##### 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 September 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 001-31579
 DORAL FINANCIAL CORPORATION
  Puerto Rico
(State or other jurisdiction of 
incorporation or organization)
    
    66-0312162
(I.R.S. employer
identification number)1451 F.D. Roosevelt Avenue, 
San Juan, Puerto Rico
(Address of principal executive offices)
    
    00920-2717
(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




---



##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATION
    
    
    3
    

Item 1  Financial Statements
    
    
    3Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Income (Loss) (Unaudited)  Quarters and nine month periods ended September 30, 2009 and September 30, 2008
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)  For the nine month periods ended September 30, 2009 and September 30, 2008
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (Unaudited)  Quarters and nine month periods ended September 30, 2009 and September 30, 2008
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  For the nine month periods ended September 30, 2009 and September 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
    
    
    99Item 4  Controls and Procedures
    
    
    99PART II  OTHER INFORMATION
    
    
    99Item 1  Legal Proceedings
    
    
    99Item 1A  Risk Factors
    
    
    99Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    112Item 3  Defaults Upon Senior Securities
    
    
    112Item 4  Submission of Matters to a Vote of Security Holders
    
    
    112Item 5  Other Information
    
    
    112Item 6 Exhibits and Financial Statement Schedules
    
    
    112SIGNATURES
    
    
    116EX-12.1EX-12.2EX-31.1EX-31.2EX-32.1EX-32.2
  
 2




---



##### Table of Contents



DORAL FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED
 SEPTEMBER 30,
    
    
    DECEMBER 31,(Dollars in thousands, except for share data)
    
    2009
    
    
    2008ASSETSCash and due from banks
    
    $
    220,690
    
    
    $
    185,817Other interest-earning assets
    
    
    
    
    
    
    1,700Securities held for trading, at fair value (includes $0 and $198,680 pledged as
collateral at September 30, 2009, and December 31, 2008, respectively that may be
repledged)
    
    
    50,170
    
    
    
    251,877Securities available for sale, at fair value (includes $1,353,080 and $1,067,097
pledged as collateral at September 30, 2009, and December 31, 2008, respectively,
that may be repledged)
    
    
    3,374,305
    
    
    
    3,429,151Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    126,285
    
    
    
    117,938Total investment securities
    
    
    3,550,760
    
    
    
    3,798,966Loans:Loans held for sale, at lower of cost or market
    
    
    410,190
    
    
    
    386,610Loans receivable
    
    
    5,299,133
    
    
    
    5,253,910Less: Unearned interest
    
    
    (1,332
    )
    
    
    (2,197
    )Less: Allowance for loan and lease losses
    
    
    (142,089
    )
    
    
    (132,020
    )Total net loans receivable
    
    
    5,155,712
    
    
    
    5,119,693Total loans
    
    
    5,565,902
    
    
    
    5,506,303Accounts receivable
    
    
    57,441
    
    
    
    55,197Mortgage-servicing advances
    
    
    22,222
    
    
    
    18,309Accrued interest receivable
    
    
    42,100
    
    
    
    42,934Servicing assets, net
    
    
    116,958
    
    
    
    114,396Premises and equipment, net
    
    
    102,870
    
    
    
    104,733Real estate held for sale, net
    
    
    93,145
    
    
    
    61,340Deferred tax asset
    
    
    126,386
    
    
    
    120,827Other assets
    
    
    125,202
    
    
    
    128,345Total assets
    
    $
    10,023,676
    
    
    $
    10,138,867LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    227,055
    
    
    $
    235,983Interest-bearing deposits
    
    
    3,988,259
    
    
    
    4,166,789Total deposits
    
    
    4,215,314
    
    
    
    4,402,772Securities sold under agreements to repurchase
    
    
    2,100,262
    
    
    
    1,907,447Advances from FHLB
    
    
    1,606,920
    
    
    
    1,623,400Other short-term borrowings
    
    
    265,000
    
    
    
    351,600Loans payable
    
    
    345,464
    
    
    
    366,776Notes payable
    
    
    272,619
    
    
    
