##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,San Juan, Puerto Rico
    
    00920-2717(Address of principal executive offices)
    
    (Zip Code)
 
 
  þ o
  o o
  Large accelerated filer o

    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGE
 PART I  FINANCIAL INFORMATION
    
    
    3Item 1   Financial Statements
    
    
    3Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Income (Loss) (Unaudited)  Quarters and six month periods ended June 30, 2009 and June 30, 2008
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)  For the six month periods ended June 30, 2009 and June 30, 2008
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (Unaudited)  Quarters and six month periods ended June 30, 2009 and June 30, 2008
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  For the six month periods ended June 30, 2009 and June 30, 2008
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2   Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    52Item 3   Quantitative and Qualitative Disclosures about Market Risk
    
    
    95Item 4   Controls and Procedures
    
    
    96PART II  OTHER INFORMATION
    
    
    96Item 1   Legal Proceedings
    
    
    96Item 1A   Risk Factors
    
    
    96Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    98Item 3   Defaults Upon Senior Securities
    
    
    98Item 4   Submission of Matters to a Vote of Security Holders 1
    
    
    99Item 5   Other Information
    
    
    99Item 6  Exhibits
    
    
    99SIGNATURES
    
    
    103EX-12.1EX-12.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED
 JUNE 30,
    
    
    DECEMBER 31,(Dollars in thousands, except for share data)
    
    2009
    
    
    2008ASSETSCash and due from banks
    
    $
    265,363
    
    
    $
    184,302Money market investments
    
    
    49,254
    
    
    
    3,215Securities held for trading, at fair value (includes $0 and $198,680 pledged as
collateral at June 30, 2009, and December 31, 2008, respectively that may be
repledged)
    
    
    49,141
    
    
    
    251,877Securities available for sale, at fair value (includes $1,130,876 and $1,067,097
pledged as collateral at June 30, 2009, and December 31, 2008, respectively, that
may be repledged)
    
    
    3,061,061
    
    
    
    3,429,151Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    119,241
    
    
    
    117,938Total investment securities
    
    
    3,229,443
    
    
    
    3,798,966Loans:Loans held for sale, at lower of cost or market
    
    
    400,600
    
    
    
    386,610Loans receivable
    
    
    5,296,075
    
    
    
    5,253,910Less: Unearned interest
    
    
    (1,536
    )
    
    
    (2,197
    )Less: Allowance for loan and lease losses
    
    
    (146,769
    )
    
    
    (132,020
    )Total net loans receivable
    
    
    5,147,770
    
    
    
    5,119,693Total loans
    
    
    5,548,370
    
    
    
    5,506,303Accounts receivable
    
    
    46,704
    
    
    
    45,449Mortgage-servicing advances
    
    
    26,012
    
    
    
    28,057Accrued interest receivable
    
    
    42,791
    
    
    
    42,934Servicing assets, net
    
    
    112,869
    
    
    
    114,396Premises and equipment, net
    
    
    103,220
    
    
    
    104,733Real estate held for sale, net
    
    
    83,964
    
    
    
    61,340Deferred tax asset
    
    
    124,801
    
    
    
    120,827Other assets
    
    
    121,647
    
    
    
    128,345Total assets
    
    $
    9,754,438
    
    
    $
    10,138,867LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    247,703
    
    
    $
    235,983Interest-bearing deposits
    
    
    3,816,554
    
    
    
    4,166,789Total deposits
    
    
    4,064,257
    
    
    
    4,402,772Securities sold under agreements to repurchase
    
    
    1,776,184
    
    
    
    1,907,447Advances from FHLB
    
    
    1,580,400
    
    
    
    1,623,400Other short-term borrowings
    
    
    557,000
    
    
    
    351,600Loans payable
    
    
    352,834
    
    
    
    366,776Notes payable
    
    
    273,910
    
    
    
    276,868Accrued expenses and other liabilities
    
    
    315,950
    
    
    
    304,833Total liabilities
    
    
    8,920,535
    
    
    
    9,233,696Commitments and contingencies (Please refer to Note 24 and 25)STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 7,709,704 shares issued
and outstanding, at aggregate liquidation preference value at June 30, 2009
(9,015,000 shares issued and outstanding, at aggregate liquidation preference value
at December 31, 2008):Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    197,388
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    270,253
    
    
    
    345,000Common stock, $0.01 par value; 97,500,000 shares authorized; 57,764,002 shares
issued and outstanding at June 30, 2009 (53,810,110 shares issued and outstanding
at December 31, 2008)
    
    
    578
    
    
    
    538Additional paid-in capital
    
    
    940,502
    
    
    
    849,172Legal surplus
    
    
    23,596
    
    
    
    23,596Accumulated deficit
    
    
    (458,259
    )
    
    
    (418,168
    )Accumulated other comprehensive loss, net of income tax benefit of $22,952 and
$19,329 at June 30, 2009 and December 31, 2008, respectively
    
    
    (140,155
    )
    
    
    (123,217
    )Total stockholders equity
    
    
    833,903
    
    
    
    905,171Total liabilities and stockholders equity
    
    $
    9,754,438
    
    
    $
    10,138,867
  3




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DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands, except for share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Loans
    
    $
    81,245
    
    
    $
    85,910
    
    
    $
    162,833
    
    
    $
    171,292Mortgage-backed securities
    
    
    27,256
    
    
    
    29,936
    
    
    
    54,637
    
    
    
    49,038Interest-only strips (IOs)
    
    
    1,575
    
    
    
    1,756
    
    
    
    3,203
    
    
    
    3,430Investment securities
    
    
    2,765
    
    
    
    13,912
    
    
    
    7,672
    
    
    
    28,678Other interest-earning assets
    
    
    1,737
    
    
    
    4,132
    
    
    
    2,727
    
    
    
    11,316Total interest income
    
    
    114,578
    
    
    
    135,646
    
    
    
    231,072
    
    
    
    263,754Interest expense:Deposits
    
    
    30,872
    
    
    
    37,268
    
    
    
    69,079
    
    
    
    79,916Securities sold under agreements to repurchase
    
    
    17,481
    
    
    
    22,091
    
    
    
    34,713
    
    
    
    40,404Advances from FHLB
    
    
    15,988
    
    
    
    17,549
    
    
    
    32,002
    
    
    
    34,807Other short-term borrowings
    
    
    406
    
    
    
    
    
    
    
    842
    
    
    
    Loans payable
    
    
    2,538
    
    
    
    4,568
    
    
    
    5,847
    
    
    
    10,077Notes payable
    
    
    5,203
    
    
    
    5,315
    
    
    
    10,429
    
    
    
    10,651Total interest expense
    
    
    72,488
    
    
    
    86,791
    
    
    
    152,912
    
    
    
    175,855Net interest income
    
    
    42,090
    
    
    
    48,855
    
    
    
    78,160
    
    
    
    87,899Provision for loan and lease losses
    
    
    10,133
    
    
    
    10,683
    
    
    
    33,758
    
    
    
    15,469Net interest income after provision for loan and lease losses
    
    
    31,957
    
    
    
    38,172
    
    
    
    44,402
    
    
    
    72,430Non-interest income:Total other-than-temporary impairment losses
    
    
    (35,239
    )
    
    
    
    
    
    
    (35,239
    )
    
    
    Portion of loss recognized in other comprehensive income
(before taxes)
    
    
    28,444
    
    
    
    
    
    
    
    28,444
    
    
    
    Net other-than-temporary impairment losses
    
    
    (6,795
    )
    
    
    
    
    
    
    (6,795
    )
    
    
    Net gain on mortgage loan sales and fees
    
    
    3,298
    
    
    
    3,858
    
    
    
    5,017
    
    
    
    6,226Net loss on securities held for trading, including gains and
losses on the fair value of IOs
    
    
    (5,796
    )
    
    
    (7,916
    )
    
    
    (13,124
    )
    
    
    (248
    )Net gain on investment securities
    
    
    4,810
    
    
    
    
    
    
    
    4,797
    
    
    
    194Servicing income (net of mark-to-market adjustment)
    
    
    13,960
    
    
    
    12,434
    
    
    
    11,185
    
    
    
    9,723Commissions, fees and other income
    
    
    9,654
    
    
    
    16,519
    
    
    
    19,634
    
    
    
    26,379Total non-interest income
    
    
    19,131
    
    
    
    24,895
    
    
    
    20,714
    
    
    
    42,274Non-interest expenses:Compensation and benefits
    
    
    15,823
    
    
    
    17,057
    
    
    
    38,651
    
    
    
    36,135Taxes, other than payroll and income taxes
    
    
    2,423
    
    
    
    2,379
    
    
    
    4,911
    
    
    
    4,801Advertising
    
    
    1,424
    
    
    
    2,273
    
    
    
    2,872
    
    
    
    4,505Professional services
    
    
    7,391
    
    
    
    7,117
    
    
    
    13,518
    
    
    
    12,025Communication expenses
    
    
    4,005
    
    
    
    4,486
    
    
    
    8,413
    
    
    
    8,626EDP expenses
    
    
    3,167
    
    
    
    2,053
    
    
    
    6,783
    
    
    
    4,475Occupancy expenses
    
    
    2,914
    
    
    
    4,214
    
    
    
    6,915
    
    
    
    8,503Office expenses
    
    
    1,203
    
    
    
    1,527
    
    
    
    2,669
    
    
    
    3,151Depreciation and amortization
    
    
    3,217
    
    
    
    4,072
    
    
    
    6,670
    
    
    
    8,127FDIC insurance expense
    
    
    6,144
    
    
    
    1,424
    
    
    
    8,081
    
    
    
    2,320Other
    
    
    7,815
    
    
    
    9,024
    
    
    
    16,469
    
    
    
    17,521Total non-interest expenses
    
    
    55,526
    
    
    
    55,626
    
    
    
    115,952
    
    
    
    110,189(Loss) income before income taxes
    
    
    (4,438
    )
    
    
    7,441
    
    
    
    (50,836
    )
    
    
    4,515Income tax (benefit) expense
    
    
    (12,654
    )
    
    
    5,799
    
    
    
    (12,762
    )
    
    
    5,171Net income (loss)
    
    $
    8,216
    
    
    $
    1,642
    
    
    $
    (38,074
    )
    
    $
    (656
    )Net income (loss) attributable to common shareholders(1)
    
    $
    14,524
    
    
    $
    (6,683
    )
    
    $
    (40,091
    )
    
    $
    (17,306
    )Net income (loss) per common share(2)
    
    $
    0.27
    
    
    $
    (0.12
    )
    
    $
    (0.74
    )
    
    $
    (0.32
    )
 
 (1)
    
    Please refer to Note 27 for additional information regarding net income (loss) attributable to common shareholders.(2)
    
    For the quarters and six month periods ended June 30, 2009 and 2008, net income
(loss) per common share represents the basic and diluted loss per common share, respectively,
for each of the periods presented.  4




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DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
 SIX MONTH PERIODSENDED JUNE 30,(In thousands)
    
    2009
    
    
    2008PREFERRED STOCK:Balance at beginning of period
    
    $
    573,250
    
    
    $
    573,250Conversion of preferred stock to common stock at par value:Noncumulative nonconvertible
    
    
    (30,862
    )
    
    
    Cumulative convertible
    
    
    (74,747
    )
    
    
    Balance at end of period
    
    
    467,641
    
    
    
    573,250COMMON STOCK:Balance at beginning of period
    
    
    538
    
    
    
    538Common stock issued/converted:Noncumulative nonconvertible
    
    
    14
    
    
    
    Cumulative convertible
    
    
    26
    
    
    
    Balance at end of period
    
    
    578
    
    
    
    538ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    849,172
    
    
    
    849,081Conversion of preferred stock to common stock at par value:Noncumulative nonconvertible
    
    
    5,697
    
    
    
    Cumulative convertible
    
    
    85,530
    
    
    
    Stock-based compensation recognized
    
    
    103
    
    
    
    Balance at end of period
    
    
    940,502
    
    
    
    849,081LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596ACCUMULATED DEFICIT:Balance at beginning of period
    
    
    (418,168
    )
    
    
    (66,610
    )Effect of conversion of preferred stock:Noncumulative nonconvertible
    
    
    23,917
    
    
    
    Cumulative convertible
    
    
    (14,548
    )
    
    
    Net loss
    
    
    (38,074
    )
    
    
    (656
    )Cash dividends declared on preferred stock
    
    
    (11,386
    )
    
    
    (16,650
    )Balance at end of period
    
    
    (458,259
    )
    
    
    (83,916
    )ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (123,217
    )
    
    
    (33,148
    )Other comprehensive loss, net of deferred tax
    
    
    (16,938
    )
    
    
    (99,914
    )Balance at end of period
    
    
    (140,155
    )
    
    
    (133,062
    )Total stockholders equity
    
    $
    833,903
    
    
    $
    1,229,487
  5




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##### Table of Contents



DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPRENHENSIVE INCOME (LOSS)
(UNAUDITED)
 QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    8,216
    
    
    $
    1,642
    
    
    $
    (38,074
    )
    
    $
    (656
    )Other comprehensive loss, before tax:Unrealized gains (losses) on securities arising during the period
    
    
    16,031
    
    
    
    (50,771
    )
    
    
    60
    
    
    
    (113,389
    )Non-credit portion of other-than-temporary impairment losses
    
    
    (28,444
    )
    
    
    
    
    
    
    (28,444
    )
    
    
    Reclassification of realized losses (gains) included in net loss
    
    
    4,627
    
    
    
    
    
    
    
    4,230
    
    
    
    (194
    )Other comprehensive loss on investment securities, before tax
    
    
    (7,786
    )
    
    
    (50,771
    )
    
    
    (24,154
    )
    
    
    (113,583
    )Income tax benefit related to investment securities
    
    
    1,168
    
    
    
    5,113
    
    
    
    3,623
    
    
    
    13,913Other comprehensive loss on investment securities, net of tax
    
    
    (6,618
    )
    
    
    (45,658
    )
    
    
    (20,531
    )
    
    
    (99,670
    )Other comprehensive income (loss) on cash flow hedges(1)
    
    
    2,388
    
    
    
    2,923
    
    
    
    3,593
    
    
    
    (244
    )Other comprehensive loss
    
    
    (4,230
    )
    
    
    (42,735
    )
    
    
    (16,938
    )
    
    
    (99,914
    )Comprehensive income (loss)
    
    $
    3,986
    
    
    $
    (41,093
    )
    
    $
    (55,012
    )
    
    $
    (100,570
    )Accumulated other comprehensive loss, net of taxOther comprehensive loss on investment securities
    
    $
    (105,884
    )
    
    $
    (132,247
    )
    
    $
    (105,884
    )
    
    $
    (132,247
    )Other comprehensive losses on other-than-temporary impairment losses
on investment securities
    
    
    (24,177
    )
    
    
    
    
    
    
    (24,177
    )
    
    
    Total other comprehensive loss on investment securities
    
    
    (130,061
    )
    
    
    (132,247
    )
    
    
    (130,061
    )
    
    
    (132,247
    )Other comprehensive loss on cash flow hedge(1)
    
    
    (10,094
    )
    
    
    (815
    )
    
    
    (10,094
    )
    
    
    (815
    )Total accumulated other comprehensive loss, net of tax
    
    $
    (140,155
    )
    
    $
    (133,062
    )
    
    $
    (140,155
    )
    
    $
    (133,062
    )
 
 (1)
    
    For the quarter and six month period ended June 30, 2009, other comprehensive
loss on cash flow hedges includes $3.9 million related to a deferred tax asset valuation allowance.  6




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DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 SIX MONTH PERIODS ENDEDJUNE 30,(In thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (38,074
    )
    
    $
    (656
    )Adjustments to reconcile net loss to net cash provided by operating activities:Stock-based compensation
    
    
    103
    
    
    
    Depreciation and amortization
    
    
    6,670
    
    
    
    8,127Mark-to-market adjustment of servicing assets
    
    
    4,798
    
    
    
    7,099Deferred tax
expense
    
    
    605
    
    
    
    3,647Provision for loan and lease losses
    
    
    33,758
    
    
    
    15,469Net gain on sale of assets to be disposed of by sale
    
    
    
    
    
    
    (23
    )Accretion of discount on loans, investment securities and debt
    
    
    (282
    )
    
    
    (13,715
    )Net increase in loans held for sale
    
    
    (114,510
    )
    
    
    (55,475
    )Gains on securities
    
    
    (9,033
    )
    
    
    (3,157
    )Net other-than-temporary impairment losses
    
    
    6,795
    
    
    
    Unrealized loss on trading securities
    
    
    16,298
    
    
    
    2,983Decrease in securities held for trading
    
    
    406,265
    
    
    
    122,208Amortization and net (gain) loss in the fair value of IOs
    
    
    4,313
    
    
    
    2,768Increase in derivative instruments
    
    
    (121
    )
    
    
    (770
    )Increase in accounts receivable
    
    
    (1,255
    )
    
    
    (333
    )Decrease (increase) in mortgage servicing advances
    
    
    2,045
    
    
    
    (7,689
    )Decrease (increase) in accrued interest receivable
    
    
    143
    
    
    
    (2,750
    )Decrease (increase) in other assets
    
    
    8,170
    
    
    
    (20,415
    )Decrease in accrued expenses and other liabilities
    
    
    (15,555
    )
    
    
    (31,273
    )Total adjustments
    
    
    349,207
    
    
    
    26,701Net cash provided by operating activities
    
    
    311,133
    
    
    
    26,045Cash flows from investing activities:Purchases of securities available for sale
    
    
    (1,586,960
    )
    
    
    (1,848,684
    )Principal repayment and sales of securities available for sale
    
    
    1,927,127
    
    
    
    581,837Increase in FHLB stock
    
    
    (1,303
    )
    
    
    (40,273
    )Net increase of loans receivable
    
    
    (201,477
    )
    
    
    (267,143
    )Purchases of premises and equipment
    
    
    (5,157
    )
    
    
    (3,651
    )Proceeds from sales of mortgage servicing assets
    
    
    159
    
    
    
    Proceeds from assets to be disposed of by sale
    
    
    
    
    
    
    474Proceeds from sales of real estate held for sale
    
    
    21,313
    
    
    
    8,398Net cash provided by (used in) investing activities
    
    
    153,702
    
    
    
    (1,569,042
    )Cash flows from financing activities:(Decrease) increase in deposits
    
    
    (338,515
    )
    
    
    62,704(Decrease) increase in securities sold under agreements to repurchase
    
    
    (131,263
    )
    
    
    655,908Proceeds from advances from FHLB
    
    
    350,000
    
    
    
    1,440,000Repayment of advances from FHLB
    
    
    (393,000
    )
    
    
    (845,000
    )Proceeds from other short-term borrowings
    
    
    2,328,000
    
    
    
    Repayment of other short-term borrowings
    
    
    (2,122,600
    )
    
    
    Repayment of secured borrowings
    
    
    (13,942
    )
    
    
    (22,886
    )Repayment of notes payable
    
    
    (3,118
    )
    
    
    (2,890
    )Payment associated with conversion of preferred stock
    
    
    (4,972
    )
    
    
    Dividends paid
    
    
    (8,325
    )
    
    
    (16,650
    )Net cash (used in) provided by financing activities
    
    
    (337,735
    )
    
    
    1,271,186Net increase (decrease) in cash and cash equivalents
    
    $
    127,100
    
    
    $
    (271,811
    )Cash and cash equivalents at beginning of period
    
    
    187,517
    
    
    
    789,169Cash and cash equivalents at the end of period
    
    $
    314,617
    
    
    $
    517,358Cash and cash equivalents includes:Cash and due from banks
    
    $
    265,363
    
    
    $
    87,057Money market investments
    
    
    49,254
    
    
    
    430,301$
    314,617
    
    
    $
    517,358Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    219,617
    
    
    $
    147,574Reclassification of securities from the held for trading portfolio to the available for sale portfolio
    
    $
    
    
    
    $
    68,520Reclassification from the held for sale portfolio to the loans receivable portfolio
    
    $
    
    
    
    $
    48,185Reclassification of assets to be disposed of by sale to premises and equipment
    
    $
    
    
    
    $
    809Loans foreclosed
    
    $
    46,361
    
    
    $
    25,032Capitalization of servicing assets
    
    $
    3,430
    
    
    $
    2,975Supplemental information for cash flows:Cash used to pay interest
    
    $
    165,683
    
    
    $
    184,658Cash used to pay income taxes
    
    $
    2,365
    
    
    $
    17,816
  7




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##### Table of Contents



DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Nature of Operations and Basis of Presentation
    
