beneficiary of the variable interest entity.
The transfer of the portfolio, consisting of construction loans
and real estate assets, was accounted for as a sale. The note
receivable was recognized at its initial fair value of
$96.9 million. The initial fair value measurement of the
note receivable was determined using discount rate adjustment
techniques with significant unobservable
(Level 3) inputs. Management based its fair value
estimate using cash flows forecasted considering the initial and
future loan advances, when the various construction project
units would be complete, current absorption rates of new housing
in Puerto Rico, and a market interest rate that reflects the
estimated credit risk of the acquirer and the nature of the loan
collateral. Doral considered the loans to be construction loans
for the purposes of determining a market rate.
|
|
|
|
|
During the third quarter of 2010, the Company, through one of
its subsidiaries, Doral Money, entered into a CLO arrangement
with a third party in which up to $450.0 million of largely
U.S. mainland based commercial loans are pledged to
collateralize AAA rated debt of $250.0 million paying three
month LIBOR plus 1.85 percent issued by Doral CLO I,
Ltd. Doral CLO I, Ltd. is a variable interest entity
created to hold the commercial loans and issue the previously
noted debt and $200.0 million of subordinated notes to the
Company whereby the Company receives any excess proceeds after
payment of the senior debt interest and other fees and charges
specified in the indenture agreement. The Company also serves as
collateral manager of the assets of Doral CLO I, Ltd. Doral
CLO I, Ltd. is consolidated with the Company in these
financial statements.
|
A CLO is a securitization where a special purpose entity
purchases a pool of assets consisting of loans and issues
multiple tranches of equity or notes to investors. Typically,
the asset manager has the power over the significant decisions
of the VIE through its discretion to manage the assets of the
CLO.
Doral CLO I, Ltd. is a VIE because it
does not have sufficient equity investment at risk and the
subordinated notes provide additional financial support to the
structure. Management has determined that the Company is the
primary beneficiary of Doral CLO I, Ltd. because it has a
variable interest in Doral CLO I, Ltd. through both its
collateral manager fee and its obligation to absorb potentially
significant losses and the right to receive potentially
significant benefits of the CLO through the subordinated
securities held. The most significant activities of Doral
CLO I, Ltd. are those associated with managing the
collateral obligations on a
day-to-day
basis and, as collateral manager, the Company controls the
significant activities of the VIE.
F-93
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
The classifications of assets and liabilities on the
Companys Statement of Financial Condition associated with
our consolidated VIE follows:
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
(In thousands)
|
|
|
Carrying amount
|
|
|
|
|
Cash and other interest-earning assets
|
|
$
|
51,828
|
|
Loans receivable
|
|
|
401,723
|
|
Allowance for loan and lease losses
|
|
|
(2,388
|
)
|
Other assets
|
|
|
9,795
|
|
|
|
|
|
|
Total assets
|
|
|
460,958
|
|
Notes payable (third party liability)
|
|
|
249,822
|
|
Other liabilities
|
|
|
2,934
|
|
|
|
|
|
|
Total liabilities
|
|
|
252,756
|
|
|
|
|
|
|
Net assets
|
|
$
|
208,202
|
|
|
|
|
|
|
The following table summarizes the Companys unconsolidated
VIEs and presents the maximum exposure to loss that would be
incurred under severe, hypothetical circumstances, for which the
possibility of occurrence is remote, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
Servicing assets
|
|
$
|
15,201
|
|
|
$
|
15,878
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
Non-agency CMO
|
|
|
11,108
|
|
|
|
11,568
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
437,378
|
|
|
|
523,348
|
|
Maximum exposure to loss
(1)
|
|
|
|
|
|
|
|
|
Servicing assets
|
|
$
|
15,201
|
|
|
$
|
15,878
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
Non-agency
CMO(2)
|
|
|
11,108
|
|
|
|
11,568
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
Construction and land
|
|
|
437,378
|
|
|
|
523,348
|
|
|
|
|
(1) |
|
Maximum exposure to loss is a
required disclosure under GAAP and represents estimated loss
that would be incurred under severe, hypothetical circumstances,
for which the possibility of occurrence is remote, such as where
the value of our interests and any associated collateral
declines to zero, without any consideration of recovery or
offset from any economic hedges. Accordingly, this required
disclosure is not an indication of expected loss.