    276,868Accrued expenses and other liabilities
    
    
    337,977
    
    
    
    304,833Total liabilities
    
    
    9,143,556
    
    
    
    9,233,696Commitments and contingencies (Please refer to Notes 23 and 24)STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 7,709,704 shares
issued and outstanding, at aggregate liquidation preference value at September 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 September 30, 2009 (53,810,110 shares issued
and outstanding at December 31, 2008)
    
    
    578
    
    
    
    538Additional paid-in capital
    
    
    940,475
    
    
    
    849,172Legal surplus
    
    
    23,596
    
    
    
    23,596Accumulated deficit
    
    
    (448,259
    )
    
    
    (418,168
    )Accumulated other comprehensive loss, net of income tax benefit of $16,671 and
$19,329 at September 30, 2009 and December 31, 2008, respectively
    
    
    (103,911
    )
    
    
    (123,217
    )Total stockholders equity
    
    
    880,120
    
    
    
    905,171Total liabilities and stockholders equity
    
    $
    10,023,676
    
    
    $
    10,138,867
  3




---



##### Table of Contents



DORAL FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands, except for share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Loans
    
    $
    78,653
    
    
    $
    87,055
    
    
    $
    241,486
    
    
    $
    258,347Mortgage-backed securities
    
    
    30,026
    
    
    
    28,336
    
    
    
    84,663
    
    
    
    77,374Interest-only strips (IOs)
    
    
    1,347
    
    
    
    1,975
    
    
    
    4,550
    
    
    
    5,405Investment securities
    
    
    1,580
    
    
    
    12,723
    
    
    
    9,252
    
    
    
    41,401Other interest-earning assets
    
    
    1,797
    
    
    
    2,727
    
    
    
    4,524
    
    
    
    14,043Total interest income
    
    
    113,403
    
    
    
    132,816
    
    
    
    344,475
    
    
    
    396,570Interest expense:Deposits
    
    
    28,615
    
    
    
    36,197
    
    
    
    97,694
    
    
    
    116,113Securities sold under agreements to repurchase
    
    
    17,770
    
    
    
    22,097
    
    
    
    52,483
    
    
    
    62,501Advances from FHLB
    
    
    15,778
    
    
    
    17,934
    
    
    
    47,780
    
    
    
    52,741Other short-term borrowings
    
    
    227
    
    
    
    
    
    
    
    1,069
    
    
    
    Loans payable
    
    
    2,226
    
    
    
    4,263
    
    
    
    8,073
    
    
    
    14,340Notes payable
    
    
    5,178
    
    
    
    5,285
    
    
    
    15,607
    
    
    
    15,936Total interest expense
    
    
    69,794
    
    
    
    85,776
    
    
    
    222,706
    
    
    
    261,631Net interest income
    
    
    43,609
    
    
    
    47,040
    
    
    
    121,769
    
    
    
    134,939Provision for loan and lease losses
    
    
    4,879
    
    
    
    7,209
    
    
    
    38,637
    
    
    
    22,678Net interest income after provision for loan and lease losses
    
    
    38,730
    
    
    
    39,831
    
    
    
    83,132
    
    
    
    112,261Non-interest income:Total other-than-temporary impairment (OTTI) losses
    
    
    (71,215
    )
    
    
    (920
    )
    
    
    (106,454
    )
    
    
    (920
    )Portion of loss recognized in other comprehensive income (before taxes)
    
    
    63,905
    
    
    
    
    
    
    
    92,349
    
    
    
    Net credit related OTTI losses
    
    
    (7,310
    )
    
    
    (920
    )
    
    
    (14,105
    )
    
    
    (920
    )Net gain on mortgage loan sales and fees
    
    
    2,637
    
    
    
    3,918
    
    
    
    7,654
    
    
    
    10,144Net gain (loss) on securities held for trading, including gains and
losses on the fair value of IOs
    
    
    6,472
    
    
    
    1,898
    
    
    
    (6,652
    )
    
    
    1,650Net gain (loss) on investment securities
    
    
    1,024
    
    
    
    (4,173
    )
    