    
    9Note 2  Recent Accounting Pronouncements
    
    
    9Note 3  Cash and Due from Banks
    
    
    11Note 4  Money Markets
    
    
    11Note 5  Securities Held for Trading
    
    
    12Note 6  Securities Available for Sale
    
    
    12Note 7  Investments in an Unrealized Loss Position
    
    
    15Note 8  Pledged Assets
    
    
    18Note 9  Loans Held for Sale
    
    
    18Note 10  Loans Receivable
    
    
    19Note 11  Related Party Transactions
    
    
    21Note 12  Accounts Receivable
    
    
    21Note 13  Servicing Activities
    
    
    22Note 14  Servicing Related Matters
    
    
    24Note 15  Other Real Estate Owned
    
    
    25Note 16  Deposits
    
    
    25Note 17  Repurchase Agreements
    
    
    26Note 18  Advances from the FHLB
    
    
    26Note 19  Other Short-Term Borrowings
    
    
    27Note 20  Loans Payable
    
    
    27Note 21  Notes Payable
    
    
    28Note 22  Income Taxes
    
    
    28Note 23  Guarantees
    
    
    31Note 24  Financial Instruments with Off-Balance Sheet Risk
    
    
    32Note 25  Commitments and Contingencies
    
    
    33Note 26  Stock Options and Other Incentive Plans
    
    
    34Note 27  Earnings per Share
    
    
    36Note 28  Fair Value of Assets and Liabilities
    
    
    37Note 29  Derivatives
    
    
    44Note 30  Segment Information
    
    
    47Note 31
 Subsequent Events
    
    
    49
 8




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##### Table of Contents



1. Nature of Operations and Basis of Presentation
     2. Recent Accounting Pronouncements
 The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles  A
Replacement of FASB Statement No. 162 FASB Accounting Standards
Codification TM a b c
 Amendments to FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities
 9




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##### Table of Contents



Accounting for Transfers of Financial Assets, an
amendment of FASB No. 140 .
 Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities,
 Accounting for Transfer of Financial Assets- an amendment of FASB No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities Accounting for Certain Mortgage Banking Activities,
  10




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##### Table of Contents



Subsequent Events .
 3. Cash and due from banks
    4. Money Market Investments
  11




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##### Table of Contents



5 Securities Held for Trading
   SECURITIES HELD FOR TRADING(In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Mortgage-Backed Securities
    
    $
    703
    
    
    $
    731Variable Rate Interest-Only Strips
    
    
    47,404
    
    
    
    51,709Fixed Rate Interest-Only Strips
    
    
    462
    
    
    
    470U.S. Treasury Notes
    
    
    
    
    
    
    198,680Derivatives(1)
    
    
    572
    
    
    
    287Total
    
    $
    49,141
    
    
    $
    251,877
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure to
interest rate risk caused by changes in interest rates. Derivatives include
interest rate caps and forward contracts. Doral Financials general policy is
to account for derivatives on a marked-to-market basis with gains or losses
charged to operations as they occur. The fair value of derivatives is
generally reported net by counterparty. Derivatives not accounted as hedges
in a net asset position are recorded as securities held for trading, and
derivatives in a net liability position are reported as liabilities. The
gross notional amount of derivatives recorded as held for trading totaled
$470.0 million as of June 30, 2009 and $305.0 million as of December 31,
2008. Notional amounts indicate the volume of derivatives activity, but do
not represent Doral Financials exposure to market or credit risk.  6. Securities Available for Sale
   12




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SECURITIES AVAILABLE FOR SALE
AS OF JUNE 30, 2009
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    FAIR
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue within one year
    
    $
    12
    
    
    $
    1
    
    
    $
    
    
    
    $
    13
    
    
    
    6.04
    %Due from one to five years
    
    
    721
    
    
    
    11
    
    
    
    8
    
    
    
    724
    
    
    
    4.67
    %Due from five to ten years
    
    
    576
    
    
    
    18
    
    
    
    
    
    
    
    594
    
    
    
    6.58
    %Due over ten years
    
    
    59,090
    
    
    
    1,149
    
    
    
    15
    
    
    
    60,224
    
    
    
    5.39
    %FHLMC and FNMADue from five to ten years
    
    
    102,346
    
    
    
    2,424
    
    
    
    
    
    
    
    104,770
    
    
    
    4.63
    %Due over ten years
    
    
    1,023,870
    
    
    
    24,307
    
    
    
    73
    
    
    
    1,048,104
    
    
    
    5.03
    %CMO Government Sponsored AgenciesDue from five to ten years
    
    
    73,683
    
    
    
    186
    
    
    
    189
    
    
    
    73,680
    
    
    
    3.69
    %Due over ten years
    
    
    1,229,764
    
    
    
    6,582
    
    
    
    10,297
    
    
    
    1,226,049
    
    
    
    3.48
    %Non-Agency CMOsDue over ten years
    
    
    464,833
    
    
    
    
    
    
    
    177,468
    
    
    
    287,365
    
    
    
    4.08
    %Debt SecuritiesFHLB NotesDue within one year
    
    
    2,058
    
    
    
    53
    
    
    
    
    
    
    
    2,111
    
    
    
    4.16
    %FNMA NotesDue within one year
    
    
    43,459
    
    
    
    64
    
    
    
    
    
    
    
    43,523
    
    
    
    0.71
    %Due from one to five years
    
    
    133,162
    
    
    
    825
    
    
    
    
    
    
    
    133,987
    
    
    
    2.42
    %P.R. Housing BankDue from five to ten years
    
    
    3,595
    
    
    
    8
    
    
    
    
    
    
    
    3,603
    
    
    
    4.92
    %Due over ten years
    
    
    3,660
    
    
    
    4
    
    
    
    
    
    
    
    3,664
    
    
    
    5.47
    %OtherDue within one year
    
    
    11,080
    
    
    
    1
    
    
    
    
    
    
    
    11,081
    
    
    
    4.64
    %Due from one to five years
    
    
    54,165
    
    
    
    724
    
    
    
    
    
    
    
    54,889
    
    
    
    5.18
    %Due over ten years
    
    
    8,000
    
    
    
    
    
    
    
    1,320
    
    
    
    6,680
    
    
    
    5.61
    %$
    3,214,074
    
    
    $
    36,357
    
    
    $
    189,370
    
    
    $
    3,061,061
    
    
    
    4.10
    %
 13




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##### Table of Contents



SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2008
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    FAIR
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue within one year
    
    $
    50
    
    
    $
    1
    
    
    $
    
    
    
    $
    51
    
    
    
    5.89
    %Due from one to five years
    
    
    875
    
    
    
    8
    
    
    
    16
    
    
    
    867
    
    
    
    4.42
    %Due from five to ten years
    
    
    626
    
    
    
    12
    
    
    
    
    
    
    
    638
    
    
    
    5.83
    %Due over ten years
    
    
    63,957
    
    
    
    390
    
    
    
    354
    
    
    
    63,993
    
    
    
    5.38
    %FHLMC and FNMADue from five to ten years
    
    
    52,381
    
    
    
    1,209
    
    
    
    
    
    
    
    53,590
    
    
    
    4.61
    %Due over ten years
    
    
    975,092
    
    
    
    15,844
    
    
    
    2,296
    
    
    
    988,640
    
    
    
    5.25
    %CMO Government Sponsored AgenciesDue from five to ten years
    
    
    2,223
    
    
    
    
    
    
    
    
    
    
    
    2,223
    
    
    
    7.80
    %Due over ten years
    
    
    1,588,047
    
    
    
    2,367
    
    
    
    7,900
    
    
    
    1,582,514
    
    
    
    3.61
    %Non-Agency CMOsDue over ten years
    
    
    491,877
    
    
    
    47
    
    
    
    139,845
    
    
    
    352,079
    
    
    
    6.17
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    2,060
    
    
    
    82
    
    
    
    
    
    
    
    2,142
    
    
    
    4.16
    %Due from five to ten years
    
    
    63,470
    
    
    
    720
    
    
    
    
    
    
    
    64,190
    
    
    
    5.00
    %Due over ten years
    
    
    80,000
    
    
    
    72
    
    
    
    
    
    
    
    80,072
    
    
    
    5.21
    %FNMA NotesDue within one year
    
    
    43,518
    
    
    
    45
    
    
    
    
    
    
    
    43,563
    
    
    
    3.19
    %Due from one to five years
    
    
    3,177
    
    
    
    113
    
    
    
    
    
    
    
    3,290
    
    
    
    3.37
    %Due over ten years
    
    
    49,990
    
    
    
    91
    
    
    
    
    
    
    
    50,081
    
    
    
    6.00
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    
    
    
    
    395
    
    
    
    49,605
    
    
    
    5.50
    %P.R. Housing BankDue from five to ten years
    
    
    3,595
    
    
    
    30
    
    
    
    9
    
    
    
    3,616
    
    
    
    4.92
    %Due over ten years
    
    
    3,690
    
    
    
    26
    
    
    
    
    
    
    
    3,716
    
    
    
    5.47
    %OtherDue within one year
    
    
    11,141
    
    
    
    174
    
    
    
    
    
    
    
    11,315
    
    
    
    4.64
    %Due from one to five years
    
    
    64,241
    
    
    
    1,727
    
    
    
    
    
    
    
    65,968
    
    
    
    5.23
    %Due over ten years
    
    
    8,000
    
    
    
    48
    
    
    
    1,050
    
    
    
    6,998
    
    
    
    5.61
    %$
    3,558,010
    
    
    $
    23,006
    
    
    $
    151,865
    
    
    $
    3,429,151
    
    
    
    4.62
    %
 14




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##### Table of Contents



7. Investments in an Unrealized Loss Position
  SECURITIES AVAILABLE FOR SALE
 As of June 30, 2009Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-BackedSecuritiesGNMA
    
    
    4
    
    
    $
    450
    
    
    $
    15
    
    
    
    4
    
    
    $
    552
    
    
    $
    8
    
    
    
    8
    
    
    $
    1,002
    
    
    $
    23FNMA
    
    
    4
    
    
    
    98,445
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    98,445
    
    
    
    73CMO Government
Sponsored
Agencies
    
    
    8
    
    
    
    629,862
    
    
    
    10,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    629,862
    
    
    
    10,486Non-Agency CMOs
    
    
    1
    
    
    
    2,129
    
    
    
    302
    
    
    
    11
    
    
    
    285,236
    
    
    
    177,166
    
    
    
    12
    
    
    
    287,365
    
    
    
    177,468Debt SecuritiesOther
    
    
    1
    
    
    
    4,940
    
    
    
    60
    
    
    
    1
    
    
    
    1,740
    
    
    
    1,260
    
    
    
    2
    
    
    
    6,680
    
    
    
    1,32018
    
    
    $
    735,826
    
    
    $
    10,936
    
    
    
    16
    
    
    $
    287,528
    
    
    $
    178,434
    
    
    
    34
    
    
    $
    1,023,354
    
    
    $
    189,370
 SECURITIES AVAILABLE FOR SALE
 As of December 31, 2008Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
        
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-BackedSecuritiesGNMA
    
    
    109
    
    
    $
    33,200
    
    
    $
    370
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    109
    
    
    $
    33,200
    
    
    $
    370FNMA/FHLMC
    
    
    21
    
    
    
    387,587
    
    
    
    2,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    387,587
    
    
    
    2,296CMO Government
Sponsored
Agencies
    
    
    18
    
    
    
    1,080,204
    
    
    
    7,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    1,080,204
    
    
    
    7,900Non-Agency CMOs
    
    
    2
    
    
    
    7,154
    
    
    
    3,357
    
    
    
    9
    
    
    
    342,311
    
    
    
    136,488
    
    
    
    11
    
    
    
    349,465
    
    
    
    139,845Debt SecuritiesFHLMC Notes
    
    
    1
    
    
    
    49,605
    
    
    
    395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    49,605
    
    
    
    395P.R. Housing Bank
    
    
    1
    
    
    
    2,086
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2,086
    
    
    
    9Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,950
    
    
    
    1,050
    
    
    
    1
    
    
    
    1,950
    
    
    
    1,050152
    
    
    $
    1,559,836
    
    
    $
    14,327
    
    
    
    10
    
    
    $
    344,261
    
    
    $
    137,538
    
    
    
    162
    
    
    $
    1,904,097
    
    
    $
    151,865
  Recognition and Presentation of Other-Than-Temporary
Impairments .
 
    
    If the Company intends to sell the investment security and its fair value is less than its
amortized cost.
    
    If, based on available evidence, it is more likely than not that the Company will decide or
be required to sell the investment security before the recovery of its amortized cost basis.
    
    If the Company does not expect to recover the entire amortized cost basis of the investment
security. This occurs when the present value of cash flows expected to be collected is less
than the amortized cost basis of the security. In determining whether a credit loss exists,
the Company uses its best estimate of the present value of cash flows expected to be collected
from the investment security. Cash flows expected to be collected are
 15




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##### Table of Contents



estimated based on a
careful assessment of all available information. The difference between the present value of
the cash flows expected to be collected and the amortized cost basis represents the amount of
credit loss.
     Recognition of Interest Income and Impairment on Purchased Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets Amendments to the Impairment Guidance of EITF Issue No. 99-20.
 16




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As of June 30, 2009
    
    
    Quarter Ended June 30, 2009
    
    
    Six Month Period Ended June 30, 2009Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OTTI
    
    
    
    
    
    
    
    
    
    
    OTTICost (after
    
    
    Gross
    
    
    
    
    
    
    OTTI
    
    
    Related to
    
    
    Total
    
    
    OTTI
    
    
    Related to
    
    
    Totalcredit
    
    
    Unrealized
    
    
    
    
    
    
    Related to
    
    
    Non-Credit
    
    
    Impairment
    
    
    Related to
    
    
    Non-Credit
    
    
    Impairment(In thousands)
    
    related OTTI)
    
    
    Losses
    
    
    Fair Value
    
    
    Credit Loss
    
    
    Loss
    
    
    Losses
    
    
    Credit Loss
    
    
    Loss
    
    
    LossesOTTI InvestmentsU.S. Non-Agency CMOs
    
    $
    58,175
    
    
    $
    24,543
    
    
    $
    33,632
    
    
    $
    5,680
    
    
    $
    24,543
    
    
    $
    30,223
    
    
    $
    5,680
    
    
    $
    24,543
    
    
    $
    30,223P.R. Non-Agency CMOs
    
    
    10,744
    
    
    
    3,901
    
    
    
    6,843
    
    
    
    1,115
    
    
    
    3,901
    
    
    
    5,016
    
    
    
    1,115
    
    
    
    3,901
    
    
    
    5,016$
    68,919
    
    
    $
    28,444
    
    
    $
    40,475
    
    
    $
    6,795
    
    
    $
    28,444
    
    
    $
    35,239
    
    
    $
    6,795
    
    
    $
    28,444
    
    
    $
    35,239
  Quarter Ended
    
    
    Six Month Period Ended(In thousands)
    
    June 30, 2009
    
    
    June 30, 2009Balance at beginning of period
    
    $
    919
    
    
    $
    919Additions:Credit losses for which
other-than-temporary
impairment was not
previously recognized
    
    
    6,685
    
    
    
    6,685Additional
other-than-temporary
impairment credit losses
for which an
other-than-temporary
charge was previously
recognized
    
    
    110
    
    
    
    110Balance at end of period
    
    $
    7,714
    
    
    $
    7,714
  17




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##### Table of Contents



8. Pledged Assets
  (In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Securities available for sale
    
    $
    2,706,197
    
    
    $
    2,648,132Securities held for trading
    
    
    
    
    
    
    198,680Loans held for sale
    
    
    153,949
    
    
    
    165,929Loans receivable
    
    
    2,995,472
    
    
    
    2,885,116Total pledged assets
    
    $
    5,855,618
    
    
    $
    5,897,857
 9. Loans Held for Sale
  LOANS HELD FOR SALE(In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Conventional single family residential loans
    
    $
    143,094
    
    
    $
    154,081FHA/VA loans
    
    
    222,861
    
    
    
    194,241Commercial loans to financial institutions
    
    
    18,005
    
    
    
    19,527Commercial real estate loans
    
    
    16,640
    
    
    
    18,761Total loans held for sale (1)
    
    $
    400,600
    
    
    $
    386,610
 
 (1)
    
    At both June 30, 2009 and December 31, 2008, the loans held for
sale portfolio includes $1.1 million related to interest-only loans.    18




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##### Table of Contents



10. Loans Receivable
  LOANS RECEIVABLE, NET
 JUNE 30, 2009
    
    
    DECEMBER 31, 2008(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    480,135
    
    
    
    9
    %
    
    $
    506,031
    
    
    
    9
    %Residential mortgage loans
    
    
    3,737,541
    
    
    
    70
    %
    
    
    3,650,222
    
    
    
    69
    %Commercial  secured by real estate
    
    
    771,581
    
    
    
    15
    %
    
    
    757,112
    
    
    
    14
    %Consumer  other:Personal loans
    
    
    32,223
    
    
    
    1
    %
    
    
    37,844
    
    
    
    1
    %Auto loans
    
    
    41
    
    
    
    0
    %
    
    
    122
    
    
    
    0
    %Credit cards
    
    
    24,551
    
    
    
    1
    %
    
    
    26,034
    
    
    
    1
    %Overdrawn checking accounts
    
    
    1,251
    
    
    
    0
    %
    
    
    668
    
    
    
    0
    %Revolving lines of credit
    
    
    23,533
    
    
    
    0
    %
    
    
    25,520
    
    
    
    1
    %Lease financing receivables
    
    
    18,528
    
    
    
    0
    %
    
    
    23,158
    
    
    
    0
    %Commercial non-real estate
    
    
    130,625
    
    
    
    2
    %
    
    
    136,210
    
    
    
    3
    %Loans on savings deposits
    
    
    3,999
    
    
    
    0
    %
    
    
    5,240
    
    
    
    0
    %Land secured
    
    
    105,738
    
    
    
    2
    %
    
    
    118,870
    
    
    
    2
    %Loans receivable, gross(2)
    
    
    5,329,746
    
    
    
    100
    %
    
    
    5,287,031
    
    
    
    100
    %Less:Discount on loans transferred(3)
    
    
    (13,814
    )
    
    
    
    
    
    
    (15,735
    )Unearned interest
    
    
    (1,536
    )
    
    
    
    
    
    
    (2,197
    )Deferred loan fees/costs, net
    
    
    (19,857
    )
    
    
    
    
    
    
    (17,386
    )Allowance for loan and lease losses
    
    
    (146,769
    )
    
    
    
    
    
    
    (132,020
    )(181,976
    )
    
    
    
    
    
    
    (167,338
    )Loans receivable, net
    
    $
    5,147,770
    
    
    
    
    
    
    $
    5,119,693
 
 (1)
    
    Includes $307.2 million and $422.6 million of construction loans for residential
housing projects as of June 30, 2009 and December 31, 2008, respectively. Also includes $172.9 million
and $83.4 million of construction loans for commercial, condominiums and multifamily projects as of June
30, 2009 and December 31, 2008, respectively.(2)
    
    Includes $402.7 million and $349.5 million
of interest-only loans, as of June 30, 2009 and December 31, 2008, respectively.(3)
    
    Related
to $1.4 billion of loans transferred during 2007, from the loans held for sale portfolio to the loans
receivable portfolio. As of June 30, 2009 and December 31, 2008, the outstanding balance of these loans
transferred was $1.2 billion for both periods.   Accounting by Creditors for Impairment of a Loan
 19




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JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Impaired loans with allowance
    
    $
    237,993
    
    
    $
    207,949Impaired loans without allowance
    
    
    176,803
    
    
    
    120,378Total impaired loans
    
    $
    414,796
    
    
    $
    328,327Related allowance
    
    $
    50,016
    
    
    $
    45,099Average impaired loans
    
    $
    377,335
    
    
    $
    317,844
  Accounting by Debtors and Creditors of Troubled Debt Restructurings
  Accounting for Contingencies
  ALLOWANCE FOR LOAN AND LEASE LOSSES
    
    QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    143,900
    
    
    $
    121,182
    
    
    $
    132,020
    
    
    $
    124,733Provision for loan and lease losses
    
    
    10,133
    
    
    
    10,683
    
    
    
    33,758
    
    
    
    15,469Losses charged to the allowance
    
    
    (7,447
    )
    
    
    (9,792
    )
    
    
    (19,417
    )
    
    
    (18,845
    )Recoveries
    
    
    183
    
    
    
    26
    
    
    
    408
    
    
    
    742Balance at end of period
    
    $
    146,769
    
    
    $
    122,099
    
    
    $
    146,769
    
    
    $
    122,099
 20




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11. Related Party Transactions
  (In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Balance at beginning of period
    
    $
    2,579
    
    
    $
    5,090New loans
    
    
    3,178
    
    
    
    58Repayments
    
    
    (2,069
    )
    
    
    (101
    )Loans sold
    
    
    
    
    
    
    (511
    )Loans of former officers
    
    
    
    
    
    
    (1,957
    )Balance at end of period (1)
    
    $
    3,688
    
    
    $
    2,579
 
 (1)
    
    At June 30, 2009 and December 31, 2008, none of the loans
outstanding to officers, directors and 5% or more stockholders were delinquent.    12. Accounts Receivable
  Lehman Brothers Transaction
   21




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13 Servicing Activities
    QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2009
    
    
    2008
        
    2009
        
    2008Balance at beginning of period
    
    $
    104,426
    
    
    $
    139,570
    
    
    $
    114,396
    
    
    $
    150,238Sales of servicing asset(1)
    
    
    (159
    )
    
    
    
    
    