|
|
(2) |
|
Refers to book value of residual
interest from two private placements (Refer to Note 7 for
additional information). These transactions are structured
without recourse, so as servicers our exposure is limited to
standard representations and warranties as seller of the loans
and responsibilities as servicer of the SPEs assets.
|
The Company operates in three reportable segments: mortgage
banking activities, banking (including thrift operations) and
insurance agency activities. The Companys segment
reporting is organized by legal entity and aggregated by line of
business. Legal entities that do not meet the threshold for
separate disclosure
F-94
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
are aggregated with other legal entities with similar lines of
business. Management made this determination based on operating
decisions particular to each business line and because each one
targets different customers and requires different strategies.
The majority of the Companys operations are conducted in
Puerto Rico. The Company also operates in the mainland United
States, principally in the New York City metropolitan area and
since the third quarter of 2010 in the north west area of
Florida.
In the past, the Company operated an institutional securities
business through Doral Securities. During the third quarter of
2007, Doral Securities voluntarily withdrew its license as a
broker dealer with the SEC and its membership with the FINRA. As
a result of this decision, Doral Securities operations
during 2008 were limited to acting as a co-investment manager to
a local fixed-income investment company. Doral Securities
provided notice to the investment company in December 2008 of
its intent to assign its rights and obligations under the
investment advisory agreement to Doral Bank PR. The assignment
was completed in January 2009 and Doral Securities did not
conduct any other operations in 2009. During the third quarter
of 2009, this investment advisory agreement was terminated by
the investment company. Effective on December 31, 2009,
Doral Securities was merged with and into its holding company,
Doral Financial Corporation.
On July 1, 2008, Doral International, an IBE, subject to
supervision, examination and regulation by the Commissioner of
Financial Institutions under the IBC Act, was merged with and
into Doral Bank PR, Doral Internationals parent company,
with Doral Bank PR being the surviving corporation, in a
transaction structured as a tax free reorganization.
On December 16, 2008, Doral Investment was organized to
become a new subsidiary of Doral Bank PR. On February 2,
2010, Doral Investment was granted license to operate as an
international banking entity under the IBC Act. Doral Investment
is not currently operational.
The accounting policies followed by the segments are the same as
those described in Note 2.
The following tables present net interest income, provision for
loan and lease losses, non-interest income (loss), (loss) income
before income taxes, net income (loss) and identifiable assets
for each of the Companys reportable segments for the
periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
Mortgage
|
|
|
|
Insurance
|
|
Intersegment
|
|
|
|
|
Banking
|
|
Banking
|
|
Agency
|
|
Eliminations(1)
|
|
Total
|
|
|
(In thousands)
|
|
Net interest income
|
|
$
|
7,491
|
|
|
$
|
146,860
|
|
|
$
|
|
|
|
$
|
6,253
|
|
|
$
|
160,604
|
|
Provision for loan and lease losses
|
|
|
5,011
|
|
|
|
93,964
|
|
|
|
|
|
|
|
|
|
|
|
98,975
|
|
Non-interest income (loss)
|
|
|
45,019
|
|
|
|
(44,717
|
)
|
|
|
13,306
|
|
|
|
(27,684
|
)
|
|
|
(14,076
|
)
|
(Loss) income before income taxes
|
|
|
(22,101
|