    
    5,821
    
    
    
    (3,979
    )Servicing income (net of mark-to-market adjustment)
    
    
    11,950
    
    
    
    625
    
    
    
    23,135
    
    
    
    10,348Commissions, fees and other income
    
    
    12,115
    
    
    
    10,573
    
    
    
    31,749
    
    
    
    36,952Total non-interest income
    
    
    26,888
    
    
    
    11,921
    
    
    
    47,602
    
    
    
    54,195Non-interest expenses:Compensation and benefits
    
    
    14,459
    
    
    
    17,542
    
    
    
    53,110
    
    
    
    53,677Taxes, other than payroll and income taxes
    
    
    2,567
    
    
    
    2,550
    
    
    
    7,478
    
    
    
    7,351Advertising
    
    
    1,806
    
    
    
    2,752
    
    
    
    4,678
    
    
    
    7,257Professional services
    
    
    7,252
    
    
    
    5,834
    
    
    
    20,770
    
    
    
    17,859Communication expenses
    
    
    4,208
    
    
    
    4,626
    
    
    
    12,621
    
    
    
    13,252EDP expenses
    
    
    3,968
    
    
    
    3,468
    
    
    
    10,751
    
    
    
    7,943Occupancy expenses
    
    
    3,788
    
    
    
    5,221
    
    
    
    10,703
    
    
    
    13,723Office expenses
    
    
    1,430
    
    
    
    1,252
    
    
    
    4,099
    
    
    
    4,402Depreciation and amortization
    
    
    3,086
    
    
    
    4,170
    
    
    
    9,756
    
    
    
    12,297FDIC insurance expense
    
    
    5,468
    
    
    
    1,100
    
    
    
    13,549
    
    
    
    3,419OREO losses and other related expenses
    
    
    3,224
    
    
    
    (371
    )
    
    
    5,674
    
    
    
    (262
    )Other
    
    
    8,008
    
    
    
    4,304
    
    
    
    22,027
    
    
    
    21,719Total non-interest expenses
    
    
    59,264
    
    
    
    52,448
    
    
    
    175,216
    
    
    
    162,637Income (loss) before income taxes
    
    
    6,354
    
    
    
    (696
    )
    
    
    (44,482
    )
    
    
    3,819Income tax (benefit) expense
    
    
    (6,855
    )
    
    
    1,060
    
    
    
    (19,617
    )
    
    
    6,231Net income (loss)
    
    $
    13,209
    
    
    $
    (1,756
    )
    
    $
    (24,865
    )
    
    $
    (2,412
    )Net income (loss) attributable to common shareholders(1)
    
    $
    10,000
    
    
    $
    (10,080
    )
    
    $
    (30,091
    )
    
    $
    (27,386
    )Net income (loss) per common share (1)
    
    $
    0.17
    
    
    $
    (0.19
    )
    
    $
    (0.54
    )
    
    $
    (0.51
    )
 
 (1)
    
    For the quarters and nine month periods ended September 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.
Please refer to Note 26 for additional information regarding net income (loss)
attributable to common shareholders.  4




---



##### Table of Contents



DORAL FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
 NINE MONTH PERIODS(In thousands)
    
    ENDED SEPTEMBER 30,2009
    
    
    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
    
    
    76
    
    
    
    39Balance at end of period
    
    
    940,475
    
    
    
    849,120LEGAL 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
    
    
    (24,865
    )
    
    
    (2,412
    )Cash dividends accrued on preferred stock
    
    
    (14,595
    )
    
    
    (24,974
    )Balance at end of period
    
    
    (448,259
    )
    
    
    (93,996
    )ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (123,217
    )
    
    
    (33,148
    )Other comprehensive income (loss), net of deferred tax
    
    
    19,306
    
    
    
    (162,258
    )Balance at end of period
    
    
    (103,911
    )
    
    
    (195,406
    )Total stockholders equity
    
    $
    880,120
    
    
    $
    1,157,102
  5




---



##### Table of Contents



DORAL FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    13,209
    
    
    $
    (1,756
    )
    
