Doral Financial Corporation Reports Financial Results for the Quarter Ended December 31, 2011

Reports Net Income of $11.7 Million for the Quarter; Continues to Exceed Well Capitalized Benchmarks

Marketwired

SAN JUAN, PR--(Marketwire -01/19/12)- Doral Financial Corporation (NYSE: DRL - News) ("Doral," "Doral Financial" or the "Company"), the holding company of Doral Bank, with operations in Puerto Rico and the U.S., reported net income of $11.7 million for the quarter ended December 31, 2011, compared to a net loss of $30.2 million for the quarter ended September 30, 2011 and a net loss of $36.1 million for the quarter ended December 31, 2010.

For the year ended December 31, 2011, Doral reported a net loss of $10.7 million compared to a net loss of $291.9 million for the same period of 2010.

"Over the past year, Doral increased margins, reduced non-performing assets and lowered expenses, resulting in an increase in annualized earnings power of more than $100 million. As we report solid fourth quarter profits, we enter 2012 in a position to build on our success," said Glen Wakeman, CEO and President of Doral Financial Corporation.

Fourth Quarter Highlights:

  • Increased net interest income $1.1 million from $48.3 million in the third quarter of 2011 to $49.4 million in the fourth quarter of 2011; net interest income increased $11.8 million compared to the fourth quarter of 2010.

  • Increased net interest margin by 7 basis points from 2.60% in the third quarter of 2011 to 2.67% in the fourth quarter of 2011.

  • Grew total net loans from the third quarter of 2011 by $145.9 million largely through growth in U.S. commercial loans.

  • Decreased the provision for loan losses by $31.8 million from the third quarter of 2011.

  • Increased retail deposits by $53.9 million in the fourth quarter of 2011 while reducing total deposits rates by 16 basis points compared to the third quarter of 2011.

  • Improved income taxes as the Company recorded an $8.6 million income tax benefit mainly due to the release of the deferred tax assets reserves due to the profitability of the mortgage subsidiary.

  • Reporting Tier 1 leverage ratio of 9.13%.

Conference Call

Doral will be hosting an earnings call for interested parties at 10:00 a.m. ET Friday, January 20, 2012.

Call-in information is:
U.S. Participant Dial-In Number: (800) 288-8967
International Participant Dial-In Number: (612) 332-0335
Conference identification number: 233992

Digital replay:
U.S. Dial-In Number: (800) 475-6701
International Dial-In Number: (320) 365-3844
Conference identification number: 233992

FINANCIAL HIGHLIGHTS

  • Net income for the quarter ended December 31, 2011 totaled $11.7 million, compared to a net loss of $30.2 million for the third quarter of 2011 and a net loss of $36.1 million for the quarter ended December 31, 2010. Net loss for the year ended December 31, 2011 totaled $10.7 million, compared to a net loss of $291.9 million for the same period in 2010.

  • The Company reported net income attributable to common shareholders of $9.2 million and income per common share of $0.07 for the fourth quarter of 2011 compared to net loss attributable to common shareholders of $32.6 million and loss per common share of $0.26 for the third quarter of 2011, and net loss attributable to common shareholders and loss per share of $38.5 million and $0.30, respectively, for the fourth quarter of 2010. The Company reported net loss attributable to common shareholders and loss per share of $20.4 million and $0.16, respectively, for the year ended December 31, 2011 compared to a net loss of $274.4 million and loss per share of $2.96, respectively, for the same period in 2010.

  • Net interest income for the fourth quarter of 2011 was $49.4 million, an increase of $1.1 million compared to the third quarter of 2011, and an increase of $11.8 million when compared to the fourth quarter of 2010. Net interest margin for the fourth quarter of 2011 increased 7 basis points to 2.67%, compared to 2.60% for the third quarter of 2011. The improvement in net interest income of $1.1 million was driven by a decrease in interest expense of $1.5 million, which was partially offset by a decrease in interest income of $0.4 million. The decrease in interest expense was mainly due to: (i) a decrease of $1.6 million on interest expense on deposits as the Company has decreased the volume of higher cost brokered certificates of deposits with lower cost brokered money market deposits and (ii) lower interest rates on retail deposit product offerings. This decrease in interest expense was partially offset by a decrease in interest income, resulting from the $1.4 million decrease in interest income from mortgage backed securities as the average balance of the MBS portfolio decreased, partially offset by an increase in interest income on loans of $1.3 million due to the continued increase in commercial loans in the US.

  • Provision for loan and lease losses for the fourth quarter of 2011 was $9.9 million, a decrease of $31.8 million over the third quarter 2011 provision, and a decrease of $11.2 million from the provision recorded in the fourth quarter of 2010. The $9.9 million provision for loan and lease losses in the fourth quarter of 2011 resulted from provisions to recognize increased delinquencies of $3.9 million, updated valuations of existing impaired loans of $4.7 million, $1.1 million due to modeling assumptions, and $0.3 million due to growth in the U.S. portfolio.

  • Non-interest income for the fourth quarter of 2011 of $25.3 million reflects a decrease of $4.3 million and $2.5 million compared to non-interest income of $29.6 million for the third quarter of 2011 and $27.8 million for the fourth quarter of 2010, respectively. The decrease in non-interest income when compared to the third quarter of 2011 was largely due to a decrease of $8.1 million in net gains on sales of investment securities available for sale as the Company had a significantly lower volume of sales during the fourth quarter of 2011 when compared to the third quarter of 2011, partially offset by a $3.6 million increase in insurance agency commissions as the insurance agency subsidiary earned $3.2 million during the fourth quarter of 2011 from the annual profit sharing distributions from the insurance carriers.

  • Non-interest expense for the fourth quarter of 2011 of $61.7 million decreased $2.3 million and $14.7 million for the quarters ended September 30, 2011 and December 31, 2010, respectively. The expense decrease in the fourth quarter of 2011 compared to the third quarter of 2011 was mainly driven by a decrease of $2.2 million in foreclosure expenses as short sales volume declined during the fourth quarter of 2011 and the Company recovered approximately $0.7 million in recoverable foreclosure expenses incurred on residential mortgages serviced for others that had been previously expensed.

  • Income tax benefit for the fourth quarter of 2011 of $8.6 million improved $10.9 million and $12.6 million compared with income tax expense of $2.3 million and $4.0 million in the third quarter of 2011 and the fourth quarter of 2010, respectively. The income tax benefit was mainly due to the release of deferred tax assets reserves due to profitability of the mortgage subsidiary.

  • Doral's loan production for the fourth quarter of 2011 was $446.6 million, a decrease of $25.5 million compared to $472.1 million for the third quarter of 2011, and an increase of $21.2 million from $425.4 million for the fourth quarter of 2010. The U.S. commercial non-real estate loan production represents 50.2% of the loan production for the fourth quarter of 2011.

  • Doral reported total assets as of December 31, 2011 of $8.0 billion compared to $8.6 billion as of December 31, 2010. The decrease is mainly due to the sale of $1.4 billion of mortgage backed securities in 2011 and amortization and prepayments of $286.9 million, partially offset by purchases of securities of approximately $905.4 million as well as a net growth in loans of $354.5 million. The net sales of mortgage backed securities were conducted pursuant to the Company's strategy to substitute lower yielding securities with higher yielding loans.

  • Total deposits of $4.4 billion as of December 31, 2011, decreased $241.7 million, or 6.0%, from deposits of $4.6 billion as of December 31, 2010. The Company's brokered deposits decreased $219.3 million while retail deposits decreased $22.4 million. This significant decrease in brokered deposits is the result of the Company's strategy to reduce interest expense by reducing high cost brokered deposits.

  • Non-performing loans ("NPLs"), excluding FHA/VA loans guaranteed by the U.S. government, as of December 31, 2011 were $580.8 million, an increase of $10.6 million from September 30, 2011 and a decrease of $46.6 million when compared to December 31, 2010. The increase in NPLs during the fourth quarter of 2011 was mainly related to residential mortgage loans and commercial real estate loans.

  • Fourth quarter 2011 charge-offs totaled $15.3 million compared to the third quarter 2011 charge-offs of $17.7 million and fourth quarter 2010 charge-offs of $17.3 million. Doral's charge-off policy is to reduce the reported balance of a collateral dependent loan (a loan is collateral dependent when the liquidation of collateral is considered the likely source of repayment of a delinquent loan) by a charge to the allowance for loan and lease losses upon receipt of (i) a current market appraised value, or (ii) the portion of the difference considered uncollectible between (a) the loan balance before charge-off and (b) an internally generated estimate of the property value collateralizing the loan's fair value.

  • The Company's capital ratios continue to exceed the well-capitalized standards established by the federal banking agencies with ratios of Tier 1 Leverage of 9.13%, Tier 1 Risk-based Capital of 12.15% and Total Risk-based Capital of 13.43%. The Leverage, Tier 1 and Total Risk-based Capital Ratios exceeded the well-capitalized standards by $326.3 million, $365.2 million and $203.5 million, respectively.
 

