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Doral Financial’s expansion plans move forward

Chairman & CEO affirms company’s strength despite restatement challenges


June 17, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Doral Financial Corp.’s announcement of a restatement of earnings from 2000 through 2004 has been followed by a torrent of inquiries on behalf of analysts, investors, and clients. Yet, despite all the uncertainty, the financial institution’s well-capitalized standing in the marketplace hasn’t been questioned.

"It is important to point out that we have more than 80% of the assets and liabilities of the company in Doral Bank of Puerto Rico and Doral Bank of New York, which have their own audited financial statements that aren’t subject to revision. This is what has allowed us to continue in the market without any problems because, basically, the funding comes from the banks," explained Salomón Levis, company chairman & chief executive officer (CEO).

After the restatement, the company expects to have a 10% leveraged-capital ratio, double the 5% required by federal law to qualify as a well-capitalized financial institution. The company defined the reasons behind the restatement as "accounting and valuation issues." Doral estimates the revised financial statements will reflect a reduced valuation of floating-rate interest-only strips (IOs) of $600 million before taxes. The correction will be noncash in nature.

In a recent letter to shareholders, Doral stated it already has determined it will change the company’s valuation model to one that will value the floating-rate IOs with an implied interest rate based on a forward-yield curve of approximately five years, rather than using actual, contractual, or period-end Libor rates.

The company’s stock price on June 9 closed at $12.97. Its 52-week range has been between $9.81 and $49.95. With the loss of stock equity, shareholders have filed various lawsuits against the company and some of its officers. However, Levis believes the impact of the lawsuits, which probably will consolidate into one case, will be minimal.

"There is an important decision from April 19 of this year in which the U.S. Supreme Court established a series of requirements for individuals to recuperate losses for the fall of a stock. The most important is that the specific damage has to be established and intent to defraud has to be proved as well," explained Levis, pointing out the additional challenges plaintiffs will face to sustain their cases. Levis added that in the same opinion, the courts established that security laws don’t function as insurance for stock purchases, and the propriety, or initially acknowledged risk of the investment, also will be considered.

"In our case, the question is how much of the loss is attributable to the IOs when, in Puerto Rico, there are financial stocks that have fallen 50%, 45%, 40% without having IO problems," he pointed out. Since Puerto Rico stocks had reached such a high point after several years of growth, he said, the recent fall is also a reflection of a natural market correction. Levis emphasized that the Puerto Rico market is far from its past low periods. As recently as five years ago, Levis explained Doral’s stock was worth $3.78.

The CEO points out that these kind of cases typically take several years to resolve. Yet, even in the worst of cases, Levis explained that if a settlement were reached, the rule of thumb is it would only be about 3% of the lost market cap. In terms of the economic impact, these legal cases and restatement costs could have on the company, Levis explained that the company’s insurance, which protects it up to $50 million, would absorb much of the potential impact.

Staying strong

In a letter to shareholders, the company presented certain unaudited and preliminary operation data for the first quarter that ended March 31, showing strong operating progress was being achieved during the quarter. As of that date, the company estimates it had cash and cash equivalents of $2.8 billion, compared to $2.5 billion as of Dec. 31, 2004. The company’s banking subsidiaries reported having aggregate deposits of about $3.5 billion at the end of the quarter, about equal with the $3.6 billion at the end of 2004 and more than the $3.2 billion during the first quarter of last year.

The mortgage loan-servicing portfolio increased to $14.6 billion during the first three months of the year, up from $14.3 billion as of Dec. 31, 2004, and $13.1 billion as of March 31, 2004. There was $2.2 billion in new-loan production, compared to $1.8 billion for the first quarter last year, of which $1.2 billion was internally originated in each period.

Levis emphasized the significance of the Federal Deposit Insurance Corp. insurance provided for all deposits up to $100,000, and also pointed out that if certain combinations are used among family members, for example, much more than that amount can be protected by the insurance.

On June 14, the company is set to inaugurate a bank branch in Aguadilla, which will be followed by openings in Dorado, Carolina, Canóvanas, Guayama, and two more branches in Bayamón before year end.

In New York, where the company is concentrating its mainland U.S. operations, the company will have opened four new branches from December to August. The most recent opening was in Corona, Queens. Set to open are branches in Park Slope, Brooklyn, and Ridgewood, Queens. In December, Doral opened a branch in Flushing, Queens. The company’s tactic in the mainland U.S. is providing services for underserved communities, which is why Doral has customized its branches to each area’s specific needs. One branch has all signs and announcements written in Chinese, as well as local Chinese employees and managers.

The New York expansion is perhaps best appreciated by the fact that $6 million in deposits were raised in just two days after the launch of a special promotion celebrating the opening of the new Corona branch.

Levis was also very pleased by the addition of Antonio Faría to the New York-based Doral Money. Faría previously served as the head of Puerto Rico’s Government Development Bank, Economic Development Bank, and Financial Institutions Commissioner’s Office.

In the mainland U.S. and Puerto Rico, the company’s development and expansion plans remain the same despite the challenges that have arisen on the way. "We will keep doing what we have always done," Levis said. That means concentrating on the development of the mortgage division which, last year, was double the size of its closest competitor. The company also will concentrate on the commercial-loans sector and its leasing business.

Numerous client meetings recently have been held with developers, credit unions, large depositors, and loan clients to keep them informed of the company’s strong standing and status of its expansion plans. "We have received continued support from our customers," Levis commented.

Doral also has dedicated great effort to supporting company employees by offering economic incentives, training programs, travel opportunities, and motivational activities. However, Levis believes there is one thing that provides the most support for his staff. "When employees see that management is working as much or more than they are, there is no greater inspiration," Levis said. Doral employees certainly will be well-inspired as company management diligently dedicates itself to the restatement process and to keeping the company as solid as ever.

This Caribbean Business article appears courtesy of Casiano Communications.
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