    
    (159
    )
    
    
    Adjustment to MSR fair value for
loans repurchased(2)
    
    
    
    
    
    
    (587
    )
    
    
    
    
    
    
    (587
    )Capitalization of servicing assets
    
    
    2,047
    
    
    
    2,046
    
    
    
    3,430
    
    
    
    2,975Change in fair value
    
    
    6,555
    
    
    
    4,498
    
    
    
    (4,798
    )
    
    
    (7,099
    )Balance at end of period(3)
    
    $
    112,869
    
    
    $
    145,527
    
    
    $
    112,869
    
    
    $
    145,527
 
 (1)
    
    Amount represents MSRs sales related to $7.1 million in principal balance of mortgage
loans.(2)
    
    Amount represents the adjustment of MSR fair value related to the repurchase of $26.7
million in principal balance of mortgage loans serviced for others.(3)
    
    Outstanding balance of loans serviced for third parties amounted to $9.1 billion
and $9.7 billion as of June 30, 2009 and 2008, respectively.   22




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QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    49,744
    
    
    $
    51,538
    
    
    $
    52,179
    
    
    $
    51,928Amortization
    
    
    (2,447
    )
    
    
    (1,672
    )
    
    
    (4,320
    )
    
    
    (2,739
    )Gain (loss) on the IO value
    
    
    569
    
    
    
    (706
    )
    
    
    7
    
    
    
    (29
    )Balance at end of period
    
    $
    47,866
    
    
    $
    49,160
    
    
    $
    47,866
    
    
    $
    49,160
      23




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##### Table of Contents



Servicing
    
    Interest-(Dollars in thousands)
    
    Assets
    
    Only StripsCarrying amount of retained interest
    
    $
    112,869
    
    
    $
    47,866Weighted-average expected life (in years)
    
    
    5.6
    
    
    
    5.1Constant prepayment rate
(weighted-average annual rate)
    
    
    11.7
    %
    
    
    11.2
    %Decrease in fair value due to 10%
adverse change
    
    
    (5,475
    )
    
    
    (1,603
    )Decrease in fair value due to 20%
adverse change
    
    
    (10,581
    )
    
    
    (3,110
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.4
    %
    
    
    13.0
    %Decrease in fair value due to 10%
adverse change
    
    
    (4,300
    )
    
    
    (1,813
    )Decrease in fair value due to 20%
adverse change
    
    
    (8,289
    )
    
    
    (3,472
    )
   (Dollars in thousands)
 Change in Interest
    
    Constant Prepayment
    
    Weighted-Average Expected Life
    
    Change in Fair
    
    Percentage ofRates(Basis Points)
    
    Rate
    
    (Years)
    
    Value of IOs
    
    Change+200
    
    7.1%
    
    6.5
    
    $(3,111)
    
    (6.5)%+100
    
    8.4%
    
    6.1
    
    (495)
    
    (1.0)%+50
    
    9.7%
    
    5.6
    
    (227)
    
    (0.5)%Base
    
    11.2%
    
    5.1
    
    
    
    0%-50
    
    12.8%
    
    4.6
    
    361
    
    0.8%-100
    
    13.9%
    
    4.4
    
    1,104
    
    2.3%-200
    
    15.2%
    
    4.1
    
    3,679
    
    7.7%
 14. Servicing Related Matters
  24




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##### Table of Contents



15. Other Real Estate Owned
  16. Deposits
  (In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Brokered certificates of deposit
    
    $
    2,204,329
    
    
    $
    2,652,305Certificates of deposit
    
    
    471,337
    
    
    
    542,074Regular savings
    
    
    371,865
    
    
    
    338,784NOW accounts and other transaction accounts
    
    
    350,794
    
    
    
    356,988Money markets accounts
    
    
    418,229
    
    
    
    276,638Total interest-bearing
    
    
    3,816,554
    
    
    
    4,166,789Non interest-bearing deposits
    
    
    247,703
    
    
    
    235,983Total deposits
    
    $
    4,064,257
    
    
    $
    4,402,772
 25




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##### Table of Contents



17. Repurchase Agreements
 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Non-callable repurchase agreements
with a maturities less than or equal
to 90 days, at a fixed rate of 0.40%
and at various fixed rates averaging
0.78% at June 30, 2009 and December
31, 2008, respectively.
    
    $
    5,922
    
    
    $
    281,447Non-callable repurchase agreements
with maturities ranging from October
2009 to October 2013, at various
fixed rates averaging 3.72% and 3.96%
at June 30, 2009 and December 31,
2008, respectively.
    
    
    1,491,762
    
    
    
    1,347,500Callable repurchase agreements with
maturities ranging from September
2009 to February 2014, at various
fixed rates averaging 4.88% at both
June 30, 2009 and December 31, 2008.
    
    
    278,500
    
    
    
    278,500$
    1,776,184
    
    
    $
    1,907,447
 18. Advances from FHLB
  JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Non-callable advances with
maturities ranging from
July 2009 to May 2013 (2008
 February 2009 to May
2013), at various fixed
rates averaging 3.74% and
3.77% at June 30, 2009 and
December 31, 2008,
respectively.
    
    $
    956,400
    
    
    $
    974,400Non-callable advances due
on July 6, 2010, tied to
3-month LIBOR adjustable
quarterly, at a rate of
1.13% and 4.17% at June 30,
2009 and December 31, 2008,
respectively.
    
    
    200,000
    
    
    
    200,000Non-callable advances with
maturities ranging from
September 2009 to November
2012, tied to 1-month LIBOR
adjustable monthly, at a
rate of 0.33% and 0.49% at
June 30, 2009 and December
31, 2008, respectively.
    
    
    145,000
    
    
    
    145,000Callable advances with
maturities ranging from
June 2010 to March 2012, at
various fixed rates
averaging 5.41% and 5.40%,
at June 30, 2009 and
December 31, 2008,
respectively, callable at
various dates beginning on
July 2009 (2008 - January
2009).
    
    
    279,000
    
    
    
    304,000$
    1,580,400
    
    
    $
    1,623,400
  26




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##### Table of Contents



19. Other short-term borrowings
  JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Borrowings with the Federal
Home Loan Bank,
collateralized by securities
at a fixed rate of 0.46%,
maturing in January 2009.
    
    $
    
    
    
    $
    55,000Borrowings with the Federal
Reserve Bank, collateralized
by securities at a fixed
rate of 0.25%, with
maturities ranging from July
2009 to September 2009.
    
    
    557,000
    
    
    
    Borrowings with the Federal
Reserve Bank, collateralized
by securities at a fixed
rate of 1.39%, maturing in
January 2009.
    
    
    
    
    
    
    10,000Borrowings with the Federal
Reserve Bank, collateralized
by securities at a fixed
rate of 0.60%, maturing in
January 2009.
    
    
    
    
    
    
    138,600Borrowings with the Federal
Reserve Bank, collateralized
by securities at a fixed
rate of 0.42%, maturing in
February 2009.
    
    
    
    
    
    
    148,000$
    557,000
    
    
    $
    351,600
  20. Loans Payable
   JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Secured
borrowings with
local financial
institutions,
collateralized by
real estate
mortgage loans,
at variable
interest rates
tied to 3-month
LIBOR averaging
2.56% and 5.00%
at June 30, 2009
and December 31,
2008,
respectively.
    
    $
    332,412
    
    
    $
    344,257Secured
borrowings with
local financial
institutions,
collateralized by
real estate
mortgage loans at
fixed interest
rates averaging
7.42% at June 30,
2009 and December
31, 2008,
respectively.
    
    
    20,422
    
    
    
    22,519$
    352,834
    
    
    $
    366,776
   27




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##### Table of Contents



21. Notes payable
  JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008$100 million notes, net of
discount, bearing interest at
7.65%, due on March 26, 2016,
paying interest monthly.
    
    $
    98,539
    
    
    $
    98,459$30 million notes, net of
discount, bearing interest at
7.00%, due on April 26, 2012,
paying interest monthly.
    
    
    29,748
    
    
    
    29,709$40 million notes, net of
discount, bearing interest at
7.10%, due on April 26, 2017,
paying interest monthly.
    
    
    39,402
    
    
    
    39,374$30 million notes, net of
discount, bearing interest at
7.15%, due on April 26, 2022,
paying interest monthly.
    
    
    29,459
    
    
    
    29,446Bonds payable secured by
mortgage on building at fixed
rates ranging from 6.40% to
6.90%, with maturities ranging
from December 2009 to December
2029, paying interest monthly.
    
    
    39,885
    
    
    
    40,335Bonds payable at a fixed rate
of 6.25%, with maturities
ranging from December 2010 to
December 2029, paying interest
monthly.
    
    
    7,600
    
    
    
    7,600Note payable with a local
financial institution,
collateralized by IOs, at a
fixed rate of 7.75%, due on
December 25, 2013, paying
interest monthly.
    
    
    29,277
    
    
    
    31,945$
    273,910
    
    
    $
    276,868
  22. Income Taxes
 Background
     28




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Income Tax Expense
  QUARTER ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Current income tax (benefit) expense:Puerto Rico
    
    $
    (15,275
    )
    
    $
    346
    
    
    $
    (14,932
    )
    
    $
    693United States
    
    
    853
    
    
    
    831
    
    
    
    1,565
    
    
    
    831Total current income tax (benefit) expense
    
    
    (14,422
    )
    
    
    1,177
    
    
    
    (13,367
    )
    
    
    1,524Deferred income tax expense:Puerto Rico
    
    
    2,384
    
    
    
    4,564
    
    
    
    1,269
    
    
    
    3,390United States
    
    
    (616
    )
    
    
    58
    
    
    
    (664
    )
    
    
    257Total deferred income tax expense
    
    
    1,768
    
    
    
    4,622
    
    
    
    605
    
    
    
    3,647Total income tax (benefit) expense
    
    $
    (12,654
    )
    
    $
    5,799
    
    
    $
    (12,762
    )
    
    $
    5,171
  Accounting for Uncertainty in Income Taxes, on interpretation of FASB No. 109
  Deferred Tax Components
    29




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Accounting for
Income Taxes
       FIN 48
  30




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(In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Balance at beginning of period
    
    $
    13,709
    
    
    $
    13,709Additions for tax positions of prior years
    
    
    2,892
    
    
    
    Additions for tax positions of current year
    
    
    248
    
    
    
    Release of contingencies
    
    
    (13,709
    )
    
    
    Balance at end of period
    
    $
    3,140
    
    
    $
    13,709
 23. Guarantees
    31




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QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30, 2009
    
    
    ENDED JUNE 30, 2009Balance at beginning of period
    
    $
    9,258
    
    
    $
    8,849Net charge-offs
    
    
    (1,076
    )
    
    
    (2,129
    )Provision for recourse liability
    
    
    573
    
    
    
    2,035Balance at end of period
    
    $
    8,755
    
    
    $
    8,755
 24. Financial Instruments with Off-Balance Sheet Risk
  JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Commitments to extend credit
    
    $
    85,984
    
    
    $
    125,762Commitments to sell loans
    
    
    192,395
    
    
    
    137,797Commercial, financial and performance
standby letters of credit
    
    
    325
    
    
    
    325Total
    
    $
    278,704
    
    
    $
    263,884
   Accounting for derivatives instruments and hedging activities
  32




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25. Commitments and Contingencies
  (In thousands)2010
    
    $
    5,7042011
    
    
    5,1102012
    
    
    4,6802013
    
    
    3,7152014
    
    
    3,7202015 and thereafter
    
    
    20,842$
    43,771
    Legal Matters
  Banking Regulatory Matters
  33




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26. Stock Option and Other Incentive Plans
     Share-Based Paymen
 34




---



##### Table of Contents



QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30, 2009
    
    
    ENDED JUNE 30, 2009Stock-based compensation recognized, net
    
    $
    52
    
    
    $
    103Unrecognized at end of period
    
    $
    386
    
    
    $
    386
  Weighted-average exercise price
    
    $
    13.70Stock option estimated fair value
    
    $
    5.88Expected stock option term (years)
    
    
    6.5Expected volatility
    
    
    39
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    3.49
    %
   35




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##### Table of Contents



27. Earnings Per Share Data
  QUARTER ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands, except per share amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net Income (Loss):Net income (loss)
    
    $
    8,216
    
    
    $
    1,642
    
    
    $
    (38,074
    )
    
    $
    (656
    )Convertible preferred stock dividend(1)(2)
    
    
    (3,061
    )
    
    
    (4,097
    )
    
    
    (7,158
    )
    
    
    (8,194
    )Nonconvertible preferred stock dividend(2)
    
    
    
    
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (8,456
    )Effect of conversion of preferred stock(3)
    
    
    9,369
    
    
    
    
    
    
    
    9,369
    
    
    
    Net income (loss) attributable to common shareholders(4)
    
    $
    14,524
    
    
    $
    (6,683
    )
    
    $
    (40,091
    )
    
    $
    (17,306
    )Weighted-Average Number of Common Shares Outstanding(4)(5)(6)
    
    
    54,679,097
    
    
    
    53,810,110
    
    
    
    54,247,004
    
    
    
    53,810,110Net Income (Loss) per Common Share(7)
    
    $
    0.27
    
    
    $
    (0.12
    )
    
    $
    (0.74
    )
    
    $
    (0.32
    )
 
 (1)
    
    For the quarter and six month period ended June 30, 2009, there were 1,081,014 shares of the Companys 4.75% perpetual cumulative
convertible preferred stock that were excluded from the computation of diluted earnings per share because their effect would have been antidilutive,
compared to 1,380,000 for the corresponding 2008 periods. Each share of convertible preferred stock is currently convertible into 0.31428 shares of
common stock, subject to adjustment under specific conditions. The option of the purchasers to convert the convertible preferred stock into shares of the
Companys common stock is exercisable only (a) if during any fiscal quarter after September 30, 2003, the closing sale price of the Companys common
stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading date of the preceding fiscal quarter exceeds
120% of the conversion price of the convertible preferred stock (currently 120% of $795.47, or $954.56); (b) upon the occurrence of certain corporate
transactions; or (c) upon the delisting of the Companys common stock. On or after September 30, 2008, the Company may, at its option, cause the
convertible preferred stock to be converted into the number of shares of common stock that are issuable at the conversion price. The Company may only
exercise its conversion right if the closing sale price of the Companys common stock exceeds 130% of the conversion price of the convertible preferred
stock (currently 130% of $795.47, or $1,034.11) in effect for 20 trading days within any period of 30 consecutive trading days ending on a trading day
not more than two trading days prior to the date the Company gives notice of conversion.(2)
    
    On March 20, 2009, the Board of Directors of Doral Financial announced that it had suspended the declaration and payment of all dividends
on all of Doral Financials outstanding series of cumulative and non-cumulative preferred stock. The suspension of dividends was effective and commenced
with the dividends for the month of April 2009 for Doral Financials three outstanding series of non-cumulative preferred stock, and the dividends for
the second quarter of 2009 for Doral Financials one outstanding series of cumulative preferred stock.(3)
    
    The carrying value of the noncumulative preferred stock exceeded the fair value of consideration transferred so the difference between the
par value of the preferred stock retired and the market value of the common stock issued and the cash tendered amounted to $23.9 million was credited to retained earnings. In the
case of the convertible preferred stock, the fair value of stock and cash transferred in exchange for the preferred stock converted, exceeded the fair
value of the stock issuable pursuant to the original conversion terms, this excess or inducement amounted to $14.5 million was charged to retained earnings. As a result, both
transactions impacted the net income (loss) attributable to common shareholders.(4)
    
    Weighted-average number of common shares outstanding represents the basic and diluted earnings (loss) per common shares, respectively, for
each of the periods presented.(5)
    
    Excludes unvested shares of restricted stock.(6)
    
    Potential common shares consist of common stock issuable under the assumed exercise of stock options and unvested shares of restricted
stock using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the
amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of
potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings
per share. Stock options and unvested shares of restricted stock that result in lower potential shares issued than shares purchased under the treasury
stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per
share.(7)
    
    For the quarters and six month periods ended June 30, 2009 and 2008, net income (loss) per common share represents the basic and diluted
earnings (loss) per common share, respectively, for each of the periods presented.  36




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##### Table of Contents



The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock.
   Shares(Dollars in thousands)
    
    Outstanding
    
    
    Book ValueNonconvertible preferred stock:Series A
    
    
    1,495,000
    
    
    $
    74,750Series B
    
    
    2,000,000
    
    
    
    50,000Series C
    
    
    4,140,000
    
    
    
    103,500Convertible preferred stock
    
    
    1,380,000
    
    
    
    345,0009,015,000
    
    
    $
    573,250
  Preferred
    
    
    
    
    
    
    Book Value ofShares
    
    
    Preferred Shares
    
    
    Preferred Shares(Dollars in thousands)
    
    Converted
    
    
    After Conversion
    
    
    After ConversionNonconvertible preferred stock:Series A
    
    
    228,173
    
    
    
    1,266,827
    
    
    $
    63,341Series B
    
    
    217,339
    
    
    
    1,782,661
    
    
    
    44,567Series C
    
    
    560,798
    
    
    
    3,579,202
    
    
    
    89,480Convertible preferred stock
    
    
    298,986
    
    
    
    1,081,014
    
    
    
    270,2531,305,296
    
    
    
    7,709,704
    
    
    $
    467,641
 28. Fair Value of Assets and Liabilities
  Fair Value Measurements
 37




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##### Table of Contents



The Fair Value Option for Financing Assets and Financing
Liabilities
 Interim Disclosures about
Fair Value of Financial Instruments Disclosures about Fair Value of Financial
Instruments
 Fair Value Hierarchy
   Level 1
    
    Valuation is based upon unadjusted quoted prices for identical
instruments traded in active markets. Level 2
    
    Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that
are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market, or are derived principally from or
corroborated by observable market data, by correlation or by other means. Level 3
    
    Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable assumptions
reflect the Companys estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
 Determination of Fair Value
    Securities held for trading: Available for Sale Servicing
assets and interest-only strips, and Derivatives
 38




---



##### Table of Contents



Securities available for sale:
 Loans held for sale:
 Loans receivable:
  Servicing assets and interest-only strips: Accounting for Servicing of Financial Assets
 39




---



##### Table of Contents



Real estate held for sale:
 Other assets:
 Premises and equipment:
 Goodwill:
 CB, LLC:
 Derivatives:
  Cash and due from banks and money market investments:
 40




---



##### Table of Contents



Deposits
 Loans payable
 Notes payable, advances from FHLB, other short-term borrowings and securities sold under agreements
to repurchase
 Assets and Liabilities Recorded at Fair Value on a Recurring Basis
  June 30, 2009(In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    48,569
    
    
    $
    
    
    
    $
    
    
    
    $
    48,569
    (1)Securities available for
sale
    
    
    3,061,061
    
    
    
    
    
    
    
    2,736,797
    
    
    
    324,264Derivatives(2)
    
    
    572
    
    
    
    
    
    
    
    572
    
    
    
    Servicing assets
    
    
    112,869
    
    
    
    
    
    
    
    
    
    
    
    112,869$
    3,223,071
    
    
    $
    
    
    
    $
    2,737,369
    
    
    $
    485,702Liabilities:Derivatives(3)
    
    $
    13,303
    
    
    $
    
    
    
    $
    13,303
    
    
    $
    
 
 (1)
    
    Represents interest-only strips, of which variable interest-only strips represent substantially all of the balance. Also,
includes derivatives.(2)
    
    Included as part of securities held for trading in the Statement of Financial Condition.(3)
    
    Included as part of accrued expenses and other liabilities in the Statement of Financial Condition. December 31, 2008(In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    251,590
    
    
    $
    198,680
    
    
    $
    
    
    
    $
    52,910
    (1)Securities available for
sale
    
    
    3,429,151
    
    
    
    
    
    
    
    3,038,517
    
    
    
    390,634Derivatives(2)
    
    
    287
    
    
    
    
    
    
    
    287
    
    
    
    Servicing assets
    
    
    114,396
    
    
    
    
    
    
    
    
    
    
    
    114,396$
    3,795,424
    
    
    $
    198,680
    
    
    $
    3,038,804
    
    
    $
    557,940Liabilities:Derivatives(3)
    
    $
    15,283
    
    
    $
    
    
    
    $
    15,283
    
    
    $
    
 
 (1)
    
    Represents interest-only strips, of which variable interest-only strips represent substantially
all of the balance. Also, includes derivatives.(2)
    
    Included as part of securities held for trading in the Statement of Financial Condition.(3)
    
    Included as part of accrued expenses and other liabilities in the Statement of Financial Condition. 41




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##### Table of Contents



QUARTER ENDED JUNE 30, 2009
    
    
    SIX MONTH PERIODS ENDED JUNE 30, 2009Securities
    
    
    
    
    
    
    
    
    
    
    SecuritiesHeld for
    
    
    Securities
    
    
    Servicing
    
    
    Held for
    
    
    Securities
    
    
    Servicing(In thousands)
    