)
|
|
|
(252,853
|
)
|
|
|
10,679
|
|
|
|
(12,736
|
)
|
|
|
(277,011
|
)
|
Net income (loss)
|
|
|
(23,625
|
)
|
|
|
(261,857
|
)
|
|
|
6,324
|
|
|
|
(12,736
|
)
|
|
|
(291,894
|
)
|
Identifiable assets
|
|
|
1,741,104
|
|
|
|
7,957,966
|
|
|
|
11,850
|
|
|
|
(1,064,566
|
)
|
|
|
8,646,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Mortgage
|
|
|
|
Insurance
|
|
Intersegment
|
|
|
|
|
Banking
|
|
Banking
|
|
Agency
|
|
Eliminations(1)
|
|
Total
|
|
|
(In thousands)
|
|
Net interest income
|
|
$
|
14,657
|
|
|
$
|
149,317
|
|
|
$
|
|
|
|
$
|
3,653
|
|
|
$
|
167,627
|
|
Provision for loan and lease losses
|
|
|
249
|
|
|
|
53,414
|
|
|
|
|
|
|
|
|
|
|
|
53,663
|
|
Non-interest income
|
|
|
46,084
|
|
|
|
62,949
|
|
|
|
12,024
|
|
|
|
(33,856
|
)
|
|
|
87,201
|
|
Income (loss) before income taxes
|
|
|
4,056
|
|
|
|
(33,451
|
)
|
|
|
9,619
|
|
|
|
(22,845
|
)
|
|
|
(42,621
|
)
|
Net income (loss)
|
|
|
26,197
|
|
|
|
(32,282
|
)
|
|
|
8,031
|
|
|
|
(23,090
|
)
|
|
|
(21,144
|
)
|
Identifiable assets
|
|
|
1,654,586
|
|
|
|
9,480,008
|
|
|
|
17,368
|
|
|
|
(920,010
|
)
|
|
|
10,231,952
|
|
F-95
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
Mortgage
|
|
|
|
Institutional
|
|
Insurance
|
|
Intersegment
|
|
|
|
|
Banking
|
|
Banking
|
|
Securities
|
|
Agency
|
|
Eliminations(1)
|
|
Totals
|
|
|
(In thousands)
|
|
Net interest income
|
|
$
|
17,381
|
|
|
$
|
157,977
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,123
|
|
|
$
|
177,481
|
|
Provision for loan and lease losses
|
|
|
3,334
|
|
|
|
45,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,856
|
|
Non-interest income
|
|
|
35,473
|
|
|
|
56,357
|
|
|
|
144
|
|
|
|
12,801
|
|
|
|
(25,246
|
)
|
|
|
79,529
|
|
(Loss) income before income taxes
|
|
|
(15,863
|
)
|
|
|
(11,655
|
)
|
|
|
(129
|
)
|
|
|
10,030
|
|
|
|
(14,641
|
)
|
|
|
(32,258
|
)
|
Net (loss) income
|
|
|
(186,325
|
)
|
|
|
(123,402
|
)
|
|
|
(141
|
)
|
|
|
6,250
|
|
|
|
(14,641
|
)
|
|
|
(318,259
|
)
|
Identifiable assets
|
|
|
1,692,845
|
|
|
|
9,204,200
|
|
|
|
1,659
|
|
|
|
28,060
|
|
|
|
(787,897
|
)
|
|
|
10,138,867
|
|
|
|
|
(1) |
|
The intersegment eliminations in
the tables above include servicing fees paid by the banking
subsidiaries to the mortgage banking subsidiary recognized as a
reduction of the non interest income, direct intersegment loan
origination costs amortized as yield adjustment or offset
against net gains on mortgage loan sales and fees (mainly
related with origination costs paid by the banking segment to
the mortgage banking segment) and other income derived from
intercompany transactions, related principally to rental income
paid to Doral Properties, the Companys subsidiary that
owns the corporate headquarters facilities. Assets include
internal funding and investments in subsidiaries accounted for
at cost.
|
The following table summarizes the financial results for the
Companys Puerto Rico and mainland U.S. operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
Puerto Rico
|
|
Mainland U.S.
|
|
Eliminations
|
|
Totals
|
|
|
(In thousands)
|
|
Net interest income
|
|
$
|
142,792
|
|
|
$
|
16,963
|
|
|
$
|
849
|
|
|
$
|
160,604
|
|
Provision for loan and lease losses
|
|
|
96,049
|
|
|
|
2,926
|
|
|
|
|
|
|
|
98,975
|
|
Non-interest (loss) income
|
|
|
(18,044
|
)
|
|
|
4,925
|
|
|
|
(957
|
)
|
|
|
(14,076
|
)
|
(Loss) income before income taxes
|
|
|
(280,258
|
)
|
|
|
3,247
|
|
|
|
|
|
|
|
(277,011
|
)
|
Net (loss) income
|
|
|
(293,176
|
)
|
|
|
1,282
|
|
|
|
|
|
|
|
(291,894
|
)
|
Identifiable assets
|
|
|
8,185,181
|
|
|
|
1,051,192
|
|
|
|
(590,019
|
)
|
|
|
8,646,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Puerto Rico
|
|
Mainland U.S.