    $
    (24,865
    )
    
    $
    (2 412
    )Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities arising during the period
    
    
    105,949
    
    
    
    (76,698
    )
    
    
    104,475
    
    
    
    (176,354
    )Non-credit portion of other-than-temporary impairment losses
    
    
    (63,905
    )
    
    
    
    
    
    
    (92,349
    )
    
    
    Reclassification of realized (gains) losses included in net
income (loss)
    
    
    (174
    )
    
    
    2,499
    
    
    
    5,590
    
    
    
    (11,429
    )Other comprehensive income (loss) on investment securities, before
tax
    
    
    41,870
    
    
    
    (74,199
    )
    
    
    17,716
    
    
    
    (187,783
    )Income tax (expense) benefit related to investment securities
    
    
    (6,280
    )
    
    
    11,193
    
    
    
    (2,657
    )
    
    
    25,106Other comprehensive income (loss) on investment securities, net of
tax
    
    
    35,590
    
    
    
    (63,006
    )
    
    
    15,059
    
    
    
    (162,677
    )Other comprehensive income on cash flow hedges(1)
    
    
    654
    
    
    
    662
    
    
    
    4,247
    
    
    
    419Other comprehensive income (loss)
    
    
    36,244
    
    
    
    (62,344
    )
    
    
    19,306
    
    
    
    (162,258
    )Comprehensive income (loss)
    
    $
    49,453
    
    
    $
    (64,100
    )
    
    $
    (5,559
    )
    
    $
    (164,670
    )Accumulated other comprehensive loss, net of taxOther comprehensive loss on investment securities
    
    $
    (15,974
    )
    
    $
    (195,253
    )
    
    $
    (15,974
    )
    
    $
    (195,253
    )Other comprehensive loss on other-than-temporarily impaired losses
on investment securities
    
    
    (78,497
    )
    
    
    
    
    
    
    (78,497
    )
    
    
    Total other comprehensive loss on investment securities
    
    
    (94,471
    )
    
    
    (195,253
    )
    
    
    (94,471
    )
    
    
    (195,253
    )Other comprehensive loss on cash flow hedge(1)
    
    
    (9,440
    )
    
    
    (153
    )
    
    
    (9,440
    )
    
    
    (153
    )Total accumulated other comprehensive loss, net of tax
    
    $
    (103,911
    )
    
    $
    (195,406
    )
    
    $
    (103,911
    )
    
    $
    (195,406
    )
 
 (1)
    
    For the quarter and nine month period ended September 30, 2009, other comprehensive loss on cash flow hedges includes $3.7 million related to a deferred
tax asset valuation allowance.  6




---



##### Table of Contents



DORAL FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 NINE MONTH PERIODS ENDEDSEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (24,865
    )
    
    $
    (2,412
    )Adjustments to reconcile net loss to net cash provided by operating activities:Stock-based compensation
    
    
    76
    
    
    
    39Depreciation and amortization
    
    
    9,756
    
    
    
    12,297Mark-to-market adjustment of servicing assets
    
    
    2,499
    
    
    
    15,448Deferred tax (benefit) expense
    
    
    (7,260
    )
    
    
    3,378Provision for loan and lease losses
    
    
    38,637
    
    
    
    22,678Net gain on sale of assets to be disposed of by sale
    
    
    
    
    
    
    (348
    )Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    3,304
    
    
    
    (17,367
    )Origination and purchases of loans held for sale
    
    
    (346,546
    )
    
    
    (323,676
    )Principal repayments and sales of loans held for sale
    
    
    184,280
    
    
    
    170,768(Gain) loss on securities
    
    
    (10,700
    )
    
    
    790Net other-than-temporary impairment losses
    
    
    14,105
    
    
    
    920Unrealized loss on trading securities
    
    
    16,279
    
    
    
    663Purchases of securities held for trading
    
    
    (200,042
    )
    
    
    (343,917
    )Principal repayment and sales of securities held for trading
    
    
    701,548
    
    
    
    577,712Amortization and net (gain) loss in the fair value of IOs
    
    
    3,099
    
    
    