    Trading
    
    
    Available for Sale
    
    
    Assets
    
    
    Trading
    
    
    Available for Sale
    
    
    AssetsBalance at beginning of period
    
    $
    50,542
    
    
    $
    345,976
    
    
    $
    104,426
    
    
    $
    52,910
    
    
    $
    390,634
    
    
    $
    114,396Change in fair value
    
    
    (1,973
    )
    
    
    (1,370
    )
    
    
    6,555
    
    
    
    (4,341
    )
    
    
    (37,167
    )
    
    
    (4,798
    )Other-than-temporary
impairment
    
    
    
    
    
    
    (6,795
    )
    
    
    
    
    
    
    
    
    
    
    (6,795
    )
    
    
    Principal
repayment/amortization
of premium and discount
    
    
    
    
    
    
    (13,547
    )
    
    
    
    
    
    
    
    
    
    
    (22,408
    )
    
    
    Capitalization/sales, net
    
    
    
    
    
    
    
    
    
    
    1,888
    
    
    
    
    
    
    
    
    
    
    
    3,271Balance at end of period
    
    $
    48,569
    
    
    $
    324,264
    
    
    $
    112,869
    
    
    $
    48,569
    
    
    $
    324,264
    
    
    $
    112,869
 QUARTER ENDED JUNE 30, 2008
    
    
    SIX MONTH PERIODS ENDED JUNE 30, 2008Securities
    
    
    
    
    
    
    
    
    
    
    SecuritiesHeld for
    
    
    Securities
    
    
    Servicing
    
    
    Held for
    
    
    Securities
    
    
    Servicing(In thousands)
    
    Trading
    
    
    Available for Sale
    
    
    Assets
    
    
    Trading
    
    
    Available for Sale
    
    
    AssetsBalance at beginning of period
    
    $
    53,060
    
    
    $
    20,881
    
    
    $
    139,570
    
    
    $
    67,992
    
    
    $
    7,597
    
    
    $
    150,238Change in fair value
    
    
    (2,360
    )
    
    
    (461
    )
    
    
    4,498
    
    
    
    (2,940
    )
    
    
    (1,529
    )
    
    
    (7,099
    )Principal
repayment/amortization
of premium and discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,352
    )
    
    
    14,352
    
    
    
    Capitalization/sales, net
    
    
    
    
    
    
    
    
    
    
    1,459
    
    
    
    
    
    
    
    
    
    
    
    2,388Balance at end of period
    
    $
    50,700
    
    
    $
    20,420
    
    
    $
    145,527
    
    
    $
    50,700
    
    
    $
    20,420
    
    
    $
    145,527
  Assets Recorded at Fair Value on a Nonrecurring Basis
  (In thousands)
    
    Carrying Value
    
    
    Level 3June 30, 2009Loans receivable (1)
    
    $
    94,281
    
    
    $
    94,281Real estate held for sale(2)
    
    
    25,008
    
    
    
    25,008Total
    
    $
    119,289
    
    
    $
    119,289December 31, 2008Loans receivable(1)
    
    $
    77,966
    
    
    $
    77,966
 
 (1)
    
    Represents the carrying value of loans for
which adjustments are based on the appraised value of the collateral.(2)
    
    Represents the carrying value of real estate held for sale for
which adjustments are based on the appraised value of the properties. 42




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##### Table of Contents



Gain (loss) for the quarters
    
    
    Loss for the six monthLocation of Loss Recognized in
    
    
    ended June 30,
    
    
    periods ended June 30,(In thousands)
    
    the Income Statement
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Loans receivable(1)
    
    Provision for loan and lease losses
    
    $
    351
    
    
    $
    (475
    )
    
    $
    (355
    )
    
    $
    (5,028
    )Real estate held for sale(2)
    
    Other expenses
    
    $
    (1,351
    )
    
    $
    
    
    
    $
    (2,757
    )
    
    $
    
 
 (1)
    
    Represents the gain (loss) of loans for which adjustments are based on the appraised value of the collateral.(2)
    
    Represents the loss of real estate held for sale for which adjustments are based on the appraised value of the properties. Disclosures about Fair Value of Financial Instruments
   43




---



##### Table of Contents



June 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    Fair(In thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and due from banks
    
    $
    265,363
    
    
    $
    265,363
    
    
    $
    184,302
    
    
    $
    184,302Money market investments
    
    
    49,254
    
    
    
    49,254
    
    
    
    3,215
    
    
    
    3,215Securities held for trading
    
    
    49,141
    
    
    
    49,141
    
    
    
    251,877
    
    
    
    251,877Securities available for sale
    
    
    3,061,061
    
    
    
    3,061,061
    
    
    
    3,429,151
    
    
    
    3,429,151Loans held for sale(1)
    
    
    400,600
    
    
    
    410,210
    
    
    
    386,610
    
    
    
    394,051Loans
receivable, net
    
    
    5,147,770
    
    
    
    5,094,002
    
    
    
    5,119,693
    
    
    
    5,117,983Servicing assets
    
    
    112,869
    
    
    
    112,869
    
    
    
    114,396
    
    
    
    114,396Financial liabilities:Deposits
    
    $
    4,064,257
    
    
    $
    4,081,956
    
    
    $
    4,402,772
    
    
    $
    4,414,621Securities sold under agreements to repurchase
    
    
    1,776,184
    
    
    
    1,858,309
    
    
    
    1,907,447
    
    
    
    2,010,465Advances from FHLB
    
    
    1,580,400
    
    
    
    1,654,626
    
    
    
    1,623,400
    
    
    
    1,716,386Other short-term borrowings
    
    
    557,000
    
    
    
    557,084
    
    
    
    351,600
    
    
    
    351,681Loans payable
    
    
    352,834
    
    
    
    352,834
    
    
    
    366,776
    
    
    
    366,776Notes payable
    
    
    273,910
    
    
    
    233,265
    
    
    
    276,868
    
    
    
    123,634Derivatives(2)
    
    
    13,303
    
    
    
    13,303
    
    
    
    15,283
    
    
    
    15,283
 
 (1)
    
    Includes $192.6 million and $165.6 million for June 30, 2009 and
December 31, 2008, respectively, related to GNMA defaulted loans for which the
Company has an unconditional buy-back option.(2)
    
    Includes $0.4 million and $0.2 million of derivatives held for trading
purposes and $12.0 million and $15.6 million of derivatives held for purposes
other than trading, for June 30, 2009 and December 31, 2008, respectively, as
part of accrued expenses and other liabilities in the Consolidated Statement of
Financial Condition. 29. Derivatives
    June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair Value
    
    
    Notional
    
    
    Fair Value(In thousands)
    
    Amount
    
    
    Asset
    
    
    Liability
    
    
    Amount
    
    
    Asset
    
    
    LiabilityCash Flow Hedges:Interest rate swaps
    
    $
    345,000
    
    
    $
    
    
    
    $
    (12,951
    )
    
    $
    345,000
    
    
    $
    
    
    
    $
    (15,096
    )Other Derivatives (non hedges):Interest rate caps
    
    
    270,000
    
    
    
    484
    
    
    
    
    
    
    
    270,000
    
    
    
    287
    
    
    
    Forward contracts
    
    
    200,000
    
    
    
    88
    
    
    
    (352
    )
    
    
    35,000
    
    
    
    
    
    
    
    (187
    )Total
    
    $
    815,000
    
    
    $
    572
    
    
    $
    (13,303
    )
    
    $
    650,000
    
    
    $
    287
    
    
    $
    (15,283
    )
 44




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##### Table of Contents



Cash Flow Hedges
    Location of Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss Reclassified fromReclassified from
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    Accumulated OtherAccumulated Other
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    Comprehensive Loss toComprehensive Loss to
    
    Notional
    
    Fair
    
    Income for the
    
    Income for the(In thousands)
    
    Income
    
    Amount
    
    Value
    
    Quarter Ended
    
    Quarter EndedCash flow HedgesJune 30, 2009Interest rate swaps
    
    Interest expense - Advances from FHLB
    
    
    $345,000
    
    
    
    $(12,951
    )
    
    
    $   2,388
    
    
    
    $   (2,310
    )June 30, 2008Interest rate swaps
    
    Interest expense - Advances from FHLB
    
    
    $195,000
    
    
    
    $  (3,343
    )
    
    
    $   2,923
    
    
    
    $      (932
    )The table below presents the location and effect of cash flow derivatives on the Companys
results of operations and financial condition for the six month periods ended June 30, 2009 and
2008.Location of Loss
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    Loss Reclassified fromReclassified from
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    Accumulated OtherAccumulated Other
    
    
    
    
    
    
    
    
    
    Income (Loss) for
    
    Comprehensive Loss toComprehensive Loss to
    
    Notional
    
    Fair
    
    the Six Month
    
    Income for the Six(In thousands)
    
    Income
    
    Amount
    
    Value
    
    Period Ended
    
    Month Period EndedCash flow HedgesJune 30, 2009Interest rate swaps
    
    Interest expense - Advances from FHLB
    
    
    $345,000
    
    
    
    $(12,951
    )
    
    
    $   3,593
    
    
    
    $   (3,704
    )June 30, 2008Interest rate swaps
    
    Interest expense - Advances from FHLB
    
    
    $195,000
    
    
    
    $  (3,343
    )
    
    
    $     (244
    )
    
    
    $   (1,243
    )
 Trading and Non-Hedging Activities
  45




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##### Table of Contents



June 30, 2009Location of Gain (Loss)
    
    
    
    
    
    
    
    
    
    Net Gain (Loss)
    
    
    Net Gain (Loss) forRecognized in the
    
    Notional
    
    
    Fair
    
    
    for the Quarter
    
    
    the Six Month Period(In thousands)
    
    Income Statement
    
    Amount
    
    
    Value
    
    
    Ended
    
    
    EndedDerivatives not
designated as cash
flow hedges:Interest rate caps
    
    Net loss on securities held for trading
    
    $
    270,000
    
    
    $
    484
    
    
    $
    311
    
    
    $
    198Forward contracts
    
    Net loss on securities held for  trading
    
    
    200,000
    
    
    
    (264
    )
    
    
    (236
    )
    
    
    (1,267
    )$
    470,000
    
    
    $
    220
    
    
    $
    75
    
    
    $
    (1,069
    )
 June 30, 2008Location of (Loss) Gain
    
    
    
    
    
    
    
    
    
    Net Gain (Loss)
    
    
    Net (Loss) Gain forRecognized in the
    
    Notional
    
    
    Fair
    
    
    for the Quarter
    
    
    the Six Month Period(In thousands)
    
    Income Statement
    
    Amount
    
    
    Value
    
    
    Ended
    
    
    EndedDerivatives not
designated as cash
flow hedges:Interest rate swaps
    
    Net loss on securities held for trading
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (157
    )Interest rate caps
    
    Net loss on securities held for trading
    
    
    270,000
    
    
    
    2,246
    
    
    
    1,254
    
    
    
    764Forward contracts
    
    Net loss on securities held for trading
    
    
    23,000
    
    
    
    (539
    )
    
    
    (96
    )
    
    
    (806
    )$
    293,000
    
    
    $
    1,707
    
    
    $
    1,158
    
    
    $
    (199
    )
    46




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##### Table of Contents



30.
    
    Segment Information
     (In thousands)
    
    Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentQuarter Ended June 30, 2009
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    3,942
    
    
    $
    37,176
    
    
    $
    
    
    
    $
    
    
    
    $
    972
    
    
    $
    42,090Provision for loan and lease losses
    
    
    5,380
    
    
    
    4,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,133Non-interest income
    
    
    19,150
    
    
    
    14,929
    
    
    
    
    
    
    
    2,463
    
    
    
    (17,411
    )
    
    
    19,131Income (loss) before income taxes
    
    
    3,899
    
    
    
    4,217
    
    
    
    
    
    
    
    2,059
    
    
    
    (14,613
    )
    
    
    (4,438
    )Net income
    
    
    15,531
    
    
    
    6,327
    
    
    
    
    
    
    
    1,216
    
    
    
    (14,858
    )
    
    
    8,216Identifiable assets
    
    
    1,667,966
    
    
    
    8,866,956
    
    
    
    1,659
    
    
    
    17,047
    
    
    
    (799,190
    )
    
    
    9,754,438
 47




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##### Table of Contents



Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentQuarter Ended June 30, 2008
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    4,882
    
    
    $
    43,558
    
    
    $
    
    
    
    $
    
    
    
    $
    415
    
    
    $
    48,855Provision for loan and lease losses
    
    
    801
    
    
    
    9,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,683Non-interest income
    
    
    7,432
    
    
    
    20,327
    
    
    
    6
    
    
    
    3,535
    
    
    
    (6,405
    )
    
    
    24,895(Loss) income before income taxes
    
    
    (4,731
    )
    
    
    13,452
    
    
    
    (68
    )
    
    
    2,719
    
    
    
    (3,931
    )
    
    
    7,441Net (loss) income
    
    
    (3,976
    )
    
    
    7,934
    
    
    
    (45
    )
    
    
    1,659
    
    
    
    (3,930
    )
    
    
    1,642Identifiable assets
    
    
    2,106,364
    
    
    
    8,931,123
    
    
    
    2,037
    
    
    
    24,166
    
    
    
    (613,819
    )
    
    
    10,449,871
 
 (1)
    
    The intersegment eliminations in the tables above include servicing fees paid by the banking subsidiaries to the mortgage banking
subsidiary recognized as a reduction of the non interest income, direct intersegment loan origination costs amortized as yield adjustment or
offset against net gains on mortgage loan sales and fees (mainly related with origination costs paid by the banking segment to the mortgage banking
segment) and other income derived from intercompany transactions, related principally to rental income paid to Doral Properties, the Companys
subsidiary that owns the corporate headquarters facilities. Assets include internal funding and investments in subsidiaries accounted for at cost. (In thousands)Six Month Period Ended
    
    Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentJune 30, 2009
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    8,191
    
    
    $
    68,063
    
    
    $
    
    
    
    $
    
    
    
    $
    1,906
    
    
    $
    78,160(Recovery) provision for loan
and lease losses
    
    
    (2,396
    )
    
    
    36,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,758Non-interest income
    
    
    24,184
    
    
    
    12,887
    
    
    
    
    
    
    
    4,988
    
    
    
    (21,345
    )
    
    
    20,714Income (loss) before income taxes
    
    
    3,910
    
    
    
    (42,741
    )
    
    
    
    
    
    
    3,895
    
    
    
    (15,900
    )
    
    
    (50,836
    )Net income (loss)
    
    
    17,105
    
    
    
    (41,638
    )
    
    
    
    
    
    
    2,604
    
    
    
    (16,145
    )
    
    
    (38,074
    )Identifiable assets
    
    
    1,667,966
    
    
    
    8,866,956
    
    
    
    1,659
    
    
    
    17,047
    
    
    
    (799,190
    )
    
    
    9,754,438
 Six Month Period Ended
    
    Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentJune 30, 2008
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    9,777
    
    
    $
    77,353
    
    
    $
    
    
    
    $
    
    
    
    $
    769
    
    
    $
    87,899Provision for loan and lease losses
    
    
    1,641
    
    
    
    13,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,469Non-interest income
    
    
    15,077
    
    
    
    34,307
    
    
    
    144
    
    
    
    6,549
    
    
    
    (13,803
    )
    
    
    42,274(Loss) income before income taxes
    
    
    (6,374
    )
    
    
    14,699
    
    
    
    (3
    )
    
    
    4,977
    
    
    
    (8,784
    )
    
    
    4,515Net income (loss)
    
    
    1,798
    
    
    
    3,308
    
    
    
    (14
    )
    
    
    3,036
    
    
    
    (8,784
    )
    
    
    (656
    )Identifiable assets
    
    
    2,106,364
    
    
    
    8,931,123
    
    
    
    2,037
    
    
    
    24,166
    
    
    
    (613,819
    )
    
    
    10,449,871
 
 (1)
    
    The intersegment eliminations in the tables above include servicing fees paid by the banking subsidiaries to the mortgage banking subsidiary
recognized as a reduction of the non interest income, direct intersegment loan origination costs amortized as yield adjustment or offset against net gains on mortgage
loan sales and fees (mainly related with origination costs paid by the banking segment to the mortgage banking segment) and other income derived from intercompany
transactions, related principally to rental income paid to Doral Properties, the Companys subsidiary that owns the corporate headquarters facilities. Assets include
internal funding and investments in subsidiaries accounted for at cost.  (In thousands)Quarter Ended June 30, 2009
    
    Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsNet interest income
    
    $
    38,892
    
    
    $
    3,080
    
    
    $
    118
    
    
    $
    42,090Provision for loan and lease losses
    
    
    9,977
    
    
    
    156
    
    
    
    
    
    
    
    10,133Non-interest income
    
    
    18,821
    
    
    
    483
    
    
    
    (173
    )
    
    
    19,131(Loss) income before income taxes
    
    
    (6,329
    )
    
    
    1,892
    
    
    
    (1
    )
    
    
    (4,438
    )Net income
    
    
    6,806
    
    
    
    1,656
    
    
    
    (246
    )
    
    
    8,216Identifiable assets
    
    
    9,635,427
    
    
    
    337,201
    
    
    
    (218,190
    )
    
    
    9,754,438
 48




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##### Table of Contents



Quarter Ended June 30, 2008
    
    Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsNet interest income
    
    $
    46,939
    
    
    $
    1,887
    
    
    $
    29
    
    
    $
    48,855Provision for loan and lease losses
    
    
    10,164
    
    
    
    519
    
    
    
    
    
    
    
    10,683Non-interest income
    
    
    24,148
    
    
    
    824
    
    
    
    (77
    )
    
    
    24,895Income before income taxes
    
    
    6,520
    
    
    
    922
    
    
    
    (1
    )
    
    
    7,441Net income
    
    
    1,610
    
    
    
    33
    
    
    
    (1
    )
    
    
    1,642Identifiable assets
    
    
    10,392,531
    
    
    
    233,814
    
    
    
    (176,474
    )
    
    
    10,449,871
 (In thousands)Six Month Period EndedJune 30, 2009
    
    Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsNet interest income
    
    $
    72,157
    
    
    $
    5,798
    
    
    $
    205
    
    
    $
    78,160Provision for loan and lease losses
    
    
    33,556
    
    
    
    202
    
    
    
    
    
    
    
    33,758Non-interest income
    
    
    20,091
    
    
    
    883
    
    
    
    (260
    )
    
    
    20,714(Loss) income before income taxes
    
    
    (54,189
    )
    
    
    3,354
    
    
    
    (1
    )
    
    
    (50,836
    )Net (loss) income
    
    
    (40,282
    )
    
    
    2,454
    
    
    
    (246
    )
    
    
    (38,074
    )Identifiable assets
    
    
    9,635,427
    
    
    
    337,201
    
    
    
    (218,190
    )
    
    
    9,754,438
 Six Month Period EndedJune 30, 2008
    
    Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsNet interest income
    
    $
    84,599
    
    
    $
    3,200
    
    
    $
    100
    
    
    $
    87,899Provision for loan and lease losses
    
    
    15,052
    
    
    
    417
    
    
    
    
    
    
    
    15,469Non-interest income
    
    
    41,053
    
    
    
    1,426
    
    
    
    (205
    )
    
    
    42,274Income before income taxes
    
    
    2,795
    
    
    
    1,709
    
    
    
    11
    
    
    
    4,515Net (loss) income
    
    
    (1,288
    )
    
    
    621
    
    
    
    11
    
    
    
    (656
    )Identifiable assets
    
    
    10,392,531
    
    
    
    233,814
    
    
    
    (176,474
    )
    
    
    10,449,871
 31.
    
