Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DRL > SEC Filings for DRL > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for DORAL FINANCIAL CORP

Form 10-Q for DORAL FINANCIAL CORP


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning 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 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 Company's 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, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings, tax legislation and tax rules, compliance and regulatory matters and new accounting standards and guidance on the Company's 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 Financial's current expectations regarding future events. Such forward-looking 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," "plan," "outlook," "target," "goal," and similar expressions and future conditional verbs such as "would," "should," "could," "might," "can" or "may" 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 Financial's 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, other than as required by law, including the requirements of applicable securities laws.

Forward-looking statements are, by their nature, subject to risks and uncertainties and changes in circumstances, many of which are beyond Doral Financial's control. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain important factors (including our management's ability to identify and manage these and other risks) that could cause actual results to differ materially from those contained in any forward-looking statement:

the continued recessionary conditions of the Puerto Rico economy and any deterioration in the performance of the United States economy and capital markets that adversely affect the general economy, housing prices and absorption, the job market, consumer confidence and spending habits leading to, among other things, (i) a further 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 increased pricing of our funding sources, including brokered certificates of deposits;

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 in 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 and may subject the Company to further risk from loan defaults and foreclosures;

recent and/or future downgrades of the long-term debt ratings of the United States and the Commonwealth of Puerto Rico, which could adversely affect economic conditions in the United States and the Commonwealth of Puerto Rico;

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 of such assets under generally accepted accounting principles in the United States of America;

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 different sectors of the Puerto Rico economy;

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;


Table of Contents
uncertainty about whether Doral Financial and Doral Bank will be able to fully comply with the terms and conditions of the written agreement dated September 11, 2012 (the "Written Agreement") that Doral Financial entered into with the Federal Reserve Bank of New York (the "FRBNY") and the consent order dated August 8, 2012 (the "Consent Order") that Doral Bank entered into with the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Commissioner of Financial Institutions of Puerto Rico (the "PR Commissioner");

uncertainty about the operating and other conditions imposed by the FDIC and the PR Commissioner under the Consent Order and by the FRBNY under the Written Agreement, which may lead to, among other things, an increase in our charge-offs, loan loss provisions, and compliance costs, and an increased risk of being subject to additional regulatory actions, as well as additional actions resulting from the future regular annual safety and soundness and compliance examinations by these federal regulators;

our reliance on brokered certificates of deposit and our ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the Consent Order;

our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital proposals, as determined and interpreted by applicable regulatory authorities) and our ability to generate capital internally or raise capital on favorable terms;

the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications or changes in such requirements or guidance;

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;

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;

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;

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 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations adopted and to be adopted thereunder by various federal and state securities and banking regulatory agencies, and the impact of such developments on our business, business practices, capital requirements and costs of operations;

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, 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;

residential mortgage borrower performance different than that estimated in the cash flow forecasts for troubled debt restructured loans;

the risk of possible failure or circumvention of our controls, practices and procedures, including those designed to protect our networks, systems, computers and data from attack, damage or unauthorized access, and the risk that our risk management policies and/or processes may be inadequate;

the risk that the FDIC may further increase deposit insurance premiums and/or require special assessments to replenish its insurance fund, causing an increase in the Company's non-interest expense;

changes in our accounting policies or in accounting standards, and changes in how accounting standards are interpreted or applied;

uncertainty about the adopted changes to the Puerto Rico internal revenue code and other related tax provisions and the impact of such measures on different sectors of the Puerto Rico economy;


Table of Contents
an adverse change in our ability to attract new clients and retain existing clients;

general competitive factors and industry consolidation;

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;

potential adverse outcome in the legal or regulatory actions or proceedings described in Part I, Item 3 "Legal Proceedings" in the Company's 2011 Annual Report on Form 10-K, which was filed with the SEC on March 30, 2012, as updated from time to time in the Company's quarterly and other reports filed and to be filed with the SEC; and

the other risks and uncertainties detailed in Part II, Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012, as updated from time to time in the Company's quarterly and other reports filed and to be filed with the SEC.