|
|
Eliminations
|
|
Totals
|
|
|
(In thousands)
|
|
Net interest income
|
|
$
|
159,419
|
|
|
$
|
8,045
|
|
|
$
|
163
|
|
|
$
|
167,627
|
|
Provision for loan and lease losses
|
|
|
51,067
|
|
|
|
2,596
|
|
|
|
|
|
|
|
53,663
|
|
Non-interest income
|
|
|
86,200
|
|
|
|
1,273
|
|
|
|
(272
|
)
|
|
|
87,201
|
|
Loss before income taxes
|
|
|
(40,296
|
)
|
|
|
(2,325
|
)
|
|
|
|
|
|
|
(42,621
|
)
|
Net (loss) income
|
|
|
(21,699
|
)
|
|
|
800
|
|
|
|
(245
|
)
|
|
|
(21,144
|
)
|
Identifiable assets
|
|
|
10,137,416
|
|
|
|
504,786
|
|
|
|
(410,250
|
)
|
|
|
10,231,952
|
|
F-96
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
Puerto Rico
|
|
Mainland U.S.
|
|
Eliminations
|
|
Totals
|
|
|
(In thousands)
|
|
Net interest income
|
|
$
|
168,381
|
|
|
$
|
8,930
|
|
|
$
|
170
|
|
|
$
|
177,481
|
|
Provision for loan and lease losses
|
|
|
48,146
|
|
|
|
710
|
|
|
|
|
|
|
|
48,856
|
|
Non-interest income
|
|
|
77,524
|
|
|
|
2,402
|
|
|
|
(397
|
)
|
|
|
79,529
|
|
(Loss) income before income taxes
|
|
|
(37,553
|
)
|
|
|
5,283
|
|
|
|
12
|
|
|
|
(32,258
|
)
|
Net (loss) income
|
|
|
(320,811
|
)
|
|
|
2,540
|
|
|
|
12
|
|
|
|
(318,259
|
)
|
Identifiable assets
|
|
|
10,056,158
|
|
|
|
235,323
|
|
|
|
(152,614
|
)
|
|
|
10,138,867
|
|
42. Quarterly
Results of Operations
Financial data showing results for each of the quarters in 2010,
2009 and 2008 are presented below. These results are unaudited.
In the opinion of management all adjustments necessary
(consisting only of normal recurring adjustments) for a fair
statement have been included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
|
(In thousands, except per share data)
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
109,228
|
|
|
$
|
101,077
|
|
|
$
|
98,883
|
|
|
$
|
92,333
|
|
Net interest income
|
|
|
43,761
|
|
|
|
40,065
|
|
|
|
39,171
|
|
|
|
37,607
|
|
Provision for loan and lease losses
|
|
|
13,921
|
|
|
|
44,617
|
|
|
|
19,335
|
|
|
|
21,102
|
|
Non-interest income (loss)
|
|
|
36,584
|
|
|
|
(120,190
|
)
|
|
|
41,710
|
|
|
|
27,820
|
|
Loss before income taxes
|
|
|
(974
|
)
|
|
|
(228,824
|
)
|
|
|
(15,116
|
)
|
|
|
(32,097
|
)
|
Net loss
|
|
|
(3,503
|
)
|
|
|
(233,311
|
)
|
|
|
(19,012
|
)
|
|
|
(36,068
|
)
|
Net income (loss) attributable to common shareholders
|
|
|
21,218
|
|
|
|
(235,726
|
)
|
|
|
(21,427
|
)
|
|
|
(38,483
|
)
|
Earnings (loss) per common
share(1)
|
|
|
0.34
|
|
|
|
(3.50
|
)
|
|
|
(0.19
|
)
|
|
|
(0.30
|
)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
116,494
|
|
|
$
|
114,578
|
|
|
$
|
113,403
|
|
|
$
|
113,790
|
|
Net interest income
|
|
|
36,070
|
|
|
|
42,090
|
|
|
|
43,609
|
|
|
|
45,858
|
|
Provision for loan and lease losses
|
|
|
23,625
|
|
|
|
10,133
|
|
|
|
4,879
|
|
|
|
15,026
|
|
Non-interest income
|
|
|
1,583
|
|
|
|
19,131
|
|
|
|
26,888
|
|
|
|
39,599
|
|
(Loss) income before income taxes
|
|
|
(46,398
|
)
|
|
|
(4,438
|
)
|
|
|
6,354
|
|
|
|
1,861
|
|
Net (loss) income
|
|
|
(46,290
|
)
|
|
|
8,216
|
|
|
|
13,209
|
|
|
|
3,721
|
|
Net (loss) income attributable to common shareholders
|
|
|
(54,615
|
)
|
|
|
14,524
|
|
|
|
10,000
|
|
|
|
(16,865
|
)
|
(Loss) earnings per common
share(1)
|
|
|
(1.01
|
)
|
|
|
0.27
|
|
|
|
0.17
|
|
|
|
(0.29
|
)
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
128,108
|
|
|
$
|
135,646
|
|
|
$
|
132,816
|
|
|
$
|
128,104
|
|
Net interest income
|
|
|
39,044
|
|
|
|
48,855
|
|
|
|
47,040
|
|
|
|
42,542
|
|
Provision for loan and lease losses
|
|
|
4,786
|
|
|
|
10,683
|
|
|
|
7,209
|
|
|
|
26,178
|
|
Non-interest income
|
|
|
17,379
|
|
|
|
24,895
|
|
|
|
11,921