Selected Financial Data
                                                Quarters ended
                                  -----------------------------------------
(In thousands, except for share   December 31,  September 30,  December 31,
 data)                                2011           2011          2010
                                  ------------  -------------  ------------
Selected Income Statement Data:
  Interest income                 $     89,738  $      90,109  $     92,333
  Interest expense                      40,377         41,862        54,726
                                  ------------  -------------  ------------
  Net interest income                   49,361         48,247        37,607
  Provision for loan and lease
   losses                                9,914         41,698        21,102
                                  ------------  -------------  ------------
  Net interest income after
   provision for loan and lease
   losses                               39,447          6,549        16,505
  Non-interest income (loss)            25,338         29,627        27,820
  Non-interest expenses                 61,720         63,992        76,422
                                  ------------  -------------  ------------
  Income (loss) before income
   taxes                                 3,065        (27,816)      (32,097)
  Income tax (benefit) expense          (8,599)         2,339         3,971
                                  ------------  -------------  ------------
  Net income (loss)               $     11,664  $     (30,155) $    (36,068)
                                  ============  =============  ============
  Net income (loss) attributable
   to common shareholders(1)      $      9,249  $     (32,570) $    (38,483)
                                  ============  =============  ============
  Net income (loss) per common
   share(2)                       $       0.07  $       (0.26) $      (0.30)
                                  ============  =============  ============

Accrued dividends, preferred
 stock                            $      2,415  $       2,415  $      2,415
Preferred stock exchange premium,
 net                              $          -  $           -  $          -
Book value per common share       $       3.80  $        3.75  $       4.01
Preferred shares outstanding at
 end of period                       5,811,391      5,811,391     5,811,391
Weighted average common shares
 outstanding                       127,403,734    127,293,756    92,657,003
Common shares outstanding at end
 of period                         128,295,756    127,293,756   127,293,756

Selected Balance Sheet Data at
 Period End:
  Total investment securities(3)  $    597,652  $     715,219  $  1,550,094
  Total loans, net(4)                6,138,645      5,992,707     5,784,188
  Allowance for loan and lease
   losses ("ALLL")                     112,745        118,079       123,652
  Servicing assets, net                112,303        112,704       114,342
  Total assets                       7,975,165      8,014,458     8,646,354
  Deposits                           4,394,716      4,349,476     4,636,418
  Total borrowings                   2,476,554      2,585,792     2,896,213
  Total liabilities                  7,135,011      7,185,146     7,784,159
  Preferred equity                     352,082        352,082       352,082
  Common equity                        488,072        477,230       510,113
  Total stockholders' equity           840,154        829,312       862,195

Selected Average Balance Sheet
 Data for Period End: (5)
  Total investment securities     $    696,724  $     764,356  $  1,498,631
  Total loans(4)                     6,193,359      6,036,775     5,916,549
  Total interest-earning assets      7,337,641      7,373,540     8,054,794
  Total assets                       8,019,960      8,084,749     8,794,612
  Total deposits                     4,075,480      4,066,315     4,404,163
  Total borrowings                   2,514,450      2,589,762     2,937,105
  Total interest-bearing
   liabilities                       6,589,930      6,656,077     7,341,268
  Preferred equity                     352,082        352,082       352,082
  Common equity                        480,239        512,223       548,148
  Total stockholders' equity           832,321        864,305       900,230

Operating Data:
  Loan production                 $    446,624  $     472,068  $    425,362
  Loan servicing portfolio (6)       7,898,328      7,961,774     8,208,060





Selected Financial Data
                                          Year ended
                                  --------------------------
(In thousands, except for share   December 31,  December 31,
 data)                                2011          2010
                                  ------------  ------------
Selected Income Statement Data:
  Interest income                 $    364,955  $    401,521
  Interest expense                     178,722       240,917
                                  ------------  ------------
  Net interest income                  186,233       160,604
  Provision for loan and lease
   losses                               67,525        98,975
                                  ------------  ------------
  Net interest income after
   provision for loan and lease
   losses                              118,708        61,629
  Non-interest income (loss)           122,386       (14,076)
  Non-interest expenses                250,077       324,564
                                  ------------  ------------
  Income (loss) before income
   taxes                                (8,983)     (277,011)
  Income tax (benefit) expense           1,707        14,883
                                  ------------  ------------
  Net income (loss)               $    (10,690) $   (291,894)
                                  ============  ============
  Net income (loss) attributable
   to common shareholders(1)      $    (20,350) $   (274,418)
                                  ============  ============
  Net income (loss) per common
   share(2)                       $      (0.16) $      (2.96)
                                  ============  ============

Accrued dividends, preferred
 stock                            $      9,661  $      9,109
Preferred stock exchange premium,
 net                              $          -  $     26,585
Book value per common share       $       3.80  $       4.01
Preferred shares outstanding at
 end of period                       5,811,391     5,811,391
Weighted average common shares
 outstanding                       127,321,477    92,657,003
Common shares outstanding at end
 of period                         128,295,756   127,293,756

Selected Balance Sheet Data at
 Period End:
  Total investment securities(3)  $    597,652  $  1,550,094
  Total loans, net(4)                6,138,645     5,784,188
  Allowance for loan and lease
   losses ("ALLL")                     112,745       123,652
  Servicing assets, net                112,303       114,342
  Total assets                       7,975,165     8,646,354
  Deposits                           4,394,716     4,636,418
  Total borrowings                   2,476,554     2,896,213
  Total liabilities                  7,135,011     7,784,159
  Preferred equity                     352,082       352,082
  Common equity                        488,072       510,113
  Total stockholders' equity           840,154       862,195

Selected Average Balance Sheet
 Data for Period End: (5)
  Total investment securities     $  1,073,718  $  2,215,613
  Total loans(4)                     5,993,411     5,894,546
  Total interest-earning assets      7,567,062     8,765,849
  Total assets                       8,254,484     9,477,943
  Total deposits                     4,146,938     4,705,846
  Total borrowings                   2,690,705     3,534,294
  Total interest-bearing
   liabilities                       6,837,643     7,990,149
  Preferred equity                     352,082       410,616
  Common equity                        505,369       508,137
  Total stockholders' equity           857,451       918,753

Operating Data:
  Loan production                 $  1,763,792  $  1,439,333
  Loan servicing portfolio (6)       7,898,328     8,208,060



Selected Financial
 Data
                               Quarters ended               Year ended
                      -------------------------------  --------------------
(In thousands, except  December  September   December   December   December
 for share data)       31, 2011   30, 2011   31, 2010   31, 2011   31, 2010
                      ---------  ---------  ---------  ---------  ---------
Selected Financial
 Ratios:
  Performance:
    Net interest
     margin                2.67%      2.60%      1.85%      2.46%      1.83%
    Return on average
     assets                0.58%    (1.48)%    (1.63)%    (0.13)%    (3.08)%
    Return on average
     common equity         7.64%   (25.23)%   (27.85)%    (4.03)%   (59.24)%
    Efficiency ratio      82.04%     88.77%    123.63%     87.85%    119.73%
  Capital:
    Leverage ratio         9.13%      8.98%      8.56%      9.13%      8.56%
    Tier 1 risk-based
     capital ratio        12.15%     12.47%     13.25%     12.15%     13.25%
    Total risk-based
     capital ratio        13.43%     13.74%     14.51%     13.43%     14.51%
  Asset quality:
    Non-performing
     loans            $ 580,806  $ 570,161  $ 627,435  $ 580,806  $ 627,435
    Non-performing
     assets             766,981    740,981    852,780    766,981    852,780
    Total NPAs as a
     percentage of
     the loan
     portfolio, net
     (excluding GNMA
     defaulted loans)
     and OREO             12.59%     12.48%     14.88%     12.59%     14.88%
    Total NPAs as a
     percentage of
     consolidated
     total assets          9.62%      9.25%      9.86%      9.62%      9.86%
    Total NPLs
     (excluding
     FHA/VA
     guaranteed
     loans) to total
     loans (excluding
     GNMA defaulted
     loans and FHA/VA
     guaranteed
     loans)               10.01%     10.06%     11.63%     10.01%     11.63%
    ALLL to period-
     end loans
     receivable
     (excluding
     FHA/VA
     guaranteed loans
     and loan on
     savings
     deposits)             1.93%      2.08%      2.29%      1.93%      2.29%
    ALLL plus partial
     charge-offs and
     discounts to
     loans receivable
     (excluding
     FHA/VA
     guaranteed loans
     and loans on
     savings
     deposits)             4.50%      4.67%      4.02%      4.50%      4.02%
    ALLL to total
     NPLs, (excluding
     FHA/VA and loans
     held for sale)
     at end of period     19.48%     20.79%     19.79%     19.48%     19.79%
    ALLL plus partial
     charge-offs and
     discounts to
     non-performing
     loans (excluding
     NPLs held for
     sale)                31.98%     33.77%     32.36%     31.98%     32.36%
    ALLL to net
     charge-offs on
     an annualized
     basis               186.37%    174.14%    186.48%    143.75%    106.51%
    Provision for
     loan and lease
     losses to net
     charge-offs          65.02%    243.98%    126.26%     86.09%     85.25%
    Annualized net
     charge-off's to
     average loan
     receivable
     outstanding           1.02%      1.18%      1.18%      1.38%      2.07%
    Recoveries to
     charge-offs           1.98%      3.17%      3.31%      2.06%      1.54%
  Other ratios:
    Average common
     equity to
     average assets        6.02%      6.34%      6.23%      6.13%      5.36%
    Average total
     equity to
     average assets       10.43%     10.69%     10.24%     10.40%      9.69%
    Tier 1 common
     equity to risk-
     weighted assets       6.22%      6.34%      6.95%      6.22%      6.95%