Table of Contents

EXECUTIVE SUMMARY

This financial discussion contains an analysis of the consolidated financial position and consolidated results of operations of Doral Financial Corporation and its wholly-owned subsidiaries and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report.

In addition to the information contained in this Form 10-Q, readers should consider the description of the Company's business contained in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on March 30, 2012. While not all inclusive, Items 1 and 1A of the Form 10-K and this Form 10-Q disclose additional information about the business of the Company, risk factors, many beyond the Company's control, and further provide discussion of the operating results, financial condition and credit, market and liquidity risks than that which is presented in the narrative and tables included herein.

As discussed in greater detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, the Puerto Rico economy has contracted nearly 13% since the beginning of fiscal year 2007. The sustained recessionary, arguably depressionary, economic conditions have caused Doral to change its business strategies over time and have resulted in a much higher than desired level of non-performing loans in the loan portfolios. In 2007, Doral suspended making any new loans collateralized by construction or land in Puerto Rico. In 2008, Doral suspended new commercial lending activities in Puerto Rico, focusing on servicing its loans to existing commercial customers. In 2009, Doral significantly increased its residential mortgage loans underwriting standards for those loans it retains in its portfolio. Despite these actions which eliminated or reduced new loans to credit challenged customers, Doral's non-performing loans increased as a result of defaults from previously existing customers. In response to the combination of the Puerto Rico economy and the economic difficulties of Doral's customers, in 2010 Doral initiated programs to modify the credit terms of a significant number of residential mortgage and commercial borrowers as a means to optimize the performance of the borrowers and Doral. In addition, Doral expanded its U.S. based funding sources and outstanding commercial loans to U.S. businesses as investment securities and loans in Puerto Rico decreased as a means to generate incremental income to offset costs and losses from certain Puerto Rico based activities, and undertook actions to reduce its costs of doing business.

The Company expects the conditions that have driven the adoption of its current business strategies to continue, and these conditions are expected to affect Doral's operating results over the course of the next year. In addition, new conditions will present operational and strategic challenges to Doral that must be managed. The ongoing and new conditions include, but are not limited to, the continuing recessionary economy in some of the markets in which the Company competes, the operational restrictions that have been imposed upon the Company by the consent order with the FDIC and the Commissioner and the agreement with the Federal Reserve Bank of New York, the expected consolidation of our competitors in the Puerto Rico market, the continuing growth in Doral's U.S. business, reduction of investments and Puerto Rico loans, and the continuing limits on Puerto Rico lending activities. While the Company believes that the first three factors will negatively affect its business and operating results, the Company believes the last two factors will positively affect its business and operating results. The continuing weakness in the economy in Puerto Rico and the mainland United States is expected to continue to adversely affect the quality of the Company's Puerto Rico home mortgage, commercial real estate, and construction and land portfolios as well as its ability to generate new quality home mortgage loans - the most significant part of the Company's business. The Company anticipates that its operating capabilities will be further restricted by the consent order with the FDIC and the Commissioner and the agreement with the Federal Reserve Bank of New York and that compliance with the consent order and the agreement will cause the Company's operating costs to increase. The Company's operations will also be negatively affected by the continuing consolidation of other banks in the Puerto Rico market as these banks by virtue of their larger size have greater access to capital and customers than the Company and the ability to adopt competitive strategies that are adverse to the interests of Doral.

Regarding the benefits of Doral's strategy to develop U.S. funding and lending opportunities, at September 30, 2012, $2.1 billion of the Company's $6.2 billion gross loans receivable (34%) are to U.S. operating businesses and individuals for business purposes. The Company anticipates that within the next year the Company will expand its U.S. loan exposures to approximately $2.5 billion as investment securities and loans in Puerto Rico decrease. Funding sources specific to its U.S. businesses, specifically deposits and collateralized loan obligations, aggregated to $2.0 billion as of September 30, 2012, with the remainder of the assets funded by the general funding sources available to Doral Bank. The U.S. based commercial loans have lower defaults than the Doral's Puerto Rico commercial loan portfolio. As a result, the Company's U.S. businesses contributed $14.4 million in earnings to Doral's pre-tax pre-provision earnings over the first nine months of 2012 compared to a pre-tax pre-provision loss of $4.1 million from Puerto Rico and corporate activities.