|
|
|
|
25,334
|
|
(Loss) income before income taxes
|
|
|
(2,926
|
)
|
|
|
7,441
|
|
|
|
(696
|
)
|
|
|
(36,077
|
)
|
Net (loss) income
|
|
|
(2,298
|
)
|
|
|
1,642
|
|
|
|
(1,756
|
)
|
|
|
(315,847
|
)
|
Net loss attributable to common shareholders
|
|
|
(10,623
|
)
|
|
|
(6,683
|
)
|
|
|
(10,080
|
)
|
|
|
(324,172
|
)
|
Loss per common
share(1)
|
|
|
(0.20
|
)
|
|
|
(0.12
|
)
|
|
|
(0.19
|
)
|
|
|
(6.02
|
)
|
|
|
|
(1) |
|
For each of the quarters in 2010,
2009 and 2008, (loss) earnings per common share represents the
basic and diluted (loss) earnings per common share.
|
F-97
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
43. Doral
Financial Corporation (Holding Company Only) Financial
Information
The following condensed financial information presents the
financial position of the holding company only as of
December 31, 2010 and 2009, and the results of its
operations and cash flows for the years ended December 31,
2010, 2009 and 2008.
Doral
Financial Corporation
(Parent Company Only)
Statement of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
32,643
|
|
|
$
|
44,423
|
|
Other interest-earning assets
|
|
|
45,653
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Trading securities, at fair value
|
|
|
44,250
|
|
|
|
45,723
|
|
Securities available for sale, at fair value
|
|
|
7,193
|
|
|
|
53,736
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
51,443
|
|
|
|
99,459
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or market
|
|
|
121,239
|
|
|
|
142,315
|
|
Loans receivable, net
|
|
|
333,254
|
|
|
|
362,402
|
|
Premises and equipment, net
|
|
|
2,866
|
|
|
|
3,559
|
|
Real estate held for sale, net
|
|
|
26,404
|
|
|
|
41,097
|
|
Deferred tax asset
|
|
|
94,949
|
|
|
|
94,649
|
|
Other assets
|
|
|
43,720
|
|
|
|
49,116
|
|
Investments in subsidiaries, at equity
|
|
|
674,801
|
|
|
|
629,334
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,426,972
|
|
|
$
|
1,466,354
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
304,035
|
|
|
$
|
337,036
|
|
Notes payable
|
|
|
218,291
|
|
|
|
223,818
|
|
Accounts payable and other liabilities
|
|
|
42,451
|
|
|
|
30,456
|
|
Stockholders equity
|
|
|
862,195
|
|
|
|
875,044
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,426,972
|
|
|
$
|
1,466,354
|
|
|
|
|
|
|
|
|
|
|
F-98
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Doral
Financial Corporation
(Parent Company Only)
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
11,900
|
|
|
$
|
18,000
|
|
|
$
|
|
|
Interest income
|
|
|
33,008
|
|
|
|
41,774
|
|
|
|
64,062
|
|
Net credit related OTTI losses
|
|
|
(705
|
)
|
|
|
(1,191
|
)
|
|
|
(920
|
)
|
Net gain on mortgage loans sales and fees
|
|
|
165
|
|
|
|
68
|
|
|
|
305
|
|
Net gain on trading activities
|
|
|
8,807
|
|
|
|
2,780
|
|
|
|
5,853
|
|
Net gain on investment securities
|
|
|
|
|
|
|
953
|
|
|
|
143
|
|
Servicing income (loss)
|
|
|
5
|
|
|
|
(466
|
)
|
|
|
(869
|
)
|
Other income
|
|
|
66
|
|
|
|
119
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
$
|
53,246
|
|
|
$
|
62,037
|
|
|
$
|
68,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
23,742
|
|
|
$
|
27,298
|
|
|
$
|
44,699
|
|
Loan servicing, administrative and general expenses
|
|
|
52,634
|
|
|
|
36,225
|
|
|
|
39,087
|
|
Provision for loans and leases losses
|
|
|
5,011
|
|
|
|
249
|
|
|
|
3,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
81,387
|
|
|
|
63,772
|
|
|
|
87,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(28,141
|
)
|
|
|
(1,735
|
)
|
|
|
(18,444
|
)
|
Income tax benefit
|
|
|
(297
|
)
|
|
|
(22,855
|
)
|
|
|
176,165
|
|