    4,184Unrealized loss (gain) on derivative instruments
    
    
    233
    
    
    
    (450
    )Increase in derivative instruments
    
    
    
    
    
    
    (75
    )(Increase) decrease in accounts receivable
    
    
    (2,244
    )
    
    
    652Increase in mortgage servicing advances
    
    
    (3,913
    )
    
    
    (2,643
    )Decrease (increase) in accrued interest receivable
    
    
    834
    
    
    
    (5,141
    )Decrease (increase) in other assets
    
    
    11,958
    
    
    
    (27,632
    )Decrease in accrued expenses and other liabilities
    
    
    (19,625
    )
    
    
    (55,199
    )Total adjustments
    
    
    396,278
    
    
    
    33,081Net cash provided by operating activities
    
    
    371,413
    
    
    
    30,669Cash flows from investing activities:Purchases of securities available for sale
    
    
    (2,248,504
    )
    
    
    (2,349,698
    )Principal repayment and sales of securities available for sale
    
    
    2,306,809
    
    
    
    745,059Increase in FHLB stock
    
    
    (8,347
    )
    
    
    (40,696
    )Originations of loans receivable
    
    
    (436,261
    )
    
    
    (749,958
    )Principal repayment of loans receivable
    
    
    162,280
    
    
    
    432,453Purchases of premises and equipment
    
    
    (7,893
    )
    
    
    (8,632
    )Proceeds from sales of mortgage servicing assets
    
    
    159
    
    
    
    Proceeds from assets to be disposed of by sale
    
    
    
    
    
    
    1,018Proceeds from sales of real estate held for sale
    
    
    30,341
    
    
    
    15,021Net cash used in investing activities
    
    
    (201,416
    )
    
    
    (1,955,433
    )Cash flows from financing activities:(Decrease) increase in deposits
    
    
    (187,458
    )
    
    
    33,773Increase in securities sold under agreements to repurchase
    
    
    192,815
    
    
    
    935,864Proceeds from advances from FHLB
    
    
    427,000
    
    
    
    1,544,400Repayment of advances from FHLB
    
    
    (443,480
    )
    
    
    (1,055,000
    )Proceeds from other short-term borrowings
    
    
    2,776,000
    
    
    
    Repayment of other short-term borrowings
    
    
    (2,862,600
    )
    
    
    Repayment of secured borrowings
    
    
    (21,312
    )
    
    
    (29,657
    )Repayment of notes payable
    
    
    (4,492
    )
    
    
    (4,162
    )Payment associated with conversion of preferred stock
    
    
    (4,972
    )
    
    
    Dividends paid
    
    
    (8,325
    )
    
    
    (24,974
    )Net cash (used in) provided by financing activities
    
    
    (136,824
    )
    
    
    1,400,244Net increase (decrease) in cash and cash equivalents
    
    $
    33,173
    
    
    $
    (524,520
    )Cash and cash equivalents at beginning of period
    
    
    187,517
    
    
    
    789,169Cash and cash equivalents at the end of period
    
    $
    220,690
    
    
    $
    264,649Cash and cash equivalents includes:Cash and due from banks
    
    $
    220,690
    
    
    $
    262,346Other interest-earning assets
    
    
    
    
    
    
    2,303$
    220,690
    
    
    $
    264,649Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    318,496
    
    
    $
    259,216Reclassification 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
    
    $
    
    
    