    Subsequent Events
  49




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##### Table of Contents



FORWARD LOOKING STATEMENTS
     
    
    the continued recessionary conditions of the Puerto Rico and the United States
economies and the continued weakness in the performance of the United States capital
markets leading to, among other things, (i) a deterioration in the credit quality of our
loans and other assets, (ii) decreased demand for our products and services and lower
revenue and earnings, (iii) reduction in our interest margins, and (iv) decreased
availability and increased pricing of our funding sources, including brokered certificates
of deposits;
    
    the strength or weakness of the real estate markets and of the consumer and commercial
credit sectors and its impact in the credit quality of our loans and other assets which may
lead to, among other things, an increase in our non-performing loans, charge-offs and loan
loss provisions;
    
    a decline in the market value and estimated cash flows of our mortgage-backed
securities and other assets may result in the recognition of other-than-temporary
impairment of such assets under generally accepted accounting principles in the United
States of America (GAAP);
    
    our ability to derive sufficient income to realize the benefit of the deferred tax
assets;
    
    uncertainty about the legislative and other measures adopted by the Puerto Rico
government in response to its fiscal situation and the impact of such measures on several
sectors of the Puerto Rico economy;
    
    uncertainty about the effectiveness of the various actions undertaken to stimulate the
United States economy and stabilize the United States financial markets, and the impact of
such actions on our business, financial condition and results of operations;
    
    changes in interest rates, which may result from changes in the fiscal and monetary
policy of the federal government, and the potential impact of such changes in interest
rates on our net interest income and the value of our loans and investments;
    
    the commercial soundness of our various counterparties of financing and other
securities transactions, which could lead to possible losses when the collateral held by us
to secure the obligations of the
 50




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##### Table of Contents



counterparty is not sufficient or to possible delays or losses in recovering any excess
collateral belonging to us held by the counterparty;
    
    our ability to collect payment of a receivable from Lehman Brothers, Inc. (LBI),
which results from the excess of the value of securities owned by Doral Financial that were
held by LBI above the amounts owed by Doral Financial under certain terminated repurchase
agreements and forward agreement;
    
    higher credit losses because of federal or state legislation or regulatory action that
either (i) reduces the amount that our borrowers are required to pay us, or (ii) limits our
ability to foreclose on properties or collateral or makes foreclosures less economically
feasible;
    
    developments in the regulatory and legal environment for financial services companies
in Puerto Rico and the United States as a result of, among other things, recent legislative
and regulatory proposals made by the federal government;
    
    changes in our accounting policies or in accounting standards, and changes in how
accounting standards are interpreted or applied;
    
    general competitive factors and industry consolidation;
    
    potential adverse outcome in the legal or regulatory actions or proceedings described
in Part I, Item 3 Legal Proceedingsin the Companys 2008 Annual Report on Form 10-K, as
updated from time to time in the Companys future reports filed with the SEC; and
    
    the other risks and uncertainties detailed in Part I, Item 1A Risk Factorsin the
Companys 2008 Annual Report on Form 10-K, as updated from time to time in the Companys
future reports filed with the SEC.
 51




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   OVERVIEW OF RESULTS OF OPERATIONS
   
    
    On May 7, 2009, the Company announced the commencement of an offer to
exchange a stated amount of its shares of common stock and a cash payment in exchange
for a limited number of its shares of outstanding preferred stock. The transaction was
settled on June 11, 2009 and resulted in the retirement of $105.6 million in preferred
stock and an increase in common equity of $100.6 million.
    
    Net income attributable to common shareholders for the second quarter of
2009 of $14.5 million, resulted in a diluted earnings per share of $0.27, compared to a
net loss attributable to common shareholders for the corresponding 2008 period of $6.7
million, or a diluted loss per share of $0.12. The $0.39 improvement in earnings per
share was due to net income attributable to common shareholders of $5.2 million before the effect of
preferred stock conversion, which resulted in $0.10 per share for the
quarter, and to the results of the preferred stock conversion effected in June of 2009
of $0.17 per share.
    
    Net interest income for the second quarter of 2009 was $42.1 million,
compared to $48.9 million for the comparable period in 2008. The decrease of $6.8
million in net interest income for 2009, compared to 2008, resulted from a reduction in
interest income of $21.1 million, partially offset by a reduction in interest expense
of $14.3 million. The reduction in net interest income resulted from (a) a 0.70%
reduction in yield on assets reflecting the lower market interest rate environment, and
(b) the $367.2 million decrease in average interest earning assets, particularly $1.2
billion floating rate securities sold in May 2009, offset by growth in loans, mortgage
backed securities, and other investment securities. The decrease in interest expense
resulted from a 0.62% decrease in yield on liabilities primarily reflected in lower
costs of deposits and certain loans payable combined with slightly lower average
interest-bearing liabilities. Average interest-earning assets decreased from $9.7
billion for the second quarter of 2008 to $9.4 billion for the corresponding 2009
period, while the average interest-bearing liabilities decreased from $8.6 billion to
$8.5 billion, respectively. The reduction in leverage, combined
 52




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##### Table of Contents



with a decline in interest expense, resulted in a contraction of net interest margin
from 2.02% in the second quarter of 2008 to 1.80% in the corresponding 2009 period.
    
    Doral Financials provision for loan and lease losses for the quarter ended
June 30, 2009 amounted to $10.1 million, compared to $10.7 million for the
corresponding 2008 period. Second quarter results were impacted by the effects of
continuing deterioration of Puerto Rico economy on the residential real estate market,
causing lower home absorption rates on new construction, increased defaults on existing
mortgages and weakening economic situation of existing borrowers. An increase in the
provision for the residential mortgage portfolio of $3.1 million was offset by
decreases of $1.6 million and $2.3 million in the provision for loan and lease losses
of the commercial and construction (including land) portfolios, respectively.
    
    Non-interest income for the second quarter of 2009 was $19.1 million,
compared to $24.9 million for the corresponding period in 2008. The decrease in
non-interest income of $5.8 million for the second quarter of 2009, compared to the
same period in 2008, resulted from $6.8 million other-than-temporary impairment
realized on investment securities in the 2009 second quarter and a $5.2 million gain
recognized in the second quarter of 2008 from the redemption of shares of VISA, Inc.,
pursuant to their global restructuring agreement. These decreases were partially offset
by a gain on investment securities of $4.8 million related to the sale of approximately
$1.2 billion of its floating rate securities and lower losses on trading activities of
$2.1 million.
    
    Non-interest expense for the second quarter of 2009 was $55.5 million,
compared to $55.6 million for the corresponding period in 2008. Although total
non-interest expenses for the second quarter of 2009 remained flat compared to 2008 the
results were impacted by decreases in operating expenses for compensation and benefits,
advertising, occupancy and depreciation and amortization expenses, largely offset by:
(i) an increase of $4.2 million related to the FDIC special assessment expense during
the quarter; and (ii) an increase of $1.1 million in EDP expenses.
    
    An income tax benefit of $12.7 million for the second quarter of 2009 was
related to a net release of unrecognized tax benefits of $15.5 million. The release of
unrecognized tax benefits was due to the expiration of the statute of limitations and
was net of an accrual for unrecognized tax benefits of $3.6 million.
    
    The Company reported other comprehensive losses of approximately $4.2
million for the second quarter of 2009 compared to $42.7 million for the corresponding
2008 period. The Companys other comprehensive loss for the second quarter of 2009
resulted principally from the reduction in value of securities in its available for
sale investment portfolio. As of June 30, 2009, the Companys accumulated other
comprehensive loss (net of income tax benefit) totaled $140.2 million, compared to
$123.2 million as of December 31, 2008.
    
    Doral Financials loan production for the second quarter of 2009 was $291.9
million, compared to $383.3 million for the comparable 2008 period, a decrease of
approximately 24%. The decrease in Doral Financials loan production for the second
quarter of 2009 reflects the reduction in Puerto Rico real estate purchase and mortgage
lending activity caused by the end of the Puerto Rico government tax incentive program
for the purchase of new homes, changes in laws and regulations and to the general
economic conditions in Puerto Rico.
    
    Total assets as of June 30, 2009 amounted to $9.8 billion compared to $10.1
billion as of December 31, 2008. A decrease of $569.5 million in the Companys
securities portfolio was partially offset by increases in cash and due from banks of
$81.1 million and money market investments of $46.0 million. Total liabilities were
$8.9 billion at June 30, 2009, compared to $9.2 billion at December 31, 2008. Total
liabilities declined due to a decrease of $338.5 million in deposits driven by a
decrease of $448.0 million in brokered deposits offset by an increase in money markets
of $141.6 million, and a decrease of $131.3 million in securities sold under agreements to repurchase
that was partially offset by an increase of $205.4 million in other short-term
borrowings.
 53




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##### Table of Contents




    
    Non-performing assets as of June 30, 2009 were $889.8 million, an increase
of $110.6 million since December 31, 2008. Non-performing loans (which are included in
non-performing assets) as of June 30, 2009 were $805.7 million, and increase of $88.0
million since December 31, 2008. However, non-performing assets have increased only
$7.6 million from the March 31, 2009 non-performing asset balance of $882.2 million,
and non-performing loans decreased $6.1 million from the March 31, 2009 non-performing
loan balance of $811.8 million.
  TABLE A  SELECTED FINANCIAL DATA
 QUARTER ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Selected Income Statement Data:Interest income
    
    $
    114,578
    
    
    $
    135,646
    
    
    $
    231,072
    
    
    $
    263,754Interest expense
    
    
    72,488
    
    
    
    86,791
    
    
    
    152,912
    
    
    
    175,855Net interest income
    
    
    42,090
    
    
    
    48,855
    
    
    
    78,160
    
    
    
    87,899Provision for loan and lease losses
    
    
    10,133
    
    
    
    10,683
    
    
    
    33,758
    
    
    
    15,469Net interest income after provision for loan and lease losses
    
    
    31,957
    
    
    
    38,172
    
    
    
    44,402
    
    
    
    72,430Total non-interest income
    
    
    19,131
    
    
    
    24,895
    
    
    
    20,714
    
    
    
    42,274Non-interest expenses
    
    
    55,526
    
    
    
    55,626
    
    
    
    115,952
    
    
    
    110,189(Loss) income before income taxes
    
    
    (4,438
    )
    
    
    7,441
    
    
    
    (50,836
    )
    
    
    4,515Income tax (benefit) expense (1)
    
    
    (12,654
    )
    
    
    5,799
    
    
    
    (12,762
    )
    
    
    5,171Net income (loss)
    
    $
    8,216
    
    
    $
    1,642
    
    
    $
    (38,074
    )
    
    $
    (656
    )Net income (loss) attributable to common shareholders
    
    $
    14,524
    
    
    $
    (6,683
    )
    
    $
    (40,091
    )
    
    $
    (17,306
    )Net income (loss) per common share(2)
    
    $
    0.27
    
    
    $
    (0.12
    )
    
    $
    (0.74
    )
    
    $
    (0.32
    )Cash Dividends Declared, Preferred Stock
    
    $
    3,061
    
    
    $
    8,325
    
    
    $
    11,386
    
    
    $
    16,650Book Value Per Common Share
    
    $
    6.34
    
    
    $
    12.20
    
    
    $
    6.34
    
    
    $
    12.20Weighted  Average Common Shares Outstanding
    
    
    54,679,097
    
    
    
    53,810,110
    
    
    
    54,247,004
    
    
    
    53,810,110Common shares outstanding at end of period
    
    
    57,764,002
    
    
    
    53,810,110
    
    
    
    57,764,002
    
    
    
    53,810,110Selected Balance Sheet Data at Period End:Total investment securities
    
    $
    3,229,443
    
    
    $
    3,501,462
    
    
    $
    3,229,443
    
    
    $
    3,501,462Total loans, net(3)
    
    
    5,548,370
    
    
    
    5,484,414
    
    
    
    5,548,370
    
    
    
    5,484,414Servicing assets, net
    
    
    112,869
    
    
    
    145,527
    
    
    
    112,869
    
    
    
    145,527Total assets
    
    
    9,754,438
    
    
    
    10,449,871
    
    
    
    9,754,438
    
    
    
    10,449,871Deposit accounts
    
    
    4,064,257
    
    
    
    4,330,728
    
    
    
    4,064,257
    
    
    
    4,330,728Total borrowings
    
    
    4,540,328
    
    
    
    4,588,802
    
    
    
    4,540,328
    
    
    
    4,588,802Total liabilities
    
    
    8,920,535
    
    
    
    9,220,384
    
    
    
    8,920,535
    
    
    
    9,220,384Preferred stock
    
    
    467,641
    
    
    
    573,250
    
    
    
    467,641
    
    
    
    573,250Common stock
    
    
    578
    
    
    
    538
    
    
    
    578
    
    
    
    538Stockholders equity
    
    
    833,903
    
    
    
    1,229,487
    
    
    
    833,903
    
    
    
    1,229,487Selected Average Balance Sheet Data for Period End:Total interest-earning assets
    
    
    9,353,177
    
    
    
    9,720,382
    
    
    
    9,396,168
    
    
    
    9,230,712Total assets
    
    
    10,061,918
    
    
    
    10,470,986
    
    
    
    10,042,917
    
    
    
    10,015,366Total interest-bearing liabilities
    
    
    8,500,380
    
    
    
    8,643,916
    
    
    
    8,542,163
    
    
    
    8,115,766Preferred equity
    
    
    550,039
    
    
    
    573,250
    
    
    
    561,581
    
    
    
    573,250Total stockholders equity
    
    
    791,424
    
    
    
    1,231,371
    
    
    
    822,182
    
    
    
    1,247,732Operating Data:Loan production
    
    $
    291,940
    
    
    $
    383,309
    
    
    $
    534,278
    
    
    $
    755,383Loan servicing portfolio(4)
    
    
    9,065,032
    
    
    
    9,680,896
    
    
    
    9,065,032
    
    
    
    9,680,896Selected Financial Ratios(5)Performance:Net interest margin
    
    
    1.80
    %
    
    
    2.02
    %
    
    
    1.68
    %
    
    
    1.91
    %Return on average assets
    
    
    0.33
    %
    
    
    0.06
    %
    
    
    (0.76
    )%
    
    
    (0.01
    )%Return on average common equity(5)(6)
    
    
    8.57
    %
    
    
    (4.08
    )%
    
    
    (38.27
    )%
    
    
    (5.16
    )%Capital:Leverage ratio
    
    
    8.16
    %
    
    
    9.47
    %
    
    
    8.16
    %
    
    
    9.47
    %Tier 1 risk-based capital ratio
    
    
    13.32
    %
    
    
    15.65
    %
    
    
    13.32
    %
    
    
    15.65
    %Total risk-based capital ratio
    
    
    15.19
    %
    
    
    17.00
    %
    
    
    15.19
    %
    
    
    17.00
    %Other ratios:Average common equity to average assets
    
    
    2.40
    %
    
    
    6.29
    %
    
    
    2.59
    %
    
    
    6.73
    %Tier 1 common equity to risk-weighted assets
    
    
    6.36
    %
    
    
    6.34
    %
    
    
    6.36
    %
    
    
    6.34
    %
 54




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(1)
    
    See Note 22 of the consolidated financial statements for an explanation of the computation of income tax benefit.(2)
    
    For the quarters and six month periods ended June 30, 2009 and 2008, net income (loss) per common share represents the basic and diluted earnings (loss) per common share,
respectively, for each of the periods presented.(3)
    
    Includes loans held for sale.(4)
    
    Represents the total portfolio of loans serviced for third parties. Excludes $4.3 billion and $3.8 billion of mortgage loans owned by Doral Financial at June 30, 2009 and 2008,
respectively.(5)
    
    Average balances are computed on a daily basis.(6)
    
    Excludes $9.4 million of effect of conversion of preferred stock. SUBSEQUENT EVENTS
  CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
  RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
 NET INTEREST INCOME
   55




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56




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TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 QUARTER ENDED JUNE 30,2009
    
    
    2008AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,667,466
    
    
    $
    81,245
    
    
    
    5.75
    %
    
    $
    5,553,218
    
    
    $
    85,910
    
    
    
    6.22
    %Mortgage-backed securities
    
    
    2,977,412
    
    
    
    27,256
    
    
    
    3.67
    %
    
    
    2,316,989
    
    
    
    29,936
    
    
    
    5.20
    %Interest-only strips (IOs)
    
    
    48,964
    
    
    
    1,575
    
    
    
    12.90
    %
    
    
    51,817
    
    
    
    1,756
    
    
    
    13.63
    %Investment securities
    
    
    360,725
    
    
    
    2,765
    
    
    
    3.07
    %
    
    
    1,176,813
    
    
    
    13,912
    
    
    
    4.75
    %Other interest-earning assets
    
    
    298,610
    
    
    
    1,737
    
    
    
    2.33
    %
    
    
    621,545
    
    
    
    4,132
    
    
    
    2.67
    %Total interest-earning assets/interest income
    
    
    9,353,177
    
    
    $
    114,578
    
    
    
    4.91
    %
    
    
    9,720,382
    
    
    $
    135,646
    
    
    
    5.61
    %Total non-interest-earning assets
    
    
    708,741
    
    
    
    
    
    
    
    
    
    
    
    750,604Total assets
    
    $
    10,061,918
    
    
    
    
    
    
    
    
    
    
    $
    10,470,986LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,842,363
    
    
    $
    30,872
    
    
    
    3.22
    %
    
    $
    4,051,419
    
    
    $
    37,268
    
    
    
    3.70
    %Repurchase agreements
    
    
    1,785,233
    
    
    
    17,481
    
    
    
    3.93
    %
    
    
    2,181,718
    
    
    
    22,091
    
    
    
    4.07
    %Advances from FHLB
    
    
    1,591,938
    
    
    
    15,988
    
    
    
    4.03
    %
    
    
    1,745,374
    
    
    
    17,549
    
    
    
    4.04
    %Other short-term borrowings
    
    
    647,912
    
    
    
    406
    
    
    
    0.25
    %
    
    
    
    
    
    
    
    
    
    
    Loans payable
    
    
    357,956
    
    
    
    2,538
    
    
    
    2.84
    %
    
    
    384,698
    
    
    
    4,568
    
    
    
    4.78
    %Notes payable
    
    
    274,978
    
    
    
    5,203
    
    
    
    7.59
    %
    
    
    280,707
    
    
    
    5,315
    
    
    
    7.62
    %Total interest-bearing liabilities/interest expense
    
    
    8,500,380
    
    
    $
    72,488
    
    
    
    3.42
    %
    
    
    8,643,916
    
    
    $
    86,791
    
    
    
    4.04
    %Total non-interest-bearing liabilities
    
    
    770,114
    
    
    
    
    
    
    
    
    
    
    
    595,699Total liabilities
    
    
    9,270,494
    
    
    
    
    
    
    
    
    
    
    
    9,239,615Stockholders equity
    
    
    791,424
    
    
    
    
    
    
    
    
    
    
    
    1,231,371Total liabilities and stockholders equity
    
    $
    10,061,918
    
    
    
    
    
    
    
    
    
    
    $
    10,470,986Net interest-earning assets
    
    $
    852,797
    
    
    
    
    
    
    
    
    
    
    $
    1,076,466Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    42,090
    
    
    
    
    
    
    
    
    
    
    $
    48,855Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.49
    %
    
    
    
    
    
    
    
    
    
    
    1.57
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.80
    %
    
    
    
    
    
    
    
    
    
    
    2.02
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    110.03
    %
    
    
    
    
    
    
    
    
    
    
    112.45
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also, includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $0.4 million and $0.4 million for the second quarter of 2009 and 2008, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.(5)
    
    Net interest-earning assets ratio represents average interest-earning assets as a percentage of average interest-bearing liabilities. 57




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TABLE C
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 SIX MONTH PERIODS ENDED JUNE 30,2009
    
    
    2008AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,631,025
    
    
    $
    162,833
    
    
    
    5.83
    %
    
    $
    5,501,828
    
    
    $
    171,292
    
    
    
    6.26
    %Mortgage-backed securities
    
    
    3,052,901
    
    
    
    54,637
    
    
    
    3.61
    %
    
    
    1,791,175
    
    
    
    49,038
    
    
    
    5.51
    %Interest-only strips
    
    
    50,422
    
    
    
    3,203
    
    
    
    12.81
    %
    
    
    50,830
    
    
    
    3,430
    
    
    
    13.57
    %Investment securities
    
    
    437,696
    
    
    
    7,672
    
    
    
    3.53
    %
    
    
    1,175,526
    
    
    
    28,678
    
    
    
    4.91
    %Other interest-earning assets
    
    
    224,124
    
    
    
    2,727
    
    
    
    2.45
    %
    
    
    711,353
    
    
    
    11,316
    
    
    
    3.20
    %Total interest-earning assets/interest income
    
    
    9,396,168
    
    
    $
    231,072
    
    
    
    4.96
    %
    
    
    9,230,712
    
    
    $
    263,754
    
    
    
    5.75
    %Total non-interest-earning assets
    
    
    646,749
    
    
    
    
    
    
    
    
    
    
    
    784,654Total assets
    
    $
    10,042,917
    
    
    
    
    
    
    
    
    
    
    $
    10,015,366LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,876,902
    
    
    $
    69,079
    
    
    
    3.59
    %
    
    $
    3,954,914
    
    
    $
    79,916
    
    
    
    4.06
    %Repurchase agreements
    
    
    1,795,324
    
    
    
    34,713
    
    
    
    3.90
    %
    
    
    1,858,953
    
    
    
    40,404
    
    
    
    4.37
    %Advances from FHLB
    
    
    1,603,533
    
    
    
    32,002
    
    
    
    4.02
    %
    
    
    1,634,467
    
    
    
    34,807
    
    
    
    4.28
    %Other short-term borrowings
    
    
    629,590
    
    
    
    842
    
    
    
    0.27
    %
    
    
    
    
    
    
    
    
    
    
    Loans payable
    
    
    361,138
    
    
    
    5,847
    
    
    
    3.27
    %
    
    
    387,769
    
    
    
    10,077
    
    
    
    5.23
    %Notes payable
    
    
    275,676
    
    
    
    10,429
    
    
    
    7.63
    %
    
    
    279,663
    
    
    
    10,651
    
    
    
    7.66
    %Total interest-bearing liabilities/interest expense
    
    
    8,542,163
    
    
    $
    152,912
    
    
    
    3.61
    %
    
    
    8,115,766
    
    
    $
    175,855
    
    
    
    4.36
    %Total non-interest-bearing liabilities
    
    
    678,572
    
    
    
    
    
    
    
    
    
    
    
    651,868Total liabilities
    
    
    9,220,735
    
    
    
    
    
    
    
    
    