(1) For the year ended December 31, 2010, includes $26.6 million related to
    the net effect of the conversion of preferred stock during the period
    indicated.
(2) For the quarters ended December 31, 2011, September 30, 2011 and
    December 31, 2010 and the year ended December 31, 2011 and 2010, net
    income (loss) per common share represents the basic and diluted income
    (loss) per common share.
(3) Excludes the FHLB stock, at cost amounting to $69.7 million, $74.4
    million and $78.1 million as of December 31, 2011, September 30, 2011
    and December 31, 2010, 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 and $4.4 billion of mortgage loans
    owned by Doral Financial at December 31, 2011, September 30, 2011 and
    December 31, 2010, respectively.



FOURTH QUARTER PERFORMANCE DISCUSSION

Income Statement

Net Interest Income

 

                               Quarters ended               Year ended
                      -------------------------------  --------------------
(Dollars in            December  September   December   December   December
 thousands)            31, 2011   30, 2011   31, 2010   31, 2011   31, 2010
                      ---------  ---------  ---------  ---------  ---------
  Interest Income
    Loans             $  83,292  $  81,962  $  78,709  $ 324,557  $ 318,576
    Mortgage-backed
     securities and
     investment
     securities           4,098      5,457     10,208     30,061     69,785
    Other                 2,348      2,690      3,416     10,337     13,160
                      ---------  ---------  ---------  ---------  ---------
    Total                89,738     90,109     92,333    364,955    401,521

    Interest Expense
    Deposits             18,609     20,235     27,631     88,286    110,838
    Securities sold
     under agreement      2,880      2,881      9,520     21,119     52,654
    Advances from
     FHLB                10,852     10,847      9,300     37,129     47,155
    Notes payable         6,535      6,476      6,622     26,224     23,513
    Loans payable         1,501      1,423      1,653      5,964      6,757
                      ---------  ---------  ---------  ---------  ---------
    Total                40,377     41,862     54,726    178,722    240,917
                      ---------  ---------  ---------  ---------  ---------

  Net Interest Income $  49,361  $  48,247  $  37,607  $ 186,233  $ 160,604
                      =========  =========  =========  =========  =========

Interest rate spread       2.42%      2.35%      1.59%      2.21%      1.56%
Interest rate margin       2.67%      2.60%      1.85%      2.46%      1.83%

Fourth quarter 2011 vs. Third quarter 2011 -- Net interest margin increased 7 basis points to 2.67%, compared to 2.60% for the third quarter of 2011 due to an improvement in net interest income of $1.1 million driven by a decrease in interest expense of $1.5 million and partially offset by a decrease in interest income of $0.4 million. The reduction in interest expense was mainly due to a decrease of $1.6 million on interest expense on deposits as the Company has decreased the volume of higher cost brokered certificates of deposits with lower cost brokered money market deposits and lower interest rates on its retail deposit product offerings. These decreases in interest expense were partially offset by a decrease in interest income, resulting from a $1.4 million reduction in interest income from mortgage backed securities due to the decrease in average balance of the MBS portfolio of $31.7 million, partially offset by an increase in interest income on loans of $1.3 million due to the continued growth in commercial loans in the US.

Fourth quarter 2011 vs. Fourth quarter 2010 -- Net interest margin for the fourth quarter of 2011 increased 82 basis points to 2.67% from 1.85% for the quarter of December 31, 2010. The increase of $11.8 million in net interest income was due to a decrease in interest expense of $14.3 million partially offset by a decrease in interest income of $2.6 million. The decrease in interest expense is attributed to reductions of $6.6 million in interest expense on securities sold under agreements to repurchase and of $9.0 million in interest expense on deposits. Interest expense on securities sold under agreements to repurchase declined as the outstanding balance of securities sold under agreements to repurchase declined $734.5 million as Doral delivered. Deposits expense decreased as longer term high cost deposits renewed for like terms at lower rates, and also due to Doral's aggressive lowering of deposit rates in 2011. The decrease in interest income was driven by a decrease in interest income on mortgage backed securities of $6.1 million from the sale of securities, partially offset by an increase of $4.6 million in interest on loans related to the growth of the U.S. commercial loans portfolio.

Year Ended December 31, 2011 vs. Year Ended December 31, 2010 -- Net interest margin increased 63 basis points to 2.46% for the year ended December 31, 2011, compared to 1.83% for the same period in 2010. An increase of $25.6 million in net interest income was driven by a decrease in interest expense of $62.2 million and partially offset by a decrease in interest income of $36.6 million. The reduction in interest expense was mainly due to (i) a decrease in interest paid on securities sold under agreements to repurchase of $31.5 million due to the strategic restructuring of Doral's FHLB borrowings during first and second quarter of 2011 to increase term to maturity and reduce rates, (ii) a decrease of $22.6 million in interest on deposits as the brokered deposits portfolio continued to decrease in size and interest rate as well as a reduction in interest rates of other interest bearing deposits, and (iii) a decrease of $10.0 million in interest on advances from FHLB. These decreases were partially offset by an increase in interest expense on notes payable of $2.7 million related to the $250.0 million debt issued under the CLO in July 2010. The decrease in interest income resulted mainly from a decrease in interest on mortgage backed securities of $39.7 million as Doral sold $1.4 billion of securities during 2011.

Credit Quality and the Allowance for Loan and Lease Losses

Doral's loans receivable are subject to credit risk. Doral's loan portfolio consists mostly of residential mortgage loans related to Puerto Rico real estate, commercial real estate, and construction and land, and U.S. commercial loans and commercial real estate.

The following table summarizes the changes in the ALLL for the periods indicated:

 

                               Quarters ended               Year ended
                      -------------------------------  --------------------
                       December  September   December   December   December
(In thousands)         31, 2011   30, 2011   31, 2010   31, 2011   31, 2010
                      ---------  ---------  ---------  ---------  ---------
Balance at beginning
 of period            $ 118,079  $  93,472  $ 119,263  $ 123,652  $ 140,774
Provision for loan
 and lease losses         9,914     41,698     21,102     67,525     98,975
Losses charged to the
 ALLL                   (15,558)   (17,651)   (17,285)   (80,083)  (117,916)
Recoveries                  310        560        572      1,651      1,819
                      ---------  ---------  ---------  ---------  ---------
Balance at end of
 period               $ 112,745  $ 118,079  $ 123,652  $ 112,745  $ 123,652
                      =========  =========  =========  =========  =========

Recoveries to charge-
 offs                      1.98%      3.17%      3.31%      2.06%      1.54%
Annualized net
 charge-offs to
 average loans             1.02%      1.18%      1.18%      1.38%      2.07%
Provision to net
 charge-offs              65.02%    243.98%   126.26%%     86.09%     85.25%

Historically, Doral reduced the reported balance of collateral dependent commercial, construction and land loans (a loan is collateral dependent when the loan collateral is considered the likely source of repayment of a delinquent loan) by recording a charge-off to the ALLL upon receipt of a current market appraised value. Beginning in the second quarter of 2011, Doral began charging off the portion of the difference between the loan balance before the charge-off and an internally generated estimate of fair value of the property collateralizing the loans considered uncollectible. The practice adopted in 2011 has accelerated the recognition of loss due to collateral value deterioration.