    $
    5,277Loans foreclosed
    
    $
    67,638
    
    
    $
    35,125Capitalization of servicing assets
    
    $
    5,220
    
    
    $
    5,304Supplemental information for cash flows:Cash used to pay interest
    
    $
    235,373
    
    
    $
    286,684Cash used to pay income taxes
    
    $
    2,865
    
    
    $
    24,578
  7




---



##### 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
    
    
    12Note 4  Securities Held for Trading
    
    
    12Note 5  Securities Available for Sale
    
    
    12Note 6  Investments in an Unrealized Loss Position
    
    
    15Note 7  Pledged Assets
    
    
    18Note 8  Loans Held for Sale
    
    
    18Note 9  Loans Receivable
    
    
    19Note 10  Related Party Transactions
    
    
    21Note 11  Accounts Receivable
    
    
    22Note 12  Servicing Activities
    
    
    22Note 13  Servicing Related Matters
    
    
    25Note 14  Other Real Estate Owned
    
    
    25Note 15  Deposits
    
    
    26Note 16  Repurchase Agreements
    
    
    26Note 17  Advances from the FHLB
    
    
    27Note 18  Other Short-Term Borrowings
    
    
    27Note 19  Loans Payable
    
    
    28Note 20  Notes Payable
    
    
    28Note 21  Income Taxes
    
    
    29Note 22  Guarantees
    
    
    32Note 23  Financial Instruments with Off-Balance Sheet Risk
    
    
    33Note 24  Commitments and Contingencies
    
    
    34Note 25  Stock Options and Other Incentive Plans
    
    
    35Note 26  Earnings per Share
    
    
    37Note 27  Fair Value of Assets and Liabilities
    
    
    37Note 28  Derivatives
    
    
    44Note 29  Segment Information
    
    
    47Note 30  Subsequent Events
    
    
    49
 8




---



##### Table of Contents



1. Nature of Operations and Basis of Presentation
      2. Recent Accounting Pronouncements
 Accounting Standard Update No. 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. Debt with Conversion and Other Options,
 9




---



##### Table of Contents



Accounting Standards Update No. 2009-12, Fair Value Measurements and Disclosures (Topic 820)
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Fair
Value Measurements and Disclosures-Overall
  Accounting Standards Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820)
Measuring Liabilities at Fair Value.
  onsolidation Amendments to FASB Interpretation No. 46(R) Consolidation of Variable
Interest Entities Transfers and Servicing, Accounting for Transfers of Financial Assets, an amendment of FASB No. 140 .
  10




---



##### Table of Contents



Transfer and Servicing, Transition and Open Effective Date Information Disclosures by Public Entities (Enterprises) about Transfers of Financial
Assets and Interests in Variable Interest Entities),
 Transfer and Servicing Accounting for Transfer of Financial
Assets- an amendment of FASB No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Financial Services Mortgage
Banking/Receivables Accounting for Certain
Mortgage Banking Activities),
  11




---



##### Table of Contents



3. Cash and due from banks
    4. Securities Held for Trading
  SECURITIES HELD FOR TRADING(In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Mortgage-Backed Securities
    
    $
    722
    
    
    $
    731Variable Rate IOs
    
    
    48,650
    
    
    
    51,709Fixed Rate IOs
    
    
    430
    
    
    
    470U.S. Treasury Notes
    
    
    
    
    
    
    198,680Derivatives(1)
    
    
    368
    
    
    
    287Total
    
    $
    50,170
    
    
    $
    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. 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 $535.0 million as of September 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.  5. Securities Available for Sale
   12




---



##### Table of Contents



SECURITIES AVAILABLE FOR SALE  AS OF SEPTEMBER 30, 2009
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    FAIR
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue within one year
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    
    6.72
    %Due from one to five years
    
    
    748
    
    
    
    15
    
    
    
    6
    
    
    
    757
    
    
    
    4.37
    %Due from five to ten years
    
    
    417
    
    
    
    15
    
    
    
    
    
    
    
    432
    
    
    
    5.57
    %Due over ten years
    
    
    56,437
    
    
    
    1,477
    
    
    
    1
    
    
    
    57,913
    
    
    
    5.35
    %FHLMC and FNMADue from five to ten years
    
    
    96,419
    
    
    
    3,781
    
    
    
    
    
    
    
    100,200
    
    
    
    4.64
    %Due over ten years
    
    
    892,620
    
    
    
    32,719
    
    
    
    
    
    
    
    925,339
    
    
    
    5.11
    %CMO Government Sponsored AgenciesDue from five to ten years
    
    
    64,177
    
    
    
    700
    
    
    
    182
    
    
    
    64,695
    
    
    
    3.71
    %Due over ten years
    
    
    1,813,569
    
    
    