    
    
    8,767,634Stockholders equity
    
    
    822,182
    
    
    
    
    
    
    
    
    
    
    
    1,247,732Total liabilities and stockholders equity
    
    $
    10,042,917
    
    
    
    
    
    
    
    
    
    
    $
    10,015,366Net interest-earning assets
    
    $
    854,005
    
    
    
    
    
    
    
    
    
    
    $
    1,114,946Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    78,160
    
    
    
    
    
    
    
    
    
    
    $
    87,899Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.35
    %
    
    
    
    
    
    
    
    
    
    
    1.39
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.68
    %
    
    
    
    
    
    
    
    
    
    
    1.91
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    110.00
    %
    
    
    
    
    
    
    
    
    
    
    113.74
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also, includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $0.6 million and $0.7 million for the first half of 2009 and 2008, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.(5)
    
    Net interest-earning assets ratio represents average interest-earning assets as a percentage of average interest-bearing liabilities.  58




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TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
 QUARTER ENDEDJUNE 30,2009 COMPARED TO 2008INCREASE (DECREASE) DUE TO:(In thousands)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    10,173
    
    
    $
    (14,838
    )
    
    $
    (4,665
    )Mortgage-backed securities
    
    
    33,568
    
    
    
    (36,248
    )
    
    
    (2,680
    )Interest-only strips
    
    
    (92
    )
    
    
    (89
    )
    
    
    (181
    )Investment securities
    
    
    (7,382
    )
    
    
    (3,765
    )
    
    
    (11,147
    )Other interest-earning assets
    
    
    (1,924
    )
    
    
    (471
    )
    
    
    (2,395
    )TOTAL INTEREST INCOME VARIANCE
    
    $
    34,343
    
    
    $
    (55,411
    )
    
    $
    (21,068
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    (1,820
    )
    
    $
    (4,576
    )
    
    $
    (6,396
    )Repurchase agreements
    
    
    (3,876
    )
    
    
    (734
    )
    
    
    (4,610
    )Advances from FHLB
    
    
    (1,518
    )
    
    
    (43
    )
    
    
    (1,561
    )Other short-term borrowings
    
    
    203
    
    
    
    203
    
    
    
    406Loans payable
    
    
    (297
    )
    
    
    (1,733
    )
    
    
    (2,030
    )Notes payable
    
    
    (94
    )
    
    
    (18
    )
    
    
    (112
    )TOTAL INTEREST EXPENSE VARIANCE
    
    $
    (7,402
    )
    
    $
    (6,901
    )
    
    $
    (14,303
    )NET INTEREST INCOME VARIANCE
    
    $
    41,745
    
    
    $
    (48,510
    )
    
    $
    (6,765
    )
  59




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TABLE E
NET INTEREST INCOME VARIANCE ANALYSIS
 SIX MONTH PERIOD ENDEDJUNE 30,2009 COMPARED TO 2008INCREASE (DECREASE) DUE TO:(In thousands)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    9,899
    
    
    $
    (18,358
    )
    
    $
    (8,459
    )Mortgage-backed securities
    
    
    49,454
    
    
    
    (43,855
    )
    
    
    5,599Interest-only strips
    
    
    (28
    )
    
    
    (199
    )
    
    
    (227
    )Investment securities
    
    
    (14,509
    )
    
    
    (6,497
    )
    
    
    (21,006
    )Other interest-earning assets
    
    
    (6,399
    )
    
    
    (2,190
    )
    
    
    (8,589
    )TOTAL INTEREST INCOME VARIANCE
    
    $
    38,417
    
    
    $
    (71,099
    )
    
    $
    (32,682
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    (1,578
    )
    
    $
    (9,259
    )
    
    $
    (10,837
    )Repurchase agreements
    
    
    (1,374
    )
    
    
    (4,317
    )
    
    
    (5,691
    )Advances from FHLB
    
    
    (666
    )
    
    
    (2,139
    )
    
    
    (2,805
    )Other short-term borrowings
    
    
    421
    
    
    
    421
    
    
    
    842Loans payable
    
    
    (655
    )
    
    
    (3,575
    )
    
    
    (4,230
    )Notes payable
    
    
    (174
    )
    
    
    (48
    )
    
    
    (222
    )TOTAL INTEREST EXPENSE VARIANCE
    
    $
    (4,026
    )
    
    $
    (18,917
    )
    
    $
    (22,943
    )NET INTEREST INCOME VARIANCE
    
    $
    42,443
    
    
    $
    (52,182
    )
    
    $
    (9,739
    )
  PROVISION FOR LOAN AND LEASE LOSSES
   60




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NON-INTEREST INCOME
 TABLE F
NON-INTEREST INCOME
 QUARTER ENDED JUNE 30,
    
    
    SIX MONTH PERIODS ENDED JUNE 30,(In thousands)
    
    2009
    
    
    2008
    
    
    $ Variance
    
    
    2009
    
    
    2008
    
    
    $ VarianceNet other-than-temporary impairment losses
    
    $
    (6,795
    )
    
    $
    
    
    
    $
    (6,795
    )
    
    $
    (6,795
    )
    
    $
    
    
    
    $
    (6,795
    )Net gain on mortgage loan sales and fees
    
    
    3,298
    
    
    
    3,858
    
    
    
    (560
    )
    
    
    5,017
    
    
    
    6,226
    
    
    
    (1,209
    )Net gain (loss) on securities held for trading
    
    
    104
    
    
    
    (479
    )
    
    
    583
    
    
    
    1,783
    
    
    
    (479
    )
    
    
    2,262Gain (loss) on IO valuation
    
    
    569
    
    
    
    (706
    )
    
    
    1,275
    
    
    
    7
    
    
    
    (29
    )
    
    
    36(Loss) gain on MSR economic hedge
    
    
    (6,895
    )
    
    
    (7,889
    )
    
    
    994
    
    
    
    (14,196
    )
    
    
    459
    
    
    
    (14,655
    )Gain (loss) on derivatives
    
    
    426
    
    
    
    1,158
    
    
    
    (732
    )
    
    
    (718
    )
    
    
    (199
    )
    
    
    (519
    )Net loss on securities held for trading,
including
gains and losses on the fair value of IOs
    
    
    (5,796
    )
    
    
    (7,916
    )
    
    
    2,120
    
    
    
    (13,124
    )
    
    
    (248
    )
    
    
    (12,876
    )Net gain on investment securities
    
    
    4,810
    
    
    
    
    
    
    
    4,810
    
    
    
    4,797
    
    
    
    194
    
    
    
    4,603Servicing incomeServicing fees
    
    
    7,134
    
    
    
    7,805
    
    
    
    (671
    )
    
    
    14,975
    
    
    
    16,199
    
    
    
    (1,224
    )Late charges
    
    
    2,059
    
    
    
    2,274
    
    
    
    (215
    )
    
    
    4,335
    
    
    
    4,490
    
    
    
    (155
    )Prepayment penalties
    
    
    136
    
    
    
    148
    
    
    
    (12
    )
    
    
    262
    
    
    
    248
    
    
    
    14Other servicing fees
    
    
    141
    
    
    
    147
    
    
    
    (6
    )
    
    
    274
    
    
    
    403
    
    
    
    (129
    )Interest loss on serial notes and others
    
    
    (2,065
    )
    
    
    (2,438
    )
    
    
    373
    
    
    
    (3,863
    )
    
    
    (4,518
    )
    
    
    655Mark-to-market adjustment of servicing assets
    
    
    6,555
    
    
    
    4,498
    
    
    
    2,057
    
    
    
    (4,798
    )
    
    
    (7,099
    )
    
    
    2,301Total servicing income
    
    
    13,960
    
    
    
    12,434
    
    
    
    1,526
    
    
    
    11,185
    
    
    
    9,723
    
    
    
    1,462Commissions, fees and other income:Retail banking fees
    
    
    7,127
    
    
    
    6,587
    
    
    
    540
    
    
    
    14,209
    
    
    
    12,969
    
    
    
    1,240Insurance agency commissions
    
    
    2,463
    
    
    
    2,856
    
    
    
    (393
    )
    
    
    4,887
    
    
    
    5,261
    
    
    
    (374
    )Other income
    
    
    64
    
    
    
    7,076
    
    
    
    (7,012
    )
    
    
    538
    
    
    
    8,149
    
    
    
    (7,611
    )Total commissions, fees and other income
    
    
    9,654
    
    
    
    16,519
    
    
    
    (6,865
    )
    
    
    19,634
    
    
    
    26,379
    
    
    
    (6,745
    )Total non-interest income
    
    $
    19,131
    
    
    $
    24,895
    
    
    $
    (5,764
    )
    
    $
    20,714
    
    
    $
    42,274
    
    
    $
    (21,560
    )
  
    
    During the second quarter of 2009 it was determined that three of the Companys
non-agency collateralized mortgage obligations (CMO), representing an aggregate amortized cost of $68.9 million, were
other-than-temporarily impaired and recognized a credit loss of $6.8 million on these
securities during the quarter. Please refer to Note 7 in the accompanying Notes to the
Consolidated Financial Statements for additional information on OTTI.
    
    An improvement of approximately $2.1 million in the net loss on securities held for trading was driven by (i) a $1.3
million increase in the valuation of the IO due to higher prepayments during the quarter
and (ii) a $1.0 million improvement on the economic hedge on the mortgage servicing rights (MSRs) due to a change in
the hedging strategy during the quarter from the use of U.S. Treasuries to forward
contracts.
    
    Net gain on investment securities of $4.8 million resulted from the sale of
approximately $1.2 billion of CMO floaters during the second quarter of 2009 as part of the
execution of the Companys Asset Replacement Program during the second quarter of 2009.
 61




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
    
    An increase in the mark-to-market adjustment of servicing assets of $2.1 million
primarily driven by the decrease in expected prepayment speed caused by the increase in
interest rates during the second quarter of 2009, compared to the corresponding 2008
period.
    
    A decrease in other income of $7.0 million was related to a gain of $5.2 million
recognized in 2008 from the redemption of shares of VISA, Inc., pursuant to their global
restructuring agreement, and to income associated with the sale of certain units of a
residential housing project that the Company took possession of in 2005 totaling $0.9
million in the second quarter of 2008.
  
    
    For OTTI of $6.8 million, please refer to explanation for the quarter above.
    
    The decrease in net loss on securities held for trading was driven principally by a loss
of $14.2 million related to the U.S. Treasuries that were serving as an economic hedge on the
Companys capitalized MSR as the spreads between declining mortgage rates and the U.S.
Treasury curve compressed as a result of the U.S. Government and FED Monetary Policy
implemented at the end of 2008 designed to promote mortgage loan originations and
reduce mortgage loan interest rates.
    
    Net gain on investment securities of $4.8 million resulted from the sale of
approximately $1.2 billion of CMO floaters during 2009 as a result of the execution of the
Companys Asset Replacement Program during the second quarter of 2009.
    
    The mark-to-market adjustment of servicing assets of $4.8 million for the first half of
2009 was principally impacted by the decline in interest rates that caused the increase in
expected prepayments speed during the first quarter of 2009, partially offset by a
subsequent increase in interest rates during the second quarter of 2009.
    
    A decrease in other income of $7.6 million primarily related to a gain of $5.2 million
recognized in 2008 from the redemption of shares of VISA, Inc. Please refer to explanation
for the quarter above.
 NON-INTEREST EXPENSE
 TABLE G
NON-INTEREST EXPENSE
 QUARTER ENDED JUNE 30,
    
    
    SIX MONTH PERIODS ENDED JUNE 30,(In thousands)
    
    2009
    
    
    2008
    
    
    $ Variance
    
    
    2009
    
    
    2008
    
    
    $ VarianceCompensation and benefits
    
    $
    15,823
    
    
    $
    17,057
    
    
    $
    (1,234
    )
    
    $
    38,651
    
    
    $
    36,135
    
    
    $
    2,516Taxes, other than payroll and income taxes
    
    
    2,423
    
    
    
    2,379
    
    
    
    44
    
    
    
    4,911
    
    
    
    4,801
    
    
    
    110Advertising
    
    
    1,424
    
    
    
    2,273
    
    
    
    (849
    )
    
    
    2,872
    
    
    
    4,505
    
    
    
    (1,633
    )Professional services
    
    
    7,391
    
    
    
    7,117
    
    
    
    274
    
    
    
    13,518
    
    
    
    12,025
    
    
    
    1,493Communication expenses
    
    
    4,005
    
    
    
    4,486
    
    
    
    (481
    )
    
    
    8,413
    
    
    
    8,626
    
    
    
    (213
    )EDP expenses
    
    
    3,167
    
    
    
    2,053
    
    
    
    1,114
    
    
    
    6,783
    
    
    
    4,475
    
    
    
    2,308Occupancy expenses
    
    
    2,914
    
    
    
    4,214
    
    
    
    (1,300
    )
    
    
    6,915
    
    
    
    8,503
    
    
    
    (1,588
    )Office expenses
    
    
    1,203
    
    
    
    1,527
    
    
    
    (324
    )
    
    
    2,669
    
    
    
    3,151
    
    
    
    (482
    )Depreciation and amortization
    
    
    3,217
    
    
    
    4,072
    
    
    
    (855
    )
    
    
    6,670
    
    
    
    8,127
    
    
    
    (1,457
    )FDIC insurance expense
    
    
    6,144
    
    
    
    1,424
    
    
    
    4,720
    
    
    
    8,081
    
    
    
    2,320
    
    
    
    5,761Other expenses
    
    
    7,815
    
    
    
    9,024
    
    
    
    (1,209
    )
    
    
    16,469
    
    
    
    17,521
    
    
    
    (1,052
    )Total non-interest expense
    
    $
    55,526
    
    
    $
    55,626
    
    
    $
    (100
    )
    
    $
    115,952
    
    
    $
    110,189
    
    
    $
    5,763
  
    
    The decrease in compensation and benefits of $1.2 million is primarily related to a
decrease of $2.1 million in salaries as a result of a 17% workforce reduction between
periods.
    
    An increase of $1.1 million related to EDP expenses primarily related to certain
initiatives to optimize and update the Companys banking and mortgage platforms.
 62




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
    
    The decrease of $1.3 million in occupancy expenses is principally related to higher
expenses incurred in 2008 related to the Companys rebranding efforts together with strict
cost controls for maintenance projects, contract negotiations to reduce rent expenses and
lower utility costs due to the installation of light sensors, and reductions in fuel costs.
    
    An increase of $4.7 million in the FDIC insurance expense related primarily related to
$4.2 million of the FDIC special assessment expense during the quarter.
    
    The decrease of $1.2 million in other expenses is principally related to project
construction costs incurred in 2008 of $1.1 million related to the sale of certain units of
a residential housing project that the Company took possession of in 2005.
  
    
    An increase in compensation and benefits of $2.5 million primarily related to severance
payments made by the Company to certain employees totaling $3.8 million during the first
quarter of 2009, partially offset by a reduction in personnel.
    
    The decrease of $1.6 million in advertising principally related to cost control measures
implemented by the Company throughout 2008 and during the first half of 2009. During 2008,
the Company incurred higher advertising expenses related to its re-branding.
    
    An increase of $1.5 million in professional services expenses driven by amounts advanced
to cover legal expenses of the Companys former officers.
    
    An increase of $2.3 million in EDP expenses primarily related to certain initiatives to
optimize and update the Companys banking and mortgage platforms.
    
    An increase of $5.8 million in the FDIC insurance expense primarily related to $4.2
million of the FDIC special assessment expense during the second quarter of 2009.
    
    The $1.1 million decrease in other expenses was due to lower project construction costs
of $1.3 million related to the sale of units of the residential project the Company
manages, lower charges for uncollectible items of $0.6 million and lower loan processing
costs of $0.7 million due to tighter controls around expenses and operations. These
decreases were partially offset by an increase of $1.5 million in OREO provisions,
maintenance and foreclosure expenses as a result of higher levels of repossessed units,
higher expenses to maintain the properties in saleable conditions and lower appraisals due
to the current economic conditions in the Puerto Rico real estate market.
 INCOME TAXES
   63




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Accounting for Income Taxes
  BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  64




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TABLE H
LOAN PRODUCTION
 Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(Dollars in thousands, except for average initial loan balance)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008FHA/VA mortgage loansNumber of loans
    
    
    761
    
    
    
    760
    
    
    
    1,265
    
    
    
    1,221Volume of loans
    
    $
    108,534
    
    
    $
    91,755
    
    
    $
    180,929
    
    
    $
    142,249Percent of total volume
    
    
    37
    %
    
    
    24
    %
    
    
    34
    %
    
    
    19
    %Average initial loan balance
    
    $
    142,620
    
    
    $
    120,730
    
    
    $
    143,027
    
    
    $
    116,502Conventional conforming mortgage loansNumber of loans
    
    
    216
    
    
    
    240
    
    
    
    484
    
    
    
    476Volume of loans
    
    $
    26,696
    
    
    $
    28,213
    
    
    $
    60,750
    
    
    $
    56,874Percent of total volume
    
    
    9
    %
    
    
    7
    %
    
    
    11
    %
    
    
    8
    %Average initial loan balance
    
    $
    123,593
    
    
    $
    117,554
    
    
    $
    125,516
    
    
    $
    119,483Conventional non-conforming mortgage loans(1)Number of loans
    
    
    654
    
    
    
    1,087
    
    
    
    1,311
    
    
    
    2,180Volume of loans
    
    $
    99,650
    
    
    $
    136,201
    
    
    $
    201,622
    
    
    $
    291,629Percent of total volume
    
    
    34
    %
    
    
    36
    %
    
    
    38
    %
    
    
    39
    %Average initial loan balance
    
    $
    152,370
    
    
    $
    125,300
    
    
    $
    153,792
    
    
    $
    133,775Construction developments loansNumber of loans
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Volume of loans
    
    $
    
    
    
    $
    44,596
    
    
    $
    
    
    
    $
    44,596Percent of total volume
    
    
    0
    %
    
    
    12
    %
    
    
    0
    %
    
    
    6
    %Average initial loan balance
    
    $
    
    
    
    $
    3,430,462
    
    
    $
    
    
    
    $
    3,430,462Disbursement under existing construction development loansVolume of loans
    
    $
    22,196
    
    
    $
    23,186
    
    
    $
    29,989
    
    
    $
    51,613Percent of total volume
    
    
    8
    %
    
    
    6
    %
    
    
    5
    %
    
    
    7
    %Commercial loans(2)Number of loans
    
    
    9
    
    
    
    86
    
    
    
    24
    
    
    
    178Volume of loans
    
    $
    24,507
    
    
    $
    52,719
    
    
    $
    47,914
    
    
    $
    117,894Percent of total volume
    
    
    8
    %
    
    
    14
    %
    
    
    9
    %
    
    
    15
    %Average initial loan balance
    
    $
    2,723,000
    
    
    $
    613,012
    
    
    $
    1,996,417
    
    
    $
    662,326Consumer loans(2)Number of loans
    
    
    172
    
    
    
    508
    
    
    
    484
    
    
    
    6,572Volume of loans
    
    $
    1,157
    
    
    $
    4,639
    
    
    $
    3,874
    
    
    $
    48,528Percent of total volume
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    6
    %Average initial loan balance
    
    $
    6,727
    
    
    $
    9,132
    
    
    $
    8,004
    
    
    $
    7,384Other(3)Number of loans
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Volume of loans
    
    $
    9,200
    
    
    $
    2,000
    
    
    $
    9,200
    
    
    $
    2,000Percent of total volume
    
    
    3
    %
    
    
    0
    %
    
    
    2
    %
    
    
    0
    %Total loansNumber of loans
    
    
    1,813
    
    
    
    2,695
    
    
    
    3,569
    
    
    
    10,641Volume of loans
    
    $
    291,940
    
    
    $
    383,309
    
    
    $
    534,278
    
    
    $
    755,383
 
 (1)
    
    Includes $0.6 million and $8.1 million in second mortgages for the quarters ended June 30, 2009 and 2008, respectively, and $1.5 million and $17.6 million in second mortgages for the six month
periods ended June 30, 2009 and 2008, respectively.(2)
    
    Commercial and consumer lines of credit are included in the loan production according to the credit limit approved.(3)
    
    Consists of multifamily loans.  65




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TABLE I  LOAN ORIGINATION SOURCES
 SIX MONTH PERIODS ENDED JUNE 30,2009
    
    2008Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    71
    %
    
    
    
    
    
    
    71
    %
    
    
    54
    %
    
    
    
    
    
    
    54
    %Wholesale(1)
    
    
    12
    %
    
    
    
    
    
    
    12
    %
    
    
    11
    %
    
    
    
    
    
    
    11
    %Housing Developments(2)
    
    
    2
    %
    
    
    4
    %
    
    
    6
    %
    
    
    6
    %
    
    
    7
    %
    
    
    13
    %Other(3)
    
    
    1
    %
    
    
    10
    %
    
    
    11
    %
    
    
    13
    %
    
    
    9
    %
    
    
    22
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Includes new construction development loans and the disbursement of existing construction development loans.(3)
    