The preparation of financial statements and other financial information in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. These estimates and assumptions include management's estimates affecting the allowance for loan and lease losses, including the provision for loan


Table of Contents

and lease losses, the conditions under which a loan or security is determined to be accounted for as non-performing, the conditions under which a non-performing loan is returned to accrual status, the circumstances under which a loan is determined to be a TDR, the circumstances under which a TDR is no longer reported as a TDR, the valuation of interest only strips and mortgage servicing rights, when a loan is determined to be of such little value it is charged-off, when a security is considered to be other than temporarily impaired and the credit loss charged to income, the collectability of other receivables, the estimate of income tax expense and payable and the fair values of financial assets and liabilities. Each of these factors requires subjective judgment and those judgments have a significant impact on the Company's reported results of operations or disclosures. Management has adopted a notably more conservative view of the financial effects of the current and estimated future economic and regulatory environment in which Doral's businesses operate. Each of the identified factors, as well as others not identified, where management is making subjective judgments because the accounting does not relate to actual cash gain or loss but estimated future financial effects, can positively or negatively affect reported earnings. See "Critical Accounting Policies" below.

OVERVIEW OF RESULTS OF OPERATIONS

Net loss for the quarter ended September 30, 2012 totaled $32.5 million, compared to a net loss of $30.2 million for the comparable 2011 period. Doral Financial's net loss increased $2.4 million for the third quarter of 2012 primarily due to lower non-interest income of $8.9 million, and an increase in non-interest expenses of $10.0 million, partially offset by an improvement in net interest income of $7.4 million, a reduction of $7.3 million in the provision for loan losses and income tax expense being lower by $1.8 million.

The Company's financial results and condition for the quarter ended September 30, 2012 included the following:

Net interest income for the third quarter of 2012 was $55.6 million, compared to $48.2 million for the corresponding period in 2011. The $7.4 million increase in net interest income for 2012, compared to 2011, was due to a decrease of $5.7 million in total interest expense, combined with an increase in total interest income of $1.6 million.

The provision for loan and lease losses for the quarter ended September 30, 2012 was $34.4 million, a decrease of $7.3 million compared to the $41.7 million provision for the corresponding 2011 period. The provision for loan and lease losses in the third quarter of 2012 resulted primarily from commercial real estate, commercial and industrial, and the residential mortgage portfolios, particularly related to Puerto Rico loan exposures. The lower provision for the third quarter of 2012 compared to the same period of 2011 resulted from less deterioration in credit quality and collateral values in the residential mortgage and construction and land portfolios.

Non-interest income for the third quarter of 2012 was $20.6 million, a decrease of $8.9 million compared to non-interest income of $29.5 million for the corresponding 2011 period. The decrease in non-interest income for the third quarter of 2012, compared to the same period in 2011, resulted largely from lower gains on sales of securities of $6.9 million, an increase of $4.9 million in loss on trading derivatives and a decrease of $2.7 million in loan servicing income, primarily due to the effect of declining interest rates on the valuation of the related assets in 2012, partially offset by an increase in net gain on loans securitized and sold and capitalization of mortgage servicing rights of $3.5 million.

Non-interest expense for the third quarter of 2012 was $73.8 million, compared to $63.8 million for the corresponding period in 2011. The $10.0 million increase in non-interest expense for the third quarter of 2012 compared to the same period in 2011, was due largely to increases in compensation and benefits of $1.7 million, an increase in professional services of $1.7 million, an increase of $1.4 million in FDIC insurance, an increase of $1.5 million in electronic data processing expenses and an increase of $4.4 million in other real estate owned expenses.

Net loss attributable to common shareholders for the third quarter of 2012 totaled $35.0 million, or $0.27 per common share, compared to net loss attributable to common shareholders for the corresponding 2011 period of $32.6 million, or $0.26 per common share.