Equity in undistributed losses of subsidiaries
|
|
|
(264,050
|
)
|
|
|
(42,264
|
)
|
|
|
(123,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-99
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
Doral
Financial Corporation
(Parent Company Only)
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(291,894
|
)
|
|
$
|
(21,144
|
)
|
|
$
|
(318,259
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of subsidiaries
|
|
|
252,150
|
|
|
|
24,264
|
|
|
|
123,650
|
|
Depreciation and amortization
|
|
|
327
|
|
|
|
511
|
|
|
|
1,346
|
|
Provision for loan and lease losses
|
|
|
5,011
|
|
|
|
249
|
|
|
|
3,334
|
|
Provision for OREO losses
|
|
|
11,487
|
|
|
|
4,357
|
|
|
|
1,617
|
|
Provision for claim receivable
|
|
|
4,248
|
|
|
|
|
|
|
|
8,640
|
|
Stock-based compensation recognized
|
|
|
1,510
|
|
|
|
94
|
|
|
|
91
|
|
Deferred tax (benefit) provision
|
|
|
(297
|
)
|
|
|
(9,926
|
)
|
|
|
175,915
|
|
Loss on sale of LBI
|
|
|
445
|
|
|
|
|
|
|
|
|
|
Gain on sale of premises and equipment
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
Loss (gain) on sale of real estate held for sale
|
|
|
1,884
|
|
|
|
(578
|
)
|
|
|
(1,192
|
)
|
Gain on sale of assets to be disposed of by sale
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
(Accretion of discounts) amortization of premium on loans,
investments
|
|
|
(339
|
)
|
|
|
2,738
|
|
|
|
(659
|
)
|
Principal repayment and sales of loans held for sale
|
|
|
28,617
|
|
|
|
58,283
|
|
|
|
36,315
|
|
Net OTTI losses
|
|
|
705
|
|
|
|
1,191
|
|
|
|
920
|
|
Gain on sales of securities
|
|
|
|
|
|
|
(953
|
)
|
|
|
(137
|
)
|
Unrealized gain on trading securities
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
Decrease in trading securities
|
|
|
|
|
|
|
|
|
|
|
2,023
|
|
Amortization and net gain in the fair value of IOs
|
|
|
1,473
|
|
|
|
6,456
|
|
|
|
(251
|
)
|
Dividends received from subsidiaries
|
|
|
11,900
|
|
|
|
18,000
|
|
|
|
|
|
(Increase) decrease in prepaid expenses and other assets
|
|
|
(41,309
|
)
|
|
|
(194
|
)
|
|
|
184,427
|
|
Increase (decrease) in accounts payable and other liabilities
|
|
|
2,887
|
|
|
|
(22,750
|
)
|
|
|
(9,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
280,699
|
|
|
|
81,675
|
|
|
|
526,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(11,195
|
)
|
|
|
60,531
|
|
|
|
208,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of securities available for sale
|
|
$
|
|
|
|
$
|
(43,953
|
)
|
|
$
|
(254,089
|
)
|
Principal repayments and sales of securities available for sale
|
|
|
46,335
|
|
|
|
106,424
|
|
|
|
(27,846
|
)
|
Repurchases and disbursements of loans receivable
|
|
|
(30,153
|
)
|
|
|
(27,685
|
)
|
|
|
(32,416
|
)
|
Principal repayment of loans receivable
|
|
|
5,711
|
|
|
|
57,400
|
|
|
|
141,053
|
|
Additions to premises and equipment
|
|
|
(11
|
)
|
|
|
(5
|
)
|
|
|
|
|
Proceeds from sale of premises and equipment
|
|
|
|
|
|
|
573
|
|
|
|
801
|
|
Proceeds from assets to be disposed of by sale
|
|
|
|
|
|
|
|
|
|
|
544
|
|
Proceeds from sales of real estate held for sale
|
|
|
14,800
|
|
|
|
18,946
|
|
|
|
16,589
|
|
Contribution of investment
|
|
|
(168,631
|
)
|
|
|
(118,545
|
)
|
|
|
(182,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(131,949
|
)
|
|
|
(6,845
|
)
|
|
|
(338,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in securities sold under agreements to repurchase
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7,035
|
)
|
Decrease in loans payable
|
|
|
(33,001
|
)
|
|
|
(29,740
|
)
|
|
|
(35,925
|
)
|
Decrease in notes payable
|
|
|
(5,879
|
)
|
|
|
(5,442
|
)
|
|
|