    Refers to commercial, consumer and multifamily loans originated through the banking subsidiaries. MORTGAGE LOAN SERVICING
  66




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TABLE J
LOANS SERVICED FOR THIRD PARTIES
 AS OF JUNE 30,(Dollars in Thousands, Except for Average Size of Loans Serviced)
    
    2009
    
    
    2008Composition of Portfolio Serviced for Third Parties at Period End:GNMA
    
    $
    2,334,067
    
    
    $
    2,135,166FHLMC/FNMA
    
    
    3,248,679
    
    
    
    3,607,022Other conventional mortgage loans(1)(2)
    
    
    3,482,286
    
    
    
    3,938,708Total portfolio serviced for third parties
    
    $
    9,065,032
    
    
    $
    9,680,896Activity of Portfolio Serviced for Third Parties:Beginning servicing portfolio
    
    $
    9,460,350
    
    
    $
    10,072,538Additions to servicing portfolio
    
    
    239,384
    
    
    
    147,574Servicing released due to repurchases
    
    
    (42,788
    )
    
    
    (46,138
    )MSRs sales(3)
    
    
    (7,111
    )
    
    
    Run-off(4)
    
    
    (584,803
    )
    
    
    (493,078
    )Ending servicing portfolio
    
    $
    9,065,032
    
    
    $
    9,680,896Selected Data Regarding Mortgage Loans Serviced for Third Parties:Number of loans
    
    
    107,608
    
    
    
    115,094Weighted- average interest rate
    
    
    6.36
    %
    
    
    6.44
    %Weighted- average remaining maturity (months)
    
    
    244
    
    
    
    247Weighted- average gross servicing fee rate
    
    
    0.39
    %
    
    
    0.39
    %Average servicing portfolio(5)
    
    $
    9,264,298
    
    
    $
    9,875,978Principal prepayments
    
    $
    388,922
    
    
    $
    359,141Constant prepayment rate
    
    
    7.75
    %
    
    
    6.78
    %Average size of loans
    
    $
    84,241
    
    
    $
    84,113Servicing assets, net
    
    $
    112,869
    
    
    $
    145,527Mortgage-servicing advances
    
    $
    26,012
    
    
    $
    32,659Delinquent Mortgage Loans and Pending Foreclosures at Period End:60-89 days past due
    
    
    2.21
    %
    
    
    1.98
    %90 days or more past due
    
    
    4.07
    %
    
    
    2.31
    %Total delinquencies excluding foreclosures
    
    
    6.28
    %
    
    
    4.29
    %Foreclosures pending
    
    
    3.02
    %
    
    
    2.48
    %
 
 (1)
    
    Excludes $4.3 billion and $3.8 billion of mortgage loans owned by Doral Financial at June 30, 2009 and 2008, respectively.(2)
    
    Includes portfolios of $163.0 million and $189.7 million at June 30, 2009 and 2008, respectively, of delinquent FHA/VA and conventional mortgage loans sold to third parties.(3)
    
    Amount represents MSRs sales related to $7.1 million in principal balance of mortgage loans.(4)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures.(5)
    
    Excludes the average balance of mortgage loans owned by Doral Financial of $4.2 billion and $3.7 billion as of June 30, 2009 and 2008, respectively.   67




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LIQUIDITY AND CAPITAL RESOURCES
  Liquidity of the Holding Company
      68




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Liquidity of the Banking Subsidiaries
  Cash Sources and Uses
    Primary Sources of Cash
  69




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TABLE KSOURCES OF BORROWINGS
 AS OF JUNE 30, 2009
    
    AS OF DECEMBER 31, 2008AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGE(Dollars in thousands)
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,064,257
    
    
    
    2.78
    %
    
    $
    4,402,772
    
    
    
    3.58
    %Repurchase Agreements
    
    
    1,776,184
    
    
    
    3.89
    %
    
    
    1,907,447
    
    
    
    3.62
    %Advances from FHLB
    
    
    1,580,400
    
    
    
    3.39
    %
    
    
    1,623,400
    
    
    
    3.83
    %Other short-term borrowings
    
    
    557,000
    
    
    
    0.25
    %
    
    
    351,600
    
    
    
    0.52
    %Loans Payable
    
    
    352,834
    
    
    
    7.27
    %
    
    
    366,776
    
    
    
    7.27
    %Notes Payable
    
    
    273,910
    
    
    
    7.31
    %
    
    
    276,868
    
    
    
    7.31
    %
   TABLE L
AVERAGE DEPOSIT BALANCE
 SIX MONTH PERIOD ENDED
    
    
    YEAR ENDEDJUNE 30, 2009
    
    
    DECEMBER 31, 2008AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    496,110
    
    
    
    3.59
    %
    
    $
    543,081
    
    
    
    4.17
    %Brokered certificates of deposits
    
    
    2,307,859
    
    
    
    4.29
    %
    
    
    2,451,523
    
    
    
    4.51
    %Regular passbook savings
    
    
    362,007
    
    
    
    1.79
    %
    
    
    332,032
    
    
    
    2.56
    %NOW accounts and other transaction accounts
    
    
    350,932
    
    
    
    1.44
    %
    
    
    381,848
    
    
    
    1.57
    %Money market accounts
    
    
    359,994
    
    
    
    3.01
    %
    
    
    294,847
    
    
    
    3.07
    %Total interest-bearing
    
    
    3,876,902
    
    
    
    3.59
    %
    
    
    4,003,331
    
    
    
    3.91
    %Non-interest bearing
    
    
    247,139
    
    
    
    
    
    
    
    254,566
    
    
    
    Total deposits
    
    $
    4,124,041
    
    
    
    3.38
    %
    
    $
    4,257,897
    
    
    
    3.68
    %
  TABLE M
CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    413,433Over three through six months
    
    
    521,612Over six through twelve months
    
    
    395,720Over twelve months
    
    
    983,617Total
    
    $
    2,314,382
 70




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Other Uses of Cash
  71




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ASSETS AND LIABILITIES
   CAPITAL
    72




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The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock.
   Regulatory Capital Requirements
  73




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##### Table of Contents



TABLE N
REGULATORY CAPITAL RATIOS
 AS OF JUNE 30, 2009DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital Ratio (Total capital to risk- weighted assets)
    
    
    15.2
    %
    
    
    13.7
    %
    
    
    15.9
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    13.3
    %
    
    
    12.4
    %
    
    
    15.4
    %Leverage Ratio(1)
    
    
    8.2
    %
    
    
    6.4
    %
    
    
    10.8
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital
to adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of June 30, 2009. Ratios were
prepared as if the company were subject to the requirement for comparability purposes. AS OF DECEMBER 31, 2008DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital Ratio (Total capital to risk- weighted assets)
    
    
    17.1
    %
    
    
    15.4
    %
    
    
    19.1
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    13.8
    %
    
    
    14.2
    %
    
    
    18.5
    %Leverage Ratio(1)
    
    
    7.6
    %
    
    
    6.4
    %
    
    
    15.0
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital to
adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of December 31, 2008. Ratios were
prepared as if the company were subject to the requirement for comparability purposes.   Legal Proceedings
  FAIR VALUE OF FINANCIAL INSTRUMENTS
  74




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 Level 1
    
     Valuation is based upon unadjusted quoted prices for identical
instruments traded in active markets.
  Level 2
    
     Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques for which all significant assumptions
are observable in the market, or are derived principally from or corroborated by
observable market data, by correlation or by other means.
  Level 3
    
     Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable assumptions
reflect the Companys estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
     OFF-BALANCE SHEET ACTIVITIES
  75




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QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30, 2009
    
    
    ENDED JUNE 30, 2009Balance at beginning of period
    
    $
    9,258
    
    
    $
    8,849Net charge-offs
    
    
    (1,076
    )
    
    
    (2,129
    )Provision for recourse liability
    
    
    573
    
    
    
    2,035Balance at end of period
    
    $
    8,755
    
    
    $
    8,755
   76




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  77




---



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TABLE O
CONTRACTUAL OBLIGATIONS
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,064,257
    
    
    $
    3,041,422
    
    
    $
    679,416
    
    
    $
    184,954
    
    
    $
    158,465Repurchase agreements(1) (2)
    
    
    1,776,184
    
    
    
    1,100,684
    
    
    
    69,000
    
    
    
    606,500
    
    
    
    Advances from FHLB(1) (2)
    
    
    1,580,400
    
    
    
    678,480
    
    
    
    652,920
    
    
    
    249,000
    
    
    
    Other short-term borrowings
    
    
    557,000
    
    
    
    557,000
    
    
    
    
    
    
    
    
    
    
    
    Loans payable(3)
    
    
    352,834
    
    
    
    43,667
    
    
    
    80,111
    
    
    
    62,846
    
    
    
    166,210Notes payable
    
    
    273,910
    
    
    
    6,121
    
    
    
    42,960
    
    
    
    11,409
    
    
    
    213,420Other liabilities
    
    
    109,522
    
    
    
    109,522
    
    
    
    
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    46,047
    
    
    
    5,713
    
    
    
    9,840
    
    
    
    9,652
    
    
    
    20,842Total Contractual Cash Obligations
    
    $
    8,760,154
    
    
    $
    5,542,609
    
    
    $
    1,534,247
    
    
    $
    1,124,361
    
    
    $
    558,937
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $278.5 million of repurchase agreements with an average rate of 4.88% and $279.0 million in advances from
FHLB-NY with an average rate of 5.41%,which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from FHLB-NY are included in the less than one year category in the above table but have actual
contractual maturities ranging from July 2009 to February 2014. They are included on the first call date basis because increases in
interest rates over the average rate of the Companys callable borrowings may induce the lenders to exercise their call right.(3)
    
    Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at variable
interest rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are required to be
repaid according to the regular amortization and prepayments of the underlying mortgage loans. For purposes of the table above, the
Company used a CPR of 11.2% to estimate the repayments. TABLE P  OTHER COMMERCIAL COMMITMENTS (1)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    85,984
    
    
    $
    79,771
    
    
    $
    5,770
    
    
    $
    443
    
    
    $
    Commitments to sell loans
    
    
    192,395
    
    
    
    192,395
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    325
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    900,610
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900,610Total
    
    $
    1,179,314
    
    
    $
    272,491
    
    
    $
    5,770
    
    
    $
    443
    
    
    $
    900,610
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  Interest Rate and Market Risk Management
   78




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##### Table of Contents




    
    developing the Companys asset/liability management and liquidity strategy;
 
    
    monitoring and management of interest rate, pricing and liquidity risk limits to ensure
compliance with the Companys policies;
 
    
    overseeing product pricing and volume objectives for banking and treasury activities;
and
 
    
    overseeing the maintenance of management information systems that supply relevant
information for the ALCO to fulfill its responsibilities as it relates to asset/liability
management.
 Risk Identification Measurement and Control
   
    
    Net Interest Income Sensitivity.Refers to the relationship between market interest
rates and net interest income due to the maturity mismatches and repricing characteristics
of Doral Financials interest-earning assets, interest-bearing liabilities and off-balance
sheet positions. To measure net interest income exposure to changes in market interest
rates, the Company uses earnings simulation techniques. These simulation techniques allow
for the forecasting of net interest income and expense under various rate scenarios for the
measurement of interest rate risk exposures of Doral Financial. Primary scenarios include
instantaneous parallel and non-parallel rate shocks. Net interest income sensitivity is
measured for time horizons ranging from twelve to sixty months and as such, serves as a
measure of short to medium term earnings risk. The basic underlying assumptions used in net
interest income simulations are: (a) the Company maintains a static balance sheet; (b) full
reinvestment of funds in similar product/instruments with similar maturity and repricing
characteristics; (c) spread assumed constant; (d) prepayment rates on mortgages and
mortgage related securities are modeled using multi-factor prepayment model; (e)
non-maturity deposit run-offs and elasticity assumptions are modeled, and (f) evaluation of
embedded options.
 79




---



##### Table of Contents




    
    Market Value of Equity Sensitivity.Used to capture and measure the risks associated
with longer-term maturity and re-pricing mismatches. Doral Financial uses value simulation
techniques for all financial components of the Statement of Financial Condition. Valuation
techniques include static cash flows analyses, stochastic models to qualify value of
embedded options and prepayment modeling. To complement and broaden the risk analysis, the
Company uses duration and convexity analysis to measure the sensitivity of the market value
of equity to changes in interest rates. Duration measures the linear change in market value
of equity caused by changes in interest rates, while, convexity measures the asymmetric
changes in market value of equity caused by changes in interest rates due to the presence
of options. The analysis of duration and convexity combined provide a better understanding
of the sensitivity of the market value of equity to changes in interest rates.
 
    
    Effective Duration of Equity.The effective duration of equity is a broad measure of
the impact of interest rate changes on Doral Financials economic capital. The measure
summarizes the net sensitivity of assets and liabilities, adjusted for off-balance sheet
positions. The stated threshold for Doral Financials effective duration of equity is 12
years.
 Interest Rate Risk Management Strategy
  Net Interest Income Risk.
 Market Value of Equity Hedging Strategies
 Duration Risk
 Convexity Risk
  80




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Hedging related to Mortgage Banking Activities
  
    
    The valuation of mortgage servicing assets (MSRs) are recorded in earnings immediately
within the accounting period in which the changes in value occur, whereas the impact of
changes in interest rates are reflected in originations with a time lag and effects on
servicing fee income occurs over time. Thus, even when mortgage activities could be
protected from adverse changes in interest rates over a period of time (on a cumulative
basis) they may display large variations in income from period to period.
 
    
    The degree to which the natural hedge associated to mortgage banking (i.e. originating
and servicing) offsets changes in servicing asset valuations may be imperfect, as it may
vary over time.
 
    
    Origination volumes, the valuation of servicing assets, economic hedging activities and
other related costs are impacted by multiple factors, which include, changes in the mix of
new business, changes in the term structure of interest rates, changes in mortgage spreads
(mortgage basis) to other rate benchmarks, and rate volatility (among others).
Interrelation of all these factors is hard to predict and, as such, the ability to
perfectly hedge their effects is limited.
 Doral Financials Risk Profile
    Market Value
    
    Net InterestAs of June 30, 2009
    
    Of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (5.0
    )%
    
    
    0.75
    %- 100 BPS
    
    
    (0.6
    )%
    
    
    (1.4
    )%
 81




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##### Table of Contents



Market Value of
    
    Net InterestAs of December 31, 2008
    
    Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (0.3
    )%
    
    
    15.9
    %- 100 BPS
    
    
    1.2
    %
    
    
    2.2
    %
 
 (1)
    
    Based on 12-month forward change in net interest income.    June 30, 2009
    
    December 31, 2008Change in Fair
    
    Change in Fair(In thousands)
    
    Value of
    
    Value ofChange in Interest
    
    Available for
    
    Available forRates (Basis Points)
    
    Sale Securities
    
    Sale Securities+200
    
    $
    (233,549
    )
    
    $
    (169,044
    )+100
    
    
    (106,542
    )
    
    
    (72,832
    )Base
    
    
    
    
    
    
    -100
    
    
    70,863
    
    
    
    47,100-200
    
    
    118,671
    
    
    
    80,303
  Derivatives
  82




---



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TABLE Q
INTEREST RATE CAPS
 (Dollars in thousands)NOTIONAL
    
    
    MATURITY
    
    
    ENTITLED PAYMENT
    
    PREMIUM
    
    
    FAIRAMOUNT
    
    
    DATE
    
    
    CONDITIONS
    
    PAID
    
    
    VALUE$
    25,000
    
    
    September, 2010
    
    1-month LIBOR over
5.00%
    
    $
    205
    
    
    $
    215,000
    
    
    September, 2011
    
    1-month LIBOR over
5.50%
    
    
    134
    
    
    
    815,000
    
    
    September, 2012
    
    1-month LIBOR over
6.00%
    
    
    143
    
    
    
    3135,000
    
    
    October, 2010
    
    1-month LIBOR over
5.00%
    
    
    199
    
    
    
    315,000
    
    
    October, 2011
    
    1-month LIBOR over
5.00%
    
    
    172
    
    
    
    1615,000
    
    
    October, 2012
    
    1-month LIBOR over
5.50%
    
    
    182
    
    
    
    4750,000
    
    
    November, 2012
    
    1-month LIBOR over
6.50%
    
    
    228
    
    
    
    9650,000
    
    
    November, 2012
    
    1-month LIBOR over
5.50%
    
    
    545
    
    
    
    15950,000
    
    
    November, 2012
    
    1-month LIBOR over
6.00%
    
    
    350
    
    
    
    122$
    270,000
    
    
    
    
    
    
    
    
    $
    2,158
    
    
    $
    484
  TABLE R
INTEREST RATE SWAPS
 (Dollars in thousands)NOTIONAL
    
    
    MATURITY
    
    
    PAY
    
    
    RECEIVE
    
    FAIRAMOUNT
    
    
    DATE
    
    
    FIXED RATE
    
    
    FLOATING RATE
    
    VALUECASH FLOW HEDGE$
    200,000
    
    
    July, 2010
    
    
    3.00%
    
    
    3-month LIBOR minus 0.04%
    
    $
    (5,234
    )10,000
    
    
    September, 2009
    
    
    4.57%
    
    
    1-month LIBOR plus 0.02%
    
    
    (100
    )8,000
    
    
    September, 2010
    
    
    4.62%
    
    
    1-month LIBOR plus 0.02%
    
    
    (374
    )3,000
    
    
    September, 2011
    
    
    4.69%
    
    
    1-month LIBOR plus 0.02%
    
    
    (206
    )10,000
    
    
    October, 2009
    
    
    4.30%
    
    
    1-month LIBOR plus 0.04%
    
    
    (123
    )8,000
    
    
    October, 2010
    
    
    4.37%
    
    
    1-month LIBOR plus 0.02%
    
    
    (364
    )6,000
    
    
    October, 2011
    
    
    4.51%
    
    
    1-month LIBOR plus 0.05%
    
    
    (388
    )5,000
    
    
    October, 2012
    
    
    4.62%
    
    
    1-month LIBOR plus 0.05%
    
    
    (402
    )20,000
    
    
    November, 2009
    
    
    4.35%
    
    
    1-month LIBOR plus 0.02%
    
    
    (316
    )15,000
    
    
    November, 2010
    
    
    4.42%
    
    
    1-month LIBOR
    
    
    (726
    )15,000
    
    
    November, 2011
    
    
    4.55%
    
    
    1-month LIBOR plus 0.02%
    
    
    (1,012
    )45,000
    
    
    November, 2012
    
    
    4.62%
    
    
    1-month LIBOR plus 0.02%
    
    
    (3,706
    )$
    345,000
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (12,951
    )
 Freestanding Derivatives.
 83




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##### Table of Contents



Derivatives  Hedge Accounting.
  TABLE S

DERIVATIVES POSITIONS
 June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCash flow HedgesInterest rate swaps
    
    $
    345,000
    
    
    $
    (12,951
    )
    
    $
    345,000
    
    
    $
    (15,096
    )Other derivativesInterest rate caps
    
    
    270,000
    
    
    
    484
    
    
    
    270,000
    
    
    
    287Forward contracts
    
    
    200,000
    
    
    
    (264
    )
    
    
    35,000
    
    
    
    (187
    )470,000
    
    
    
    220
    
    
    
    305,000
    
    
    
    100$
    815,000
    
    
    $
    (12,731
    )
    
    $
    650,000
    
    
    $
    (14,996
    )
  TABLE T

FAIR VALUE RECONCILIATION
 Six Month Period Ended(In thousands)
    
    June 30, 2009Fair value of contracts outstanding at the beginning of the period
    
    $
    100Changes in fair values during the period
    
    
    120Fair value of contracts outstanding at the end of the period
    
    $
    220
 84




---



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TABLE U

SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of June 30, 2009
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValuePrices actively quoted
    
    $
    (264
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (264
    )Prices provided by
internal sources
    
    
    
    
    
    
    29
    
    
    
    455
    
    
    
    
    
    
    
    484$
    (264
    )
    
    $
    29
    
    
    $
    455
    
    
    $
    
    
    
    $
    220
   TABLE V
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    June 30, 2009Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    215,000
    
    
    $
    444
    
    
    $
    
    
    
    $
    444
    
    
    
    2.95A+
    
    
    2
    
    
    
    450,000
    
    
    
    289
    
    
    
    (13,112
    )
    
    
    (12,823
    )
    
    
    1.34A
    
    
    1
    
    
    
    150,000
    
    
    
    
    
    
    
    (352
    )
    
    
    (352
    )
    
    
    0.12Total Derivatives
    
    
    4
    
    
    $
    815,000
    
    
    $
    733
    
    
    $
    (13,464
    )
    
    $
    (12,731
    )
    
    
    1.54
 
 (1)
    
    Based on the S&P Long-Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive
fair value including the related accrued interest receivable/payable (net). 85




---



##### Table of Contents



(Dollars in thousands)
    
    December 31, 2008Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    215,000
    
    
    $
    259
    
    
    $
    
    
    
    $
    259
    
    
    
    3.45A+
    
    
    2
    
    
    
    410,000
    
    
    
    28
    
    
    
    (15,137
    )
    