Income tax expense was $0.5 million for the third quarter of 2012, compared to income tax expense of $2.3 million for the corresponding period in 2011. The positive variance in taxes resulted from the tax effects of merging Doral Bank FSB with Doral Bank PR, as well as the selection of the 2011 tax code for one of the Puerto Rico entities.

Doral Financial's loan production for the third quarter of 2012 was $771.1 million, compared to $445.6 million for the comparable 2011 period, an increase of approximately 73%. Major components of the increase include $120.1 million in additional mortgage loans originated for sale in Puerto Rico and $81.7 million in additional commercial lending in the U.S.


Table of Contents
Assets as of September 30, 2012 totaled $8.4 billion compared to $8.0 billion as of December 31, 2011, an increase of $395.4 million primarily due to an increase in net loans of $326.3 million and to the establishment of the prepaid tax asset and release of the related deferred tax asset reserve pursuant to the first quarter of 2012 agreement with the government of Puerto Rico, partially offset by a decrease of $20.7 million in total investment securities.

Total deposits of $4.6 billion increased $219.7 million, or 5%, from deposits of $4.4 billion as of December 31, 2011.

Non-performing loans, excluding FHA/VA loans guaranteed by the US government, as of September 30, 2012 were $733.6 million, an increase of $164.0 million from December 31, 2011. The increase in NPLs during the third quarter of 2012 resulted largely from the classification of certain performing residential mortgage and commercial real estate TDR loans as non-performing loans pursuant to Doral's adoption of a more conservative stance on future loan performance reflective of the uncertain current economic and regulatory environments.


Table of Contents

Table A

Selected Financial Data



                                                                     Quarters ended                         Nine months ended
                                                                      September 30,                           September 30,
(In thousands, except for share data)                           2012                2011                2012                2011
Selected Income Statement Data:
Interest income                                             $      91,719       $      90,109       $     274,179       $     275,217
Interest expense                                                   36,122              41,862             112,388             138,345

Net interest income                                                55,597              48,247             161,791             136,872
Provision for loan and lease losses                                34,413              41,698             154,803              57,612

Net interest income after provision for loan and lease
losses                                                             21,184               6,549               6,988              79,260
Non-interest income                                                20,617              29,471              58,067              96,429
Non-interest expenses                                              73,798              63,836             207,899             187,737

Loss before income taxes                                          (31,997 )           (27,816 )          (142,844 )           (12,048 )
Income tax expense (benefit)                                          549               2,339            (111,290 )            10,307

Net loss                                                    $     (32,546 )     $     (30,155 )     $     (31,554 )     $     (22,355 )

Net loss attributable to common shareholders                $     (34,961 )     $     (32,570 )     $     (38,799 )     $     (29,600 )

Net loss per common share(1)                                $       (0.27 )     $       (0.26 )     $       (0.30 )     $       (0.23 )


Accrued dividends, preferred stock                          $       2,415       $       2,415       $       7,245       $       7,245
Book value per common share                                 $        3.57       $        3.75       $        3.57       $        3.75
Preferred shares outstanding at end of period                   5,811,391           5,811,391           5,811,391           5,811,391
Weighted average common shares outstanding                    128,460,423         127,293,756         128,437,917         127,293,756
Common shares outstanding at end of period                    128,460,423         127,293,756         128,460,423         127,293,756

Selected Balance Sheet Data at Period End:
Cash and cash equivalents                                   $     481,592       $     479,418       $     481,592       $     479,418
Total investment securities                                       576,934             789,649             576,934             789,649
Total loans, net(2)                                             6,464,993           5,992,707           6,464,993           5,992,707
Allowance for loan and lease losses                               145,773             118,079             145,773             118,079
Servicing assets, net                                             104,036             112,704             104,036             112,704
Total assets                                                    8,370,576           8,014,458           8,370,576           8,014,458
Deposits                                                        4,614,438           4,337,139           4,614,438           4,337,139
Total borrowings                                                2,617,874           2,585,792           2,617,874           2,585,792
Total liabilities                                               7,559,585           7,185,146           7,559,585           7,185,146
. . .
  Add DRL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DRL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.