The following table summarizes key credit quality information for the periods indicated:

 

                    ALLL plus partial charge-offs, credit related discounts
                               and deferred fees, net as a % of:
                   ---------------------------------------------------------
                          Loans(1)(2)(5)       Non-performing Loans(1)(3)(4)
                   --------------------------- -----------------------------
                   December September December  December September  December
                   31, 2011  30, 2011 31, 2010  31, 2011  30, 2011  31, 2010
                   -------- --------- -------- --------- --------- ---------
Consumer:
  Residential
   mortgage           3.78%     3.71%    3.14%    27.25%    29.94%    37.28%
  Other consumer     13.71%    12.00%   11.26% 1,338.29% 1,025.91% 1,436.08%
                   -------- --------- -------- --------- --------- ---------
    Total consumer    3.90%     3.68%    3.28%    28.76%    31.41%    39.38%

Lease financing
 receivable           2.28%     1.49%   11.96%   351.16%    67.20%   139.14%

Commercial:
  Commercial real
   estate             5.95%     7.33%    6.32%    23.20%    24.49%    23.89%
  Commercial and
   industrial         0.79%     0.87%    1.15%   349.80%   259.29%   289.63%
  Construction and
   land              16.84%    17.84%    9.37%    45.59%    44.25%    26.91%
                   -------- --------- -------- --------- --------- ---------
    Total
     commercial       5.32%     6.30%    5.37%    34.91%    35.83%    26.96%
                   -------- --------- -------- --------- --------- ---------
Total                 4.50%     4.67%    4.02%    31.98%    33.77%    32.36%
                   ======== ========= ======== ========= ========= =========

(1) Loan receivable and NPL amounts are increased by the amount of partial
    charge-offs and discounts.
(2) Reflects partial charge-offs, credit related discounts and deferred
    fees, net on loans receivable of $63.8 million, $56.5 million, $54.2
    million in the residential mortgage portfolio; $35.8 million, $32.8
    million and $21.1 million in commercial real estate; and $53.3 million,
    $62.7 million and $19.8 million in construction and land portfolios as
    of December 31, 2011, September 30, 2011 and December 31, 2010,
    respectively.
(3) Reflects partial charge-offs, credit related discounts and deferred
    fees, net on non-performing loans of $25.1 million, $23.4 million and
    $17.7 million in the residential mortgage portfolio; $31.0 million,
    $27.9 million and $19.6 million in commercial real estate; and $49.6
    million, $58.9 million and $17.8 million in construction and land
    portfolios as of December 31, 2011, September 30, 2011 and December 31,
    2010, respectively.
(4) Excludes $2.0 million, $2.2 million, $2.7 million of non-performing
    loans classified as held for sale as of December 31, 2011, September 30,
    2011 and December 31, 2010, respectively.
(5) Excludes $95.1 million, $113.9 million and $187.5 million of FHA/VA
    guaranteed loans and $1.5 million, $1.9 million and $2.9 million of
    loans on saving deposits as of December 31, 2011, September 30, 2011 and
    December 31, 2010, respectively.



The loans receivable gross portfolio increased $136.5 million, or 2.4%, while NPLs increased $10.6 million, or 1.9% and the ALLL decreased $5.3 million or 4.5% as of December 31, 2011 compared to September 30, 2011, respectively. Accordingly, the loans receivable and NPL modified coverage ratios (ALLL plus partial charge-offs and discounts as a percentage of loans receivable and NPLs, respectively) decreased 17 basis points and 179 basis points, respectively, over the same periods.

During the past several years, Doral has made significant strides in reducing its credit risk by discontinuing new construction lending in Puerto Rico in 2007, new commercial real estate and commercial and industrial lending in Puerto Rico in 2008, and significantly tightening its residential underwriting standards in 2009. As the loan portfolio seasons, the problem loans emerge and are addressed while performing loans require less provision. In 2010, Doral sold $139.0 million in unpaid principal balance of construction loans, further reducing its credit exposure. As the Company is able to improve its asset quality, it reduces its costs to reserve, maintain and sell low quality assets.

Provision and Allowance for Loan and Lease Losses

The following tables summarize the effect of provisions and net charge-offs on the allowance for loan and lease losses by portfolio for the periods indicated:

 

                                              Quarters Ended
                              ---------------------------------------------
                                            December 31, 2011
                              ---------------------------------------------
                                                          Net
                               Beginning    Provision   Charge-     Ending
(In thousands)                  Balance    (Recovery)     offs     Balance
                              ----------- ------------ ---------  ---------
Residential mortgage          $    70,747 $      3,058 $  (8,912) $  64,893
Other consumer                      4,780        1,084    (1,056)     4,808
Lease financing receivable             69           61        21        151
Commercial real estate             18,965          260    (2,705)    16,520
Commercial and industrial           8,052          799      (223)     8,628
Construction and land              15,466        4,652    (2,373)    17,745
                              ----------- ------------ ---------  ---------
  Total                       $   118,079 $      9,914 $ (15,248) $ 112,745
                              =========== ============ =========  =========


                                              Quarters Ended
                             -----------------------------------------------
                                            September 30, 2011
                              ----------------------------------------------
                                                           Net
                               Beginning    Provision    Charge-     Ending
(In thousands)                  Balance    (Recovery)      offs     Balance
                              ----------- ------------  ---------  ---------
Residential mortgage          $    54,976 $     22,331  $  (6,560) $  70,747
Other consumer                      5,212        1,134     (1,566)     4,780
Lease financing receivable            335         (310)        44         69
Commercial real estate             15,752        6,785     (3,572)    18,965
Commercial and industrial           6,046        2,059        (53)     8,052
Construction and land              11,151        9,699     (5,384)    15,466
                              ----------- ------------  ---------  ---------
  Total                       $    93,472 $     41,698  $ (17,091) $ 118,079
                              =========== ============  =========  =========


                                              Quarters Ended
                             -----------------------------------------------
                                             December 31, 2010
                              ----------------------------------------------
                                                           Net
                               Beginning    Provision    Charge-     Ending
(In thousands)                  Balance    (Recovery)      offs     Balance
                              ----------- ------------  ---------  ---------
Residential mortgage          $    57,367 $      6,156  $  (7,249) $  56,274
Other consumer                      6,416        1,109     (1,769)     5,756
Lease financing receivable          1,044         (577)        51        518
Commercial real estate             23,832        6,123        (30)    29,925
Commercial and industrial           4,866        1,509       (222)     6,153
Construction and land              25,738        6,782     (7,494)    25,026
                              ----------- ------------  ---------  ---------
  Total                       $   119,263 $     21,102  $ (16,713) $ 123,652
                              =========== ============  =========  =========

                                                Year ended
                              ----------------------------------------------
                                             December 31, 2011
                              ----------------------------------------------
                                                           Net
                               Beginning    Provision    Charge-     Ending
(In thousands)                  Balance    (Recovery)      offs     Balance
                              ----------- ------------  ---------  ---------
Residential mortgage          $    56,274 $     31,589  $ (22,970) $  64,893
Other consumer                      5,756        3,991     (4,939)     4,808
Lease financing receivable            518         (679)       312        151
Commercial real estate             29,925        5,697    (19,102)    16,520
Commercial and industrial           6,153        3,090       (615)     8,628
Construction and land              25,026       23,837    (31,118)    17,745
                              ----------- ------------  ---------  ---------
  Total                       $   123,652 $     67,525  $ (78,432) $ 112,745
                              =========== ============  =========  =========



                                               Year ended
                             ----------------------------------------------
                                            December 31, 2010
                              ---------------------------------------------
                                                          Net
                               Beginning    Provision   Charge-     Ending
(In thousands)                  Balance    (Recovery)     offs     Balance
                              ----------- ------------ ---------  ---------
Residential mortgage          $    51,743 $     35,388 $ (30,857) $  56,274
Other consumer                      6,955        6,651    (7,850)     5,756
Lease financing receivable          1,383          251    (1,116)       518
Commercial real estate             21,954       25,043   (17,072)    29,925
Commercial and industrial           4,281        5,139    (3,267)     6,153
Construction and land              54,458       26,503   (55,935)    25,026
                              ----------- ------------ ---------  ---------
  Total                       $   140,774 $     98,975 $(116,097) $ 123,652
                              =========== ============ =========  =========

The ALLL decreased $5.3 million compared to September 30, 2011 due to a $9.9 million provision, offset by net charge-offs of previously reserved loans of $15.2 million. The $9.9 million provision for loan and lease losses in the fourth quarter of 2011 resulted from provisions to recognize increased delinquencies of $3.9 million, updated valuations of existing impaired loans of $4.7 million, $1.1 million credit due to modeling assumptions, and $0.3 million due to growth in the U.S. portfolio.

The provision for loan and lease losses for the fourth quarter of 2011 reflected a decrease of $11.2 million compared to the fourth quarter of 2010 and was primarily all in the Puerto Rico loan portfolios.