    
    (15,109
    )
    
    
    1.95A
    
    
    1
    
    
    
    25,000
    
    
    
    
    
    
    
    (146
    )
    
    
    (146
    )
    
    
    0.07Subtotal
    
    
    4
    
    
    $
    650,000
    
    
    $
    287
    
    
    $
    (15,283
    )
    
    $
    (14,996
    )
    
    
    2.37
 
 (1)
    
    Based on the S&P Long-Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported
separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive
fair value including the related accrued interest receivable/payable (net). Credit Risk
      86




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##### Table of Contents



Accounting by Debtors and Creditors
of Troubled Debt Restructurings Accounting by Creditors for Impairment of a Loan
 Non-performing Assets and Allowance for Loan and Lease Losses
  87




---



##### Table of Contents



TABLE W
NON-PERFORMING ASSETS
 AS OF
    
    
    AS OF(Dollars in thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Non-performing loans:Residential mortgage loans  held for sale
(1)
    
    $
    4,929
    
    
    $
    4,942Residential mortgage loans  held for
investment
    
    
    377,177
    
    
    
    346,579Total non-performing residential mortgage
loans(2)
    
    
    382,106
    
    
    
    351,521Other lending activities:Construction loans
    
    
    264,643
    
    
    
    215,080Commercial real estate loans
    
    
    116,490
    
    
    
    116,841Commercial real estate loans  held for sale
    
    
    1,113
    
    
    
    1,130Consumer loans
    
    
    518
    
    
    
    685Commercial non-real estate loans
    
    
    1,852
    
    
    
    1,751Lease financing receivable
    
    
    1,066
    
    
    
    1,053Land loans
    
    
    37,891
    
    
    
    29,613Total non-performing other lending activities
    
    
    423,573
    
    
    
    366,153Total non-performing loans
    
    
    805,679
    
    
    
    717,674Repossessed Units
    
    
    145
    
    
    
    191OREO(3)
    
    
    83,964
    
    
    
    61,340Total NPAs of Doral Financial (consolidated)
    
    $
    889,788
    
    
    $
    779,205Loans past due 90 days and still accruingConsumer loans(4)
    
    $
    3,129
    
    
    $
    2,603Commercial non-real estate loans(4)
    
    
    1,196
    
    
    
    1,428Total loans past due 90 days and still accruing
    
    $
    4,325
    
    
    $
    4,031Total NPAs as a percentage of the loan portfolio,
net, and OREO (excluding GNMA defaulted loans)
    
    
    16.36
    %
    
    
    14.42
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    9.12
    %
    
    
    7.69
    %Total non-performing loans to total loans
(excluding GNMA defaulted loans)
    
    
    14.64
    %
    
    
    13.11
    %Ratio of allowance for loan and lease losses to
total non-performing loans (excluding loans held
for sale) at end of period(5)
    
    
    18.35
    %
    
    
    18.55
    %
 
 (1)
    
    Does not include approximately $146.5 million and $120.4 million of GNMA defaulted loans over 90 days delinquent (for which the Company has the option, but not an obligation, to buy back from the pools serviced), included as part of the loans held for sale portfolio as of June 30, 2009 and
December 31, 2008, respectively.(2)
    
    Includes approximately $8.4 million and $5.3 million of FHA and VA loans where the principal balance of these loans is insured or guaranteed under applicable programs and interest is, in most cases, fully recovered in foreclosure proceedings as of June 30, 2009 and December 31, 2008,
respectively.(3)
    
    Excludes FHA and VA claims amounting to $13.2 million and $17.0 million as of June 30, 2009 and December 31, 2008, respectively. (4)
    
    Relates to revolving lines of credit and credit cards that are still accruing until 180 days delinquent.(5)
    
    Refer to non-performing loans and allowance for loan and lease losses above for additional information regarding the Companys methodology for assessing the adequacy of the allowance for loan and lease losses. 88




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TABLE X  COMPOSITION OF MORTGAGE NON-PERFORMING ASSETS
 COLLATERAL TYPE
    
    LOAN TO VALUE
    
    DISTRIBUTIONFHA/VA loans
    
    
    
    
    
    
    2.7
    %Loans with private mortgage insurance
    
    
    
    
    
    
    7.4
    %Loans with no mortgage insurance
    
    
    < 60
    %
    
    
    15.8
    %61-80
    %
    
    
    46.9
    %81-90
    %
    
    
    18.4
    %Over 91%
    
    
    8.8
    %Total loans
    
    
    
    
    
    
    100.0
    %
    89




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##### Table of Contents



As of
    
    As of(Dollars in thousands)
    
    June 30, 2009
    
    December 31, 2008Construction loans(1) (2)
    
    $
    480,135
    
    
    $
    506,031Total undisbursed funds under existing commitments(2) (3)
    
    
    38,885
    
    
    
    54,160Total non-performing construction loans(2)
    
    
    264,643
    
    
    
    215,080Net charge offs  Construction loans(2)
    
    
    5,554
    
    
    
    21,749Allowance for loan losses  Construction loans(2)
    
    
    50,657
    
    
    
    45,159Non-performing construction loans to total construction loans
    
    
    55.1
    %
    
    
    42.5
    %Allowance for loan losses  construction loans to total
construction loans
    
    
    10.6
    %
    
    
    8.9
    %Net charge-offs on an annualized basis to total construction loans
    
    
    2.3
    %
    
    
    4.3
    %
 
 (1)
    
    Includes $307.2 million and $422.6 million of construction loans for
residential housing projects as of June 30, 2009 and December 31, 2008, respectively.
Also includes $172.9 million and $83.4 million of construction loans for commercial,
condominiums and multifamily projects as of June 30, 2009 and December 31, 2008,
respectively.(2)
    
    Excludes land loans.(3)
    
    Excludes undisbursed funds to matured loans and loans in non-accrual
status. 90




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TABLE Y
ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    143,900
    
    
    $
    121,182
    
    
    $
    132,020
    
    
    $
    124,733Provision (recovery) for loan and lease losses:Construction loans
    
    
    2,697
    
    
    
    3,598
    
    
    
    11,052
    
    
    
    116Residential mortgage loans
    
    
    7,523
    
    
    
    4,375
    
    
    
    11,919
    
    
    
    6,924Commercial real estate loans
    
    
    (3,157
    )
    
    
    25
    
    
    
    2,932
    
    
    
    3,101Consumer loans
    
    
    2,167
    
    
    
    1,829
    
    
    
    4,631
    
    
    
    3,926Lease financing
    
    
    52
    
    
    
    204
    
    
    
    401
    
    
    
    237Commercial non-real estate loans
    
    
    1,541
    
    
    
    (63
    )
    
    
    2,826
    
    
    
    1,078Land secured loans
    
    
    (690
    )
    
    
    715
    
    
    
    (3
    )
    
    
    87Total provision for loan and lease losses
    
    
    10,133
    
    
    
    10,683
    
    
    
    33,758
    
    
    
    15,469Charge-offs:Construction loans
    
    
    (1,608
    )
    
    
    (3,780
    )
    
    
    (5,554
    )
    
    
    (8,333
    )Residential mortgage loans
    
    
    (1,186
    )
    
    
    (773
    )
    
    
    (2,219
    )
    
    
    (1,199
    )Commercial real estate loans
    
    
    (1
    )
    
    
    (2,994
    )
    
    
    (2,035
    )
    
    
    (4,027
    )Consumer loans
    
    
    (2,529
    )
    
    
    (1,746
    )
    
    
    (5,363
    )
    
    
    (4,166
    )Lease financing
    
    
    7
    
    
    
    (289
    )
    
    
    (279
    )
    
    
    (467
    )Commercial non-real estate loans
    
    
    (2,130
    )
    
    
    (210
    )
    
    
    (3,967
    )
    
    
    (653
    )Total charge-offs
    
    
    (7,447
    )
    
    
    (9,792
    )
    
    
    (19,417
    )
    
    
    (18,845
    )Recoveries:Residential mortgage loans
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Commercial real estate loans
    
    
    9
    
    
    
    64
    
    
    
    26
    
    
    
    77Consumer loans
    
    
    145
    
    
    
    (68
    )
    
    
    327
    
    
    
    433Lease financing
    
    
    21
    
    
    
    42
    
    
    
    40
    
    
    
    201Commercial non-real estate loans
    
    
    6
    
    
    
    (12
    )
    
    
    13
    
    
    
    31Total recoveries
    
    
    183
    
    
    
    26
    
    
    
    408
    
    
    
    742Net charge-offs
    
    
    (7,264
    )
    
    
    (9,766
    )
    
    
    (19,009
    )
    
    
    (18,103
    )Balance at end of period
    
    $
    146,769
    
    
    $
    122,099
    
    
    $
    146,769
    
    
    $
    122,099Allowance for loan losses as a percentage of loans receivable outstanding, at
the end of period
    
    
    2.77
    %
    
    
    2.33
    %
    
    
    2.77
    %
    
    
    2.33
    %Provision for loan losses to net charge-offs
    
    
    139.50
    %
    
    
    109.38
    %
    
    
    177.59
    %
    
    
    85.45
    %Net charge-offs on an annualized basis to average loans receivable outstanding
    
    
    0.55
    %
    
    
    0.76
    %
    
    
    0.73
    %
    
    
    0.71
    %Allowance for loan and lease losses to net charge-offs on an annualized basis
    
    
    503.73
    %
    
    
    310.82
    %
    
    
    382.87
    %
    
    
    335.39
    %
  91




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TABLE Z
ALLOCATION OF ALLOWANCE FOR LOAN
AND LEASE LOSSES
 June 30, 2009
    
    
    December 31, 2008(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans receivable:Construction
    
    $
    50,657
    
    
    
    9
    %
    
    $
    45,159
    
    
    
    10
    %Residential mortgage loans
    
    
    42,728
    
    
    
    70
    %
    
    
    33,026
    
    
    
    69
    %Commercial  secured by real estate
    
    
    28,000
    
    
    
    15
    %
    
    
    27,076
    
    
    
    14
    %Consumer
    
    
    7,559
    
    
    
    2
    %
    
    
    7,964
    
    
    
    2
    %Lease financing receivable
    
    
    1,474
    
    
    
    0
    %
    
    
    1,312
    
    
    
    0
    %Commercial non-real estate
    
    
    3,161
    
    
    
    2
    %
    
    
    4,290
    
    
    
    3
    %Land secured
    
    
    13,190
    
    
    
    2
    %
    
    
    13,193
    
    
    
    2
    %Total
    
    $
    146,769
    
    
    
    100
    %
    
    $
    132,020
    
    
    
    100
    %
    Accounting by Creditors for Impairment of a Loan
  92




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##### Table of Contents



(In thousands)
    
    JUNE 30, 2009
    
    
    DECEMBER 31, 2008Impaired loans with allowance
    
    $
    237,993
    
    
    $
    207,949Impaired loans without allowance
    
    
    176,803
    
    
    
    120,378Total impaired loans
    
    $
    414,796
    
    
    $
    328,327Related allowance
    
    $
    50,016
    
    
    $
    45,099Average impaired loans
    
    $
    377,335
    
    
    $
    317,844
  Accounting for Contingencies
   93




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##### Table of Contents



Counterparty Risk
   Operational Risk
  Overview of Operational Risk Management
  Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions
    94




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##### Table of Contents



Current Puerto Rico Government Fiscal Conditions
   
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  95




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##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
  Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
 Risk Factors Form 10-Q.
 During the first half of 2009, Doral Financials credit quality, including the potential for credit
losses on its investment portfolio, continued to be affected by the sustained deterioration of the
economic conditions affecting our markets, including higher unemployment levels, much lower
absorption rates and further declines in property values.
  96




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##### Table of Contents



Legislative and regulatory actions taken now or in the future as a result of the current crisis in
the financial industry may significantly affect our business, financial condition or results of
operations.
   Financial
Regulatory Reform  A New Foundation: Rebuilding Financial Regulation and Supervision
  97




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##### Table of Contents



ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  98




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##### Table of Contents



ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    The election of 9 directors of Doral Financial;
 2.
    
    The ratification of the selection of PricewaterhouseCoopers LLP as Doral Financials
independent registered public accounting firm for the fiscal year ending December 31, 2009.
  Election of Directors
 Nominees or One-Year Term
    
    Votes For
    
    Votes WithheldDennis G. Buchert
    
    
    52,663,842
    
    
    
    212,713James E. Gilleran
    
    
    52,663,842
    
    
    
    212,713Douglas Jacobs
    
    
    52,669,854
    
    
    
    206,701David E. King
    
    
    51,729,181
    
    
    
    1,147,374Mark Kleinman
    
    
    52,672,286
    
    
    
    204,269Howard M. Levkowitz
    
    
    52,666,401
    
    
    
    210,154Raymond J. Quinlan
    
    
    52,672,534
    
    
    
    204,021Gerard Smith
    
    
    52,670,045
    
    
    
    206,510Glen R. Wakeman
    
    
    52,366,246
    
    
    
    510,309
 Ratification of the Appointment of PricewaterhouseCoopers LLP as the Companys Independent Registered Public Accounting Firm for 2009
 For:
    
    
    52,413,370Against:
    
    
    442,827Abstain:
    
    
    20,358Broker Non-Votes:
    
    
    976,471
 
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS.
   ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation of Doral Financial, as currently in effect.
(Incorporated herein by reference to exhibit number 3.1(j) to Doral
Financials Annual Report on Form 10-K for the year ended December 31, 2007
filed with the Commission on March 19, 2008).3.2
    
    Bylaws of Doral Financial, as amended on August 2, 2007. (Incorporated
herein by reference to exhibit number 3.1 of Doral Financials Current
Report on Form 8-K filed with the Commission on August 6, 2007).
 99




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##### Table of Contents



ExhibitNumber
    
    Description4.1
    
    Common Stock Certificate (Incorporated herein by reference to exhibit
number 4.1 to Doral Financials Annual Report on Form 10-K for the year
ended December 31, 2007 filed with the Commission on March 19, 2008).4.2
    
    Loan and Guaranty Agreement among Puerto Rico Industrial, Tourist,
Educational, Medical and Environmental Control Facilities Financing
Authority (AFICA), Doral Properties, Inc. and Doral Financial.
(Incorporated herein by reference to exhibit number 4.1 of Doral
Financials Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 filed with the Commission on November 15, 1999).4.3
    
    Trust Agreement between AFICA and Citibank, N.A. (Incorporated herein by
reference to exhibit number 4.2 of Doral Financials Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 filed with the
Commission on November 15, 1999).4.4
    
    Form of Serial and Term Bond (included in Exhibit 4.3 hereof).4.5
    
    Deed of Constitution of First Mortgage over Doral Financial Plaza.
(Incorporated herein by reference to exhibit number 4.4 of Doral
Financials Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 filed with the Commission on November 15, 1999).4.6
    
    Mortgage Note secured by First Mortgage referred to in Exhibit 4.5 hereto
(included in Exhibit 4.5 hereof).4.7
    
    Pledge and Security Agreement. (Incorporated herein by reference to exhibit
number 4.6 of Doral Financials Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 filed with the Commission on November 15,
1999).4.8
    
    Indenture, dated May 14, 1999, between Doral Financial and U.S. Bank
National Association, as trustee, pertaining to senior debt securities.
(Incorporated herein by reference to exhibit number 4.1 of Doral
Financials Current Report on Form 8-K filed with the Commission on May 21,
1999).4.9
    
    Indenture, dated May 14, 1999, between Doral Financial and Bankers Trust
Company, as trustee, pertaining to subordinated debt securities.
(Incorporated herein by reference to exhibit number 4.3 of Doral
Financials Current Report on Form 8-K filed with the Commission on May 21,
1999).4.10
    
    Form of Stock Certificate for 7% Noncumulative Monthly Income Preferred
Stock, Series A. (Incorporated herein by reference to exhibit number 4(A)
of Doral Financials Registration Statement on Form S-3 filed with the
Commission on October 30, 1998).4.11
    
    Form of Stock Certificate for 8.35% Noncumulative Monthly Income Preferred
Stock, Series B. (Incorporated herein by reference to exhibit number 4.1 of
Doral Financials Registration Statement on Form 8-A filed with the
Commission on August 30, 2000).4.12
    
    First Supplemental Indenture, dated as of March 30, 2001, between Doral
Financial and Deutsche Bank Trust Company Americas (formerly known as
Bankers Trust Company), as trustee. (Incorporated herein by reference to
exhibit number 4.9 to Doral Financials Current Report on Form 8-K filed
with the Commission on April 2, 2001).4.13
    
    Form of Stock Certificate for 7.25% Noncumulative Monthly Income Preferred
Stock, Series C. (Incorporated herein by reference to exhibit number 4.1 of
Doral Financials Registration Statement on Form 8-A filed with the
Commission on May 30, 2002).
 100




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##### Table of Contents



ExhibitNumber
    
    Description4.14
    
    Form of Stock Certificate for 4.75% Perpetual Cumulative Convertible
Preferred Stock. (Incorporated herein by reference to exhibit number 4 to
Doral Financials Current Report on Form 10-K filed with the Commission on
September 30, 2003).10.1
    
    Order to Cease and Desist issued by the Board of Governors of the Federal
Reserve System on March 16, 2006. (Incorporated herein by reference to
exhibit number 99.2 of Doral Financials Current Report of Form 8-K filed
with the Commission on March 17, 2006).10.2
    
    Stipulation and Agreement of Partial Settlement, dated as of April 27,
2007. (Incorporated herein by reference to same exhibit number of Doral
Financials Annual Report on Form 10-K for the year ended December 31, 2006
filed with the Commission on April 30, 2007).10.3
    
    Order to Cease and Desist issued by the Federal Deposit Insurance
Corporation, dated February 19, 2008. (Incorporated herein by reference to
exhibit number 99-2 of Doral Financials Current Report of Form 8-K filed
with the Commission on February 21, 2008).10.4
    
    Purchase Agreement, dated September 23, 2003, between Doral Financial
Corporation and Wachovia Securities LLC, as Representative of the Initial
Purchasers of Doral Financials 4.75% Perpetual Cumulative Convertible
Preferred Stock named therein. (Incorporated herein by reference to exhibit
number 1 to Doral Financials Current Report on Form 8-K filed with the
Commission on September 30, 2003).10.5
    
    Employment Agreement, dated as of May 23, 2006, between Doral Financial
Corporation and Glen Wakeman. (Incorporated herein by reference to exhibit
number 10.1 to Doral Financials Current Report on Form 8-K filed with the
Commission on May 30, 2006).10.6
    
    Employment Agreement, dated as of August 14, 2006, between Doral Financial
Corporation and Lesbia Blanco. (Incorporated herein by reference to exhibit
number 10.1 to Doral Financials Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006 filed with the Commission on December 29,
2006).10.7
    
    Employment Agreement, dated as of October 2, 2006, between Doral Financial
Corporation and Enrique R. Ubarri, Esq. (Incorporated herein by reference
to exhibit number 10.7 to Doral Financials Quarterly Report on Form 10-Q
for the quarter ended September 30, 2006 filed with the Commission on
December 29, 2006).10.8
    
    Employment Agreement, dated as of June 25, 2007, between Doral Financial
Corporation and Paul Makowski (Incorporated herein by reference to exhibit
number 10.10 to Doral Financials Annual Report on Form 10-K for the year
ended December 31, 2007 filed with the Commission on March 19, 2008).10.9
    
    Employment Agreement, dated as of June 1, 2007, between Doral Financial
Corporation and Christopher Poulton (Incorporated herein by reference to
exhibit number 10.11 to Doral Financials Annual Report on Form 10-K for
the year ended December 31, 2007 filed with the Commission on March 19,
2008).10.10
    
    Securityholders Registration Rights Agreement dated as of July 19, 2007,
between Doral Financial Corporation and Doral Holding Delaware, LLC
(Incorporated herein by reference to exhibit number 10.1 to the Current
Report on Form 8-K filed with the Commission on July 20, 2007).10.11
    
    Advisory Services Agreements, dated as of July 19, 2007, between Doral
Financial Corporation and Bear Stearns Merchant Manager III, L.P.
(Incorporated herein by reference to exhibit number 10.2 to the Current
Report on Form 8-K filed with the Commission on July 20, 2007).
 101




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ExhibitNumber
    
    Description10.12
    
    Doral Financial 2008 Stock Incentive Plan (Incorporated herein by reference
to Annex A to the Definitive Proxy Statement for the Doral Financial 2008
Annual Stockholders Meeting filed with the Commission on April 11, 2008).10.13
    
    Employment Agreement, dated as of March 24, 2009, between Doral Financial
and Robert E. Wahlman. (Incorporated herein by reference to exhibit number
99.2 to Doral Financials Current Report on Form 8-K filed with the
Commission on March 26, 2009).12.1
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.31.1
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to the Sarbanes-Oxley Act of 2002.
 102




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SIGNATURES
  DORAL FINANCIAL CORPORATION
(Registrant)Date: August 6, 2009
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: August 6, 2009
    /s/ Robert E. WahlmanRobert E. WahlmanExecutive Vice President and 
Chief Financial Officer 103