    22,178
    
    
    
    4,408
    
    
    
    1,831,339
    
    
    
    3.49
    %Non-Agency CMOsDue over ten years
    
    
    443,278
    
    
    
    
    
    
    
    167,828
    
    
    
    275,450
    
    
    
    3.76
    %Debt SecuritiesFHLB NotesDue within one year
    
    
    2,057
    
    
    
    36
    
    
    
    
    
    
    
    2,093
    
    
    
    4.16
    %FNMA NotesDue within one year
    
    
    46,343
    
    
    
    142
    
    
    
    
    
    
    
    46,485
    
    
    
    0.89
    %P.R. Housing BankDue from five to ten years
    
    
    3,595
    
    
    
    111
    
    
    
    
    
    
    
    3,706
    
    
    
    4.92
    %Due over ten years
    
    
    3,660
    
    
    
    196
    
    
    
    
    
    
    
    3,856
    
    
    
    5.47
    %OtherDue within one year
    
    
    6,557
    
    
    
    97
    
    
    
    
    
    
    
    6,654
    
    
    
    4.26
    %Due from one to five years
    
    
    47,569
    
    
    
    657
    
    
    
    
    
    
    
    48,226
    
    
    
    5.31
    %Due from five to ten years
    
    
    5,000
    
    
    
    262
    
    
    
    
    
    
    
    5,262
    
    
    
    5.50
    %Due over ten years
    
    
    3,000
    
    
    
    
    
    
    
    1,103
    
    
    
    1,897
    
    
    
    5.80
    %$
    3,485,447
    
    
    $
    62,386
    
    
    $
    173,528
    
    
    $
    3,374,305
    
    
    
    4.01
    %
 13




---



##### 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




---



##### Table of Contents



6. Investments in an Unrealized Loss Position
  SECURITIES AVAILABLE FOR SALE
 As of September 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-Backed SecuritiesGNMA
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    8
    
    
    $
    913
    
    
    $
    7
    
    
    
    8
    
    
    $
    913
    
    
    $
    7CMOs Government
Sponsored Agencies
    
    
    7
    
    
    
    303,561
    
    
    
    4,590
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    303,561
    
    
    
    4,590Non-Agency CMOs
    
    
    1
    
    
    
    2,067
    
    
    
    350
    
    
    
    11
    
    
    
    273,383
    
    
    
    167,478
    
    
    
    12
    
    
    
    275,450
    
    
    
    167,828Debt SecuritiesOther
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,897
    
    
    
    1,103
    
    
    
    1
    
    
    
    1,897
    
    
    
    1,1038
    
    
    $
    305,628
    
    
    $
    4,940
    
    
    
    20
    
    
    $
    276,193
    
    
    $
    168,588
    
    
    
    28
    
    
    $
    581,821
    
    
    $
    173,528
 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-Backed SecuritiesGNMA
    
    
    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
  Investments-Debt and Equity Securities/Transition and Open
Effective Date Information 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
 15




---



##### Table of Contents



value of cash flows expected to be collected from the investment security. Cash flows expected
to be collected are estimated based on a careful assessment of all available information. The
difference between the present value of the cash flows expected to be collected and the
amortized cost basis represents the amount of credit loss.
     Investments  Other/Beneficial
Interest in Securitized Financial Assets 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




---



##### Table of Contents



As of
    
    
    Quarter Ended
    
    
    Nine Month Period EndedSeptember 30, 2009
    
    
    September 30, 2009
    
    
    September 30, 2009Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OTTI
    
    
    
    
    
    
    
    
    
    
    OTTICost (after
    
    
    Gross
    
    
    
    
    
    
    OTTI
    
    
    Related to
    
    
    Total
    
    
    OTTI
    
    
    Related to
    
    
    Totalcredit related
    
    
    Unrealized
    
    
    Fair
    
    
    Related to
    
    
    Non-Credit
    
    
    Impairment
    
    
    Related to
    
    
    Non-Credit
    
    
    Impairment(In thousands)
    
    OTTI)
    