Non-Performing Assets

The following table sets forth information with respect to Doral Financial's non-accrual loans, OREO and other NPA's as of the periods indicated:

 

                                 December 31,  September 30,   December 31,
(In thousands)                       2011           2011           2010
                                -------------  -------------  -------------
Non-performing consumer
  Residential mortgage          $     307,212  $     294,283  $     281,170
  Other consumer                          313            466            404
                                -------------  -------------  -------------
    Total non-performing
     consumer, excluding FHA/VA       307,525        294,749        281,574

  Lease financing receivables              43            104            415
  Commercial real estate              172,852        163,007        194,186
  Commercial and industrial             2,239          2,754          2,522
  Construction and land                98,147        109,547        148,738
                                -------------  -------------  -------------
Total non-performing loans,
 excluding FHA/VA                     580,806        570,161        627,435

  OREO and repossessed units          121,204        103,123        100,348
  Non-performing FHA/VA
   guaranteed residential              59,971         64,493        121,305
Other non-performing assets             5,000          3,204          3,692
                                -------------  -------------  -------------
Total non-performing assets     $     766,981  $     740,981  $     852,780
                                =============  =============  =============

Total NPAs as a percentage of
 the net loan portfolio,
 (excluding GNMA defaulted
 loans) and OREO                        12.59%         12.48%         14.88%

Total NPAs as a percentage of
 consolidated total assets               9.62%          9.25%          9.86%

Total NPLs (excluding FHA/VA
 guaranteed loans) to total
 loans (excluding GNMA
 defaulted loans and FHA/VA
 guaranteed loans)                      10.01%         10.06%         11.63%

Ratio of allowance for loan and
 lease losses to total NPLs
 (excluding FHA/VA guaranteed
 loans and loans held for sale)
 at end of period                       19.48%         20.79%         19.79%



Loans past due 90 days and still accruing

                                  December 31,  September 30,   December 31,
(In thousands)                        2011           2011           2010
                                 -------------  -------------  -------------
Consumer loans                   $         568  $       1,612  $       1,995
Commercial and industrial                  323          1,866            560
Government guaranteed
 residential mortgage loans              9,852         14,392         31,508
                                 -------------  -------------  -------------
  Total loans past due 90 days
   and still accruing            $      10,743  $      17,870  $      34,063
                                 =============  =============  =============



Non-performing loans (excluding FHA/VA loans guaranteed by the U.S. government) as of December 31, 2011 totaled to $580.8 million, an increase of $10.6 million from September 30, 2011.

During the fourth quarter of 2011 Doral adopted two banking industry practices for estimating when a loan is considered non-performing. Previously, for loans whose terms were modified, Doral estimated that a residential loan returns to performing status upon receipt of three payments in accordance with the modified loan terms and placed the loan on probation for an additional three months in which missing a payment resulted in the loan immediately returning to non-performing status. This convention was changed to estimating that a modified residential loan returned to performing status upon receipt of six consecutive payments in accordance with the modified terms. In addition, in previous periods Doral estimated that income recognition of residential mortgage loans was terminated when it became ninety days delinquent. In the fourth quarter of 2011 this convention was changed to estimating that income recognition is terminated when the residential mortgage loan reaches four payments past due. These changes resulted in an increase in non-performing loans reported as of December 31, 2011 of $4.3 million.

After consideration of the changes described, the increase in non-performing loans (excluding FHA/VA loans guaranteed by the U.S. government) resulted from increases of $12.9 million in the residential mortgage portfolio and $9.8 million in the commercial real estate portfolio. The increase of $12.9 million for residential mortgages includes the $4.3 million impact from the two practices previously mentioned, and $8.6 from increases in mortgage loan delinquencies. These increases were partially offset by a reduction of $11.4 million on construction and land loans that were foreclosed during the fourth quarter of 2011 and are now recorded as OREO.

Non-performing assets, including non-performing loans, increased by $26.0 million, as of December 31, 2011 compared to September 30, 2011, and decreased $85.8 million compared to December 31, 2010. The increase in non-performing assets during the fourth quarter of 2011 compared to September 30, 2011 was mainly due to an $18.1 million increase in OREO, of which $9.6 million is from the construction and land portfolio and $7.1 million is from residential mortgages. Compared to December 31, 2010 the decrease in non-performing assets resulted mainly from a decrease in non-performing FHA/VA guaranteed loans of $61.3 million, partially offset by an increase of $20.9 million in OREO.

Non-Interest Income

 

                               Quarters ended               Year ended
                      -------------------------------  --------------------
                       December  September   December   December   December
(In thousands)         31, 2011   30, 2011   31, 2010   31, 2011   31,2010
                      ---------  ---------  ---------  ---------  ---------
Net other-than-
 temporary impairment
 losses               $  (1,043) $  (3,161) $    (702) $  (4,290) $ (13,961)
Net gain on loans
 securitized and sold
 and capitalization
 of mortgage
 servicing                8,298     11,200      9,138     34,066     20,375
Servicing income:
  Servicing fees          6,524      6,757      6,556     27,117     27,961
  Late charges            1,948      1,999      3,126      7,467     10,110
  Prepayment
   penalties                 10         19        647        820        774
  Other servicing
   fees                     181        269        215        907        912
  Interest loss on
   serial notes and
   others                (1,382)    (2,414)      (880)    (5,758)    (6,764)
  Amortization and
   market valuation
   of servicing asset    (3,107)    (5,768)    (2,558)   (12,074)   (12,087)
                      ---------  ---------  ---------  ---------  ---------
Total servicing
 income                   4,174        862      7,106     18,479     20,906
Trading activities:
  Gain on IO
   valuation                438      3,415         41      7,481      8,811
  Gain on MSR
   economic hedge           231      1,174       (399)     1,464      7,476
  (Loss) gain on
   hedging
   derivatives           (1,017)    (2,692)     1,157     (5,110)    (2,611)
                      ---------  ---------  ---------  ---------  ---------
Net (loss) gain on
 trading assets and
 derivatives               (348)     1,897        799      3,835     13,676
Commissions, fees and
 other income:
  Retail banking fees     6,566      6,571      7,313     27,211     28,595
  Insurance agency
   commissions and
   other income           6,113      2,504      5,474     13,279     13,306
  Other income              717        809        779      5,407      4,489
                      ---------  ---------  ---------  ---------  ---------
    Total
     commissions,
     fees and other
     income              13,396      9,884     13,566     45,897     46,390
Net loss on early
 repayment of debt            -          -     (2,087)    (3,068)    (7,749)
Net gain (loss) on
 sale of investment
 securities available
 for sale                   861      8,945          -     27,467    (93,713)

                      ---------  ---------  ---------  ---------  ---------
Total non-interest
 income (loss)        $  25,338  $  29,627  $  27,820  $ 122,386  $ (14,076)
                      =========  =========  =========  =========  =========



Fourth quarter 2011 vs. Third quarter 2011 -- Non-interest income of $25.3 million for the fourth quarter of 2011 reflected a decrease of $4.3 million when compared to non-interest income of $29.6 million for the third quarter of 2011. The decrease in non-interest income for the fourth quarter of 2011 when compared to September 30, 2011 was largely due to:

  • A decrease of $8.1 million in net gains on sale of investment securities available for sale as the Company sold $121.0 million of mortgage backed securities during the fourth quarter of 2011 compared to the impact of sales of $452.8 million during the third quarter of 2011.
  • A decrease of $2.9 million in net gains on loans securitized and sold and capitalization of mortgage servicing rights, which was mainly driven by a decrease of $2.4 million in net gains on sale of securities held for trading partially offset by an increase of $0.8 million in losses on sale of mortgage loans and deferred origination fees.
  • Net losses of $0.3 million on trading assets and derivatives compared to a $1.9 million gain in the third quarter of 2011. The fourth quarter decrease was mainly due to a decrease of $3.0 million in the IO valuation and a decrease of $0.9 million on the MSR economic hedge offset by a gain of $1.7 million on hedging activities.
  • An increase of $3.3 million in servicing income, which includes a $2.7 million decrease in the amortization of the servicing asset and a $1.0 million decrease of interest losses on serial notes.
  • An increase of $3.5 million in commissions, fees and other income resulting from the $3.4 million annual profit sharing distribution received by Doral Insurance from the insurance carriers.
  • An OTTI loss of $1.0 million, which decreased $2.1 million when compared to the third quarter of 2011. The OTTI loss is related to the residual interest held in a 2004 securitization of Doral originated mortgages.

Fourth quarter 2011 vs. Fourth quarter 2010 -- The $2.5 million decrease in non-interest income in the fourth quarter of 2011 compared to the fourth quarter of 2010 was due to:

  • Net gains on trading assets and derivatives decreased $1.1 million due mainly to a $2.2 million loss on hedging derivatives. The negative variance was mostly due to a loss on hedging activities of $2.2 million offset by increases of $0.4 million and $0.6 million on IO valuation and the MSR economic hedge, respectively.
  • Servicing income decreased $2.9 million mostly due to a reduction of $1.8 million in late charges and prepayment penalties, respectively. The decrease was driven by the improvement of the collection efforts by the Company during 2011.
  • Net gains on loans securitized and sold and capitalization of mortgage servicing decreased $0.8 million mostly related to a $2.1 million in loss on sale of mortgage loans and deferred origination fees partially offset by a $1.9 million increase in net gains on sale of securities held for trading.
  • A reduction of $2.1 million on losses on early repayment of debt as the Company did not enter into transactions during the fourth quarter of 2011 that were subject to early repayment fees.