(5,037
|
)
|
Issuance of common stock, net
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
Payment associated with conversion of preferred stock
|
|
|
|
|
|
|
(4,972
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(8,325
|
)
|
|
|
(33,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
132,120
|
|
|
|
(48,479
|
)
|
|
|
(81,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(11,024
|
)
|
|
$
|
5,207
|
|
|
$
|
(211,212
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
44,423
|
|
|
|
39,216
|
|
|
|
250,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year
|
|
$
|
33,399
|
|
|
$
|
44,423
|
|
|
$
|
39,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-100
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR
DORAL FINANCIAL
CORPORATION (Continued)
During 2010, 2009 and 2008, the parent company contributed
capital amounting to $193.9 million, $119.8 million
and $182.9 million, respectively, to Doral Bank PR. This
capital infusion was approved by the Board of Directors of Doral
Financial.
During 2010 and 2009, the parent company received dividends
amounting to $11.9 million and $18.0 million from
Doral Insurance.
As a state non-member bank, Doral Bank PRs ability to pay
dividends is limited by the Puerto Rico Banking Law which
requires that a reserve fund be maintained in an amount equal to
at least 20% of the outstanding capital of the institution. The
payment of dividends by Doral Bank PR may also be affected by
other regulatory requirements and policies, such as the
maintenance of certain minimum capital levels described in
Note 37, above.
Savings banks, such as Doral Bank US, that meet all applicable
capital requirements may make distributions in an amount equal
to the sum of (i) the current years net income, and
(ii) the retained net income from the preceding two years,
without an application to the OTS. See Note 34, for
additional information regarding restrictions to pay dividends.
New Puerto Rico Tax Code. On January 31,
2011, the Governor signed into law the Internal Revenue Code of
2011 (2011 Code) making the PR Code ineffective, for
the most part, for years commenced after December 31, 2010.
The most significant impact on Corporations of the 2011 Code is
the reduction in the maximum statutory corporate income tax rate
from 39% to 30% for years commenced after December 31, 2010
and ending before January 1, 2014; if the Government meets
its income generation and expense control goals, for years
commenced after December 31, 2013, the maximum corporate
tax rate will be 25%. The 2011 Code eliminated the special 5%
surtax on corporations for tax year 2011. The Company is
evaluating the impact of the tax reform on its results of
operations, however the change in the statutory tax rate will
result in a reduction in the net deferred tax asset with a
corresponding charge to deferred tax expense during the first
quarter of 2011. A corporation may elect to be subject to the
provisions of the PR Code by the time it files its income tax
return for the first year commenced after December 31, 2010
and ending before January 1, 2012. Once the election is
made, it will be effective for such year and the next 4
succeeding years.
Advances from FHLB restructure. In January
2011, the Company entered into an agreement with the FHLB to
restructure $555.4 million of its non-callable term
advances, reducing the average interest rate on those
restructured advances to 1.7% from 4.1% and extending the
average maturities to 39 months from 14 months. This
transaction resulted in a $22.0 million fee paid to the
FHLB.
F-101