Year ended December 31, 2011 vs. Year ended December 31, 2010 -- Non-interest income of $122.4 million for the year ended December 31, 2011 increased by $136.5 million when compared to the same period in 2010. The increase in non-interest income was mainly due to:

  • An improvement in gain on sale of investment securities available for sale of $121.2 million. During 2010, the Company reported a loss on sale of securities of $93.7 million driven by a loss of $136.7 million from the sale of $378.0 million of certain non-agency CMOs, partially offset by the sale of certain agency securities that generated net gains of $43.5 million. During 2011, the Company reported a gain on sale of investment securities of $27.4 million as a result of its deleveraging of the balance sheet.
  • An increase of $13.7 million on net gains on loans securitized and sold and capitalization of mortgage servicing, which was driven by an increase of $14.9 million in net gains on sales of securities held for trading and an increase of $1.9 million in capitalization of mortgage servicing assets partially offset by decreases of $1.2 million in origination and discount fees and $1.9 million in gain on sale of mortgage loans and deferred origination fees.
  • An improvement in OTTI of $9.7 million. During 2010, the deterioration in estimated future cash flows of certain non-agency CMOs resulted in an OTTI of $13.3 million. These securities were sold during the second quarter of 2010 and the unrealized loss in OCI was realized.
  • A $4.7 million decrease in net losses on early repayment of debt. During 2010 the Company recorded net losses on early repayment of debt of $7.7 million due to the early payment of securities sold under agreements to repurchase resulting from the previously mentioned sale of $378.0 million of certain non-agency CMOs and retirement of callable certificates of deposit.
  • Net gains on trading assets and derivatives decreased $9.8 million mainly due to decreases of $6.0 million and $2.5 million in losses on the MSR economic hedge and hedging derivatives, respectively.
  • A decrease of $2.4 million in servicing income mainly due to a decrease of $2.6 million in late charges and prepayment penalties partially offset by a decrease of $1.0 million in the interest loss on serial notes. The decrease was driven by the reduction in servicing volume of $309.7 million and improved performance of the portfolio decreased late fee charges.

Non-Interest Expense

 

                                   Quarters ended             Year ended
                           ----------------------------- -------------------
                            December September  December  December  December
(In thousands)              31, 2011  30, 2011  31, 2010  31, 2011  31, 2010
                           --------- --------- --------- --------- ---------
  Compensation and
   benefits                $  17,065 $  16,992 $  20,602 $  73,431 $  75,080
  Professional services       11,029    11,355    10,680    40,360    53,902
  FDIC insurance expense       2,867     3,296     4,173    14,316    19,833
  Communication expenses       3,681     3,824     4,573    15,145    17,019
  Occupancy expenses           4,972     4,958     5,096    19,056    17,658
  EDP expenses                 3,209     2,972     3,843    12,480    14,197
  Depreciation and
   amortization                3,269     3,293     3,254    13,228    12,689
  Taxes, other than
   payroll and income
   taxes                       2,678     3,168     3,202    11,645    11,177
  Advertising                  1,142     1,097     1,368     4,985     8,917
  Office expenses                871     1,075     1,498     3,978     5,490
  Corporate insurance          1,374     1,235     1,648     5,669     5,664
  Other                        3,954     4,086     7,279    14,949    18,864
                           --------- --------- --------- --------- ---------
                              56,111    57,351    67,216   229,242   260,490
  OREO expenses and other
   reserves:
  Other real estate owned
   expense                     3,801     2,888     5,741    10,713    40,711
  Foreclosure expenses            94     2,318     2,098     4,920     4,250
  Reserve on claim
   receivable from LBI             -         -         -         -    12,359
  Provisions for other
   credit related expenses     1,714     1,435     1,367     5,202     6,754
                           --------- --------- --------- --------- ---------
                               5,609     6,641     9,206    20,835    64,074
                           --------- --------- --------- --------- ---------
Total non-interest expense $  61,720 $  63,992 $  76,422 $ 250,077 $ 324,564
                           ========= ========= ========= ========= =========



Fourth quarter 2011 vs. Third quarter 2011 -- Non-interest expense for the fourth quarter of 2011 of $61.7 million was down $2.3 million compared to the third quarter of 2011. The change was mainly driven by the following:

  • Foreclosure expenses improved by $2.2 million as: (a) there was a reduction in the volume of short sales, resulting in a decrease in related losses of $0.7 million, and (b) the Company recovered approximately $0.7 million in recoverable foreclosure expenses incurred on mortgage loans serviced for others that had been previously expensed.
  • A decrease of $0.5 million in taxes other than payroll and income taxes as the Company paid approximately $0.5 million in extraordinary property taxes during the third quarter of 2011.
  • A decrease of $0.4 million in FDIC insurance expense due to a lower deposit base and a change in the method of computing the assessment as prescribed by the regulator.
  • An increase of $0.9 million in OREO expenses. OREO expenses include a $1.1 million increase in the provision for OREO upon the receipt of recent appraisals, which was partially offset by a $0.1 million decrease in losses resulting from the sale of OREO.

Fourth quarter 2011 vs. Fourth quarter 2010 -- The $14.7 million decrease in non-interest expense in the fourth quarter of 2011 compared to the same period in 2010 resulted largely from the following:

  • A decrease of $3.5 million in compensation and benefits driven by the initiatives to right size the Company.
  • Lower FDIC insurance expense of $1.3 million related to a lower deposit base and a change in the method of computing the assessment as prescribed by the regulator.
  • A decrease of $2.0 million in foreclosure expenses due to the Company recovered approximately $0.7 million in recoverable foreclosure expenses from mortgage loans serviced for others that had been previously expensed and the efforts made by the Company to improve bankruptcy and claim processes.
  • A decrease of $1.9 million in OREO expenses due to (a) a $2.0 million decrease in losses from the sale of OREO as the Company sold $3.4 million in OREO during the fourth quarter of 2011 compared to $12.4 million during the fourth quarter of 2010, and (b) a $0.5 million decrease in general expenses related to the maintenance of repossessed properties, partially offset by a $1.0 million increase in the provision for OREO upon the receipt of recent appraisals.
  • A decrease of $3.3 million in other expenses mainly due to (a) a $1.4 million decrease related to the reserve for the Company's claim on Lehman Brothers, Inc. that was established in the second quarter of 2010, (b) a $1.4 million decrease in representation and warranty provision, and (c) a $0.4 million decrease related to efforts made by the Company to improve the management of banking cards and reduce fraud costs.

Year ended December 31, 2011 vs. Year ended December 31, 2010 -- Non-interest expense of $250.1 million for the year ended December 31, 2011 was down $74.5 million or 23.0% when compared to the same period of 2010. The decrease in non-interest expense was mainly due to:

  • OREO expenses totaling to $10.7 million in 2011 compared to $40.7 million for the same period in 2010, a decrease of $30.0 million. Higher OREO expenses in 2010 were mainly related to an additional provision for OREO losses of $17.0 million established during the second quarter of 2010 to recognize the effect of management's strategic decision to reduce pricing to stimulate property sales, market value adjustments driven by lower values of certain OREO properties, and higher maintenance costs to maintain the properties in saleable condition.
  • A decrease of $13.5 million in professional services was driven by lower defense litigation costs of $7.9 million, lower advisory services of $0.6 million related to the dissolution of Doral Holdings and Doral Holdings L.P., and lower advisory services of $7.0 million in 2011 compared to 2010 which were incurred during 2010 in relation to the sale of certain construction loans as well as expenses incurred for the Company's participation in bidding for FDIC assisted transactions.
  • A decrease of $12.4 million in the reserve for the Company's claim on Lehman Brothers Inc. that was established in the second quarter of 2010. The claim was subsequently sold to a third party.
  • Lower FDIC insurance expense of $5.5 million related to a lower deposit base and a change in the method of computing the assessment as prescribed by the regulator.

Income Tax Expense

The Puerto Rico income tax law does not provide for the filing of a consolidated tax return; therefore, income tax expense on the Company's consolidated statement of income is the aggregate income tax expense of Doral's individual subsidiaries. Doral Money, Inc., a U.S. corporation, and the U.S. branches of Doral Bank, are subject to U.S. income tax on its income derived from all sources. Substantially all other of the Company's operations are conducted through subsidiaries in Puerto Rico.

Fourth quarter 2011 reflected an income tax benefit of $8.6 million compared with a $2.3 million and $4.0 million income tax expense for the third quarter of 2011 and fourth quarter of 2010, respectively. The decrease in tax expense was mainly due to the release of a portion of the deferred tax asset as Doral Mortgage's profitability increased significantly during 2011.

Income tax expense for the year 2011 was $1.7 million compared to $14.9 million in the year 2010. The decrease in income tax expense of $13.2 million is due mainly to the tax benefit recorded during the fourth quarter of 2011, as well as funding Doral Money lending activities by U.S. based funding sources and eliminating the withholding tax on debt payments from the U.S. based lending operations to the Puerto Rico based funding operations. Income tax expense also includes branch level interest tax of $0.2 million as a result of Doral Bank Puerto Rico operating as a U.S. Branch after the merger of Doral Bank FSB with Doral Bank. However, this represents a tax savings when compared to the past withholding tax on the debt payments from Doral Money to Doral Bank. Doral Bank may also be subject to branch profits tax in future tax years, but there was no branch profits tax in the current year as there was no dividend equivalent amount as a result of the merger transaction.

Balance Sheet

Doral's assets totaled $8.0 billion at December 31, 2011, compared to $8.0 billion at September 30, 2011 and $8.6 billion at December 31, 2010. Total assets at December 31, 2011 decreased by $39.3 million when compared to September 30, 2011. This decrease was largely due to a reduction of $185.9 million in securities available for sale and $17.8 million in cash and due from banks and other interest earning assets. These decreases were partially offset by an increase of $145.9 million in loans net of allowance for loan and lease losses. The increase in loans is due to the continued growth of the U.S. commercial loans portfolio offset in part by a decrease in the Puerto Rico net loans outstanding.

Total liabilities were $7.1 billion at December 31, 2011, compared to $7.2 billion at September 30, 2011 and $7.8 billion at December 31, 2010. The $50.1 million decrease in total liabilities as of December 31, 2011, when compared to September 30, 2011, was due to decreases of $102.1 million in advances from the FHLB, $8.7 million in brokered deposits and $5.0 million on loans payable. These decreases were partially offset by a $53.9 million increase in retail deposits.

Loan Portfolio

 

                                 December 31,  September 30,   December 31,
(In thousands)                       2011           2011           2010
                                -------------  -------------  -------------
  Loans held for sale
    Conventional single-family
     residential                $     106,359  $     114,190  $     119,290
    FHA/VA guaranteed
     residential                      187,579        174,700        172,216
    Commercial loans to
     financial institutions            12,546         13,261         14,608
    Commercial real estate             11,787         12,003         13,155
                                -------------  -------------  -------------
      Total loans held for sale       318,271        314,154        319,269
                                -------------  -------------  -------------

  Loans receivable
  Consumer
    Residential mortgage            3,345,077      3,372,836      3,463,459
    FHA/VA guaranteed
     residential mortgage              95,062        113,884        187,473
    Consumer loans                     37,178         42,401         54,380
                                -------------  -------------  -------------
      Total consumer                3,477,317      3,529,121      3,705,312

  Lease financing receivables           7,410          6,297          4,807
  Commercial real estate              843,268        818,606        786,023
  Commercial and industrial         1,226,620      1,066,853        633,695
  Construction and land               378,504        375,755        458,734
                                -------------  -------------  -------------

        Loans receivable, gross     5,933,119      5,796,632      5,588,571
                                -------------  -------------  -------------
  Less:
    Allowance for loan and
     lease losses                    (112,745)      (118,079)      (123,652)
                                -------------  -------------  -------------
  Loans receivable, net             5,820,374      5,678,553      5,464,919
                                -------------  -------------  -------------
Total loan portfolio, net       $   6,138,645  $   5,992,707  $   5,784,188
                                =============  =============  =============



Doral's loans receivable, gross portfolio consists primarily of residential mortgage loans (December 31, 2011 -- 56.4%, September 30, 2011 -- 58.2%, December 31, 2010 -- 62.0%). Approximately 78.6%, 80.8% and 87.6% of the total loans receivable, gross portfolio is secured by real estate as of December 31, 2011, September 30, 2011 and December 31, 2010, respectively. The decrease in the percent of the portfolio collateralized by real estate is due to the increasing size of the syndicated loan portfolio (consisting of assigned interests in syndicated loans). The syndicated loan portfolio is generally secured by the general pledge of assets by the borrower. The total loan portfolio, net increased $145.9 million compared to September 30, 2011 and increased $354.5 million compared to December 31, 2010. The positive variance when compared to September 30, 2011 was mainly due to an increase of approximately $159.8 million in commercial and industrial loans in loans receivable, generally related to the purchase of assignments in the syndicated loans market in the U.S. operations, and an increase of $24.7 million in commercial real estate in loans receivable. This was partially offset by decreases in FHA/VA guaranteed residential in loans receivable of approximately $18.8 million and residential mortgages of $27.8 million. The increase of $354.5 million when compared to December 31, 2010 is mostly related to participation in syndicated commercial loans in the U.S. mainland.

Capital

Doral Financial's stockholders' equity totaled $840.2 million at December 31, 2011, compared to $829.3 million and $862.2 million at September 30, 2011 and December 31, 2010, respectively. The Company reported accumulated other comprehensive loss (net of tax) of $1.2 million, accumulated other comprehensive loss (net of tax) of $1.8 million and accumulated other comprehensive income (net of tax) of $4.2 million as of December 31, 2011, September 30, 2011 and December 31, 2010, respectively.

The Company's regulatory prescribed capital ratios exceed the published well capitalized standards established in applicable banking regulations. As of December 31, 2011 the Tier 1 Leverage, Tier 1 Risk-based Capital and Total Risk-based Capital ratios were 9.13%, 12.15% and 13.43%, respectively which represents approximately $326.3 million, $365.2 million and $203.5 million of Tier 1 Leverage, Tier 1 Risk-based Capital and Total Risk-based Capital in excess of the published well-capitalized standards of 5%, 6% and 10%, respectively.

The following table provides the regulatory capital ratios for Doral Financial:

 

                                  December 31,  September 30,  December 31,
                                      2011           2011          2010
                                  ------------  -------------  ------------
Total Capital Ratio (Total
 capital to risk-weighted assets)        13.43%         13.74%        14.51%
Tier 1 Capital Ratio (Tier 1
 capital to risk-weighted assets)        12.15%         12.47%        13.25%
Tier 1 Leverage Ratio                     9.13%          8.98%         8.56%
Tier 1 common equity to risk-
 weighted assets                          6.22%          6.34%         6.95%

Refer to Non-Generally Accepted Accounting Principles in United States ("GAAP") section for a reconciliation of stockholders' equity (GAAP) to Tier 1 common equity (non-GAAP).

Non-GAAP Financial Measures

This earnings press release contains GAAP financial measures and non-GAAP financial measures. Non-GAAP financial measures are set forth when management believes they will be helpful to an understanding of the Company's results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the text or in the attached tables of this earnings release.

Tier 1 common equity to risk-weighted assets ratio

The Federal Reserve began supplementing its assessment of the capital adequacy of bank holding companies based on a variation of Tier 1 capital known as Tier 1 common equity in connection with the Supervisory Capital Assessment Program. Tier 1 common equity is considered to be a non-GAAP financial measure since it is not formally defined by GAAP and, unlike Tier 1 capital, is not a federal banking regulatory requirement.

Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing Doral's capital position. This ratio is calculated by dividing Tier 1 capital less non-common equity items by risk weighted assets, which assets are calculated in accordance with applicable bank regulatory requirements.

 

Tier 1 Common Equity
 Reconciliation
                                 December 31,  September 30,   December 31,
                                     2011           2011           2010
                                -------------  -------------  -------------
Stockholders' equity            $     840,154  $     829,312  $     862,195
Plus (less): net unrealized
 losses (gains) on available
 for sale securities, net of
 tax                                    1,240          1,786         (4,163)
Less: preferred stock                (352,082)      (352,082)      (352,082)
Less: disallowed intangible
 assets                               (11,230)       (16,051)       (16,440)
Less: disallowed deferred tax
 assets                              (104,048)       (99,117)      (101,205)
                                -------------  -------------  -------------
Total tier 1 common equity      $     374,034  $     363,848  $     388,305
                                =============  =============  =============

FORWARD-LOOKING STATEMENTS

This earnings release contains forward-looking statements within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. In addition, Doral Financial Corporation may make forward-looking statements in its other press releases, 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 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, 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, 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," "target," "goal," and similar expressions and future or 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.

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. Risk factors and uncertainties that could cause the Company's actual results to differ materially from those described in forward-looking statements can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 which is available in the Company's website at www.doralfinancial.com, as updated from time to time in the Company's periodic and other reports filed with the SEC.

Institutional Background

Doral Financial Corporation is a bank holding company engaged in banking, mortgage banking and insurance agency activities through its wholly-owned subsidiaries Doral Bank ("Doral Bank"), with operations in the mainland U.S. (New York metropolitan area and northwest region of Florida) and Puerto Rico, Doral Insurance Agency, Inc. ("Doral Insurance Agency"), and Doral Properties, Inc. ("Doral Properties"). Doral Bank in turn operates three wholly-owned subsidiaries: Doral Mortgage LLC ("Doral Mortgage"), engaged in residential mortgage lending in Puerto Rico, Doral Money, Inc. ("Doral Money"), engaged in commercial and middle market lending primarily in the New York metropolitan area, and CB, LLC, an entity formed to dispose of a real estate project of which Doral Bank 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.

Doral Financial Corporation's common shares trade on the New York Stock Exchange under the symbol DRL. Additional information about Doral Financial Corporation may be found on the Company's website at www.doralfinancial.com.

 

                        DORAL FINANCIAL CORPORATION
               CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                  Unaudited      Unaudited       Audited
                                 December 31,  September 30,   December 31,
(Dollars in thousands, except
 for share data)                     2011           2011           2010
                                -------------  -------------  -------------
Assets
  Cash and due from banks       $     330,758  $     439,679  $     355,819
  Other interest-earning assets       158,488         67,319        156,607

  Securities held for trading,
   at fair value                       44,803         46,087         45,029
  Securities available for
   sale, at fair value                483,189        669,132      1,505,065
        Federal Home Loan Bank
         of NY stock, at cost          69,660         74,430         78,087
                                -------------  -------------  -------------
  Total investment securities         597,652        789,649      1,628,181
  Loans:
    Loans held for sale, at
     lower of cost or market          318,271        314,154        319,269
    Loans receivable, gross         5,933,119      5,796,632      5,588,571
      Less: Allowance for loan
       and lease losses              (112,745)      (118,079)      (123,652)
                                -------------  -------------  -------------
        Total net loans
         receivable                 5,820,374      5,678,553      5,464,919
                                -------------  -------------  -------------
        Total loans, net            6,138,645      5,992,707      5,784,188

  Accounts receivable                  36,426         32,814         28,704
  Mortgage-servicing advances          61,795         57,190         51,462
  Accrued interest receivable          38,352         35,810         38,774
  Servicing assets, net               112,303        112,704        114,342
  Premises and equipment, net         100,256        101,886        104,053
  Real estate held for sale,
   net                                121,153        103,043        100,273
  Deferred tax asset                  111,006        104,889        105,712
  Other assets                        168,331        176,768        178,239
                                -------------  -------------  -------------
        Total assets            $   7,975,165  $   8,014,458  $   8,646,354
                                =============  =============  =============

 Liabilities
  Deposits:
      Non-interest-bearing
       deposits                 $     296,303  $     289,828  $     276,173
      Other interest-bearing
       deposits                     1,940,605      1,893,149      1,983,092
      Brokered deposits             2,157,808      2,166,499      2,377,153
                                -------------  -------------  -------------
        Total deposits              4,394,716      4,349,476      4,636,418
  Securities sold under
   agreements to repurchase           442,300        442,300      1,176,800
  Advances from FHLB                1,241,583      1,343,698        901,420
  Loans payable                       285,905        290,866        304,035
  Notes payable                       506,766        508,928        513,958
  Accrued expenses and other
   liabilities                        263,741        249,878        251,528
                                -------------  -------------  -------------
        Total liabilities           7,135,011      7,185,146      7,784,159
  Commitments and contingencies

 Stockholders' Equity
  Preferred stock                     352,082        352,082        352,082
  Common stock                          1,283          1,273          1,273
  Additional paid-in capital        1,222,983      1,221,946      1,219,280
  Legal surplus                        23,596         23,596         23,596
  Accumulated deficit                (758,550)      (767,799)      (738,199)
  Accumulated other
   comprehensive (loss) income,
   net of tax                          (1,240)        (1,786)         4,163
                                -------------  -------------  -------------
        Total stockholders'
         equity                       840,154        829,312        862,195
                                -------------  -------------  -------------

        Total liabilities and
         stockholders' equity   $   7,975,165  $   8,014,458  $   8,646,354
                                =============  =============  =============



                        DORAL FINANCIAL CORPORATION
                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                (UNAUDITED)

                                 Quarters ended              Year ended
                         December  September  December
                            31,       30,        31,        December 31,
                         --------  ---------  --------  -------------------
(In thousands, except
 for per share data)       2011       2011      2010      2011       2010
                         --------  ---------  --------  --------  ---------
Interest income:
  Loans                  $ 83,292  $  81,962  $ 78,709  $324,557  $ 318,576
  Mortgage-backed
   securities               3,727      5,247    10,164    29,251     68,219
  Interest-only strips      1,514      1,533     1,572     6,025      6,186
  Investment securities       371        210        44       810      1,566
  Other interest-earning
   assets                     834      1,157     1,844     4,312      6,974
                         --------  ---------  --------  --------  ---------
    Total interest
     income                89,738     90,109    92,333   364,955    401,521

Interest expense:
  Deposits                 18,609     20,235    27,631    88,286    110,838
  Securities sold under
   agreements to
   repurchase               2,880      2,881     9,520    21,119     52,654
  Advances from FHLB       10,852     10,847     9,300    37,129     47,155
  Notes payable             6,535      6,476     1,653    26,224     23,513
  Loans payable             1,501      1,423     6,622     5,964      6,757
                         --------  ---------  --------  --------  ---------
    Total interest
     expense               40,377     41,862    54,726   178,722    240,917
                         --------  ---------  --------  --------  ---------

    Net interest income    49,361     48,247    37,607   186,233    160,604

  Provision for loan and
   lease losses             9,914     41,698    21,102    67,525     98,975
                         --------  ---------  --------  --------  ---------
    Net interest income
     after provision for
     loan and lease
     losses                39,447      6,549    16,505   118,708     61,629

Non-interest income
 (loss):
  Net credit related
   other than temporary
   impairment losses       (1,043)    (3,161)     (702)   (4,290)   (13,961)
  Net gain (loss) on
   sale of investment
   securities available
   for sale                   861      8,945         -    27,467    (93,713)
  Net loss on early
   repayment of debt            -          -    (2,087)   (3,068)    (7,749)
  Net gain on loans
   securitized and sold
   and capitalization of
   mortgage servicing       8,298     11,200     3,536    34,066     16,090
  Retail banking fees       6,566      6,571     7,313    27,211     28,595
  Servicing income (net
   of mark-to-market
   adjustments)             4,174        862     7,106    18,479     20,906
  Net (loss) gain on
   trading assets and
   derivatives               (348)     1,897     6,401     3,835     17,961
  Insurance agency
   commissions              2,693      2,504     2,383     9,859     10,130
  Other income              4,137        809     3,870     8,827      7,665
                         --------  ---------  --------  --------  ---------
    Total non-interest
     income (loss)         25,338     29,627    27,820   122,386    (14,076)

Non-interest expenses:
  Compensation and
   benefits                17,065     16,992    20,602    73,431     75,080
  Professional services    11,029     11,355    10,680    40,360     53,902
  Occupancy expenses        4,972      4,958     5,096    19,056     17,658
  FDIC insurance expense    2,867      3,296     4,173    14,316     19,833
  Communication expenses    3,681      3,824     4,573    15,145     17,019
  Depreciation and
   amortization             3,269      3,293     3,254    13,228     12,689
  EDP expenses              3,209      2,972     3,843    12,480     14,197
  Taxes, other than
   payroll and income
   taxes                    2,678      3,168     3,202    11,645     11,177
  Corporate Insurance       1,374      1,235     1,648     5,669      5,664
  Other                     5,967      6,258    10,145    23,912     33,271
                         --------  ---------  --------  --------  ---------
                           56,111     57,351    67,216   229,242    260,490
  Other provisions and
   other real estate
   owned expenses:
    Foreclosure and
     other credit
     related expenses       1,808      3,753     3,465    10,122     11,004
    Other real estate
     owned expenses         3,801      2,888     5,741    10,713     40,711
    Provision on claim
     receivable from
     Lehman Brothers,
     Inc. ("LBI")               -          -         -         -     12,359
                         --------  ---------  --------  --------  ---------
    Total non-interest
     expenses              61,720     63,992    76,422   250,077    324,564
                         --------  ---------  --------  --------  ---------

    Income (loss) before
     income taxes           3,065    (27,816)  (32,097)   (8,983)  (277,011)
    Income tax (benefit)
     expense               (8,599)     2,339     3,971     1,707     14,883
                         --------  ---------  --------  --------  ---------

    Net income (loss)    $ 11,664  $ (30,155) $(36,068) $(10,690) $(291,894)
                         ========  =========  ========  ========  =========

Net income (loss)
 attributable to common
 shareholders            $  9,249  $ (32,570) $(38,483) $(20,350) $(274,418)
                         ========  =========  ========  ========  =========

Net income (loss) per
 common share            $   0.07  $   (0.26) $  (0.30) $  (0.16) $   (2.96)
                         ========  =========  ========  ========  =========



Contact:
For more information contact:
Investor Relations:
Christopher Poulton
EVP
Email Contact
212-329-3794
Media:
Lucienne Gigante
SVP Public Relations & Marketing
Email Contact
787-474-6298

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