    
    Losses
    
    
    Value
    
    
    Credit Loss
    
    
    Loss
    
    
    Losses
    
    
    Credit Loss
    
    
    Loss
    
    
    LossesOTTI InvestmentsU.S. Non-Agency CMOs
    
    $
    255,926
    
    
    $
    88,448
    
    
    $
    167,478
    
    
    $
    7,310
    
    
    $
    63,905
    
    
    $
    71,215
    
    
    $
    12,991
    
    
    $
    88,448
    
    
    $
    101,439P.R. Non-Agency CMOs
    
    
    10,708
    
    
    
    3,994
    
    
    
    6,714
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,114
    
    
    
    3,901
    
    
    
    5,015$
    266,634
    
    
    $
    92,442
    
    
    $
    174,192
    
    
    $
    7,310
    
    
    $
    63,905
    
    
    $
    71,125
    
    
    $
    14,105
    
    
    $
    92,349
    
    
    $
    106,454
 As of
    
    
    Quarter Ended
    
    
    Nine Month Period EndedSeptember 30, 2008
    
    
    September 30, 2008
    
    
    September 30, 2008Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OTTI
    
    
    
    
    
    
    
    
    
    
    OTTICost (after
    
    
    Gross
    
    
    
    
    
    
    OTTI
    
    
    Related to
    
    
    Total
    
    
    OTTI
    
    
    Related to
    
    
    Totalcredit related
    
    
    Unrealized
    
    
    
    
    
    
    Related to
    
    
    Non-Credit
    
    
    Impairment
    
    
    Related to
    
    
    Non-Credit
    
    
    Impairment(In thousands)
    
    OTTI)
    
    
    Losses
    
    
    Fair Value
    
    
    Credit Loss
    
    
    Loss
    
    
    Losses
    
    
    Credit Loss
    
    
    Loss
    
    
    LossesOTTI InvestmentsP.R. Non-Agency CMOs
    
    $
    2,575
    
    
    $
    
    
    
    $
    2,575
    
    
    $
    920
    
    
    $
    
    
    
    $
    920
    
    
    $
    920
    
    
    $
    
    
    
    $
    920$
    2,575
    
    
    $
    
    
    
    $
    2,575
    
    
    $
    920
    
    
    $
    
    
    
    $
    920
    
    
    $
    920
    
    
    $
    
    
    
    $
    920
  17




---



##### Table of Contents



QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    7,715
    
    
    $
    
    
    
    $
    920
    
    
    $
    Additions:Credit losses for which
OTTI was not previously
recognized
    
    
    5,216
    
    
    
    920
    
    
    
    13,995
    
    
    
    920Additional OTTI credit
losses for which an
other-than-temporary
charge was previously
recognized
    
    
    2,094
    
    
    
    
    
    
    
    110
    
    
    
    Balance at end of period
    
    $
    15,025
    
    
    $
    920
    
    
    $
    15,025
    
    
    $
    920
  7. Pledged Assets
  (In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Securities available for sale
    
    $
    2,774,167
    
    
    $
    2,648,132Securities held for trading
    
    
    
    
    
    
    198,680Loans held for sale
    
    
    148,867
    
    
    
    165,929Loans receivable
    
    
    2,898,810
    
    
    
    2,885,116Total pledged assets
    
    $
    5,821,844
    
    
    $
    5,897,857
 8. Loans Held for Sale
  LOANS HELD FOR SALE
 (In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Conventional single family residential loans
    
    $
    140,292
    
    
    $
    154,081FHA/VA loans
    
    
    236,455
    
    
    
    194,241Commercial loans to financial institutions
    
    
    17,533
    
    
    
    19,527Commercial real estate loans
    
    
    15,910
    
    
    
    18,761Total loans held for sale (1)
    
    $
    410,190
    
    
    $
    386,610
 
 (1)
    
    At both September 30, 2009 and December 31, 2008, the loans held for sale portfolio
includes $1.1 million related to interest-only loans.   18




---



##### Table of Contents



9. Loans Receivable
  LOANS RECEIVABLE, NET
 SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    462,419
    
    
    
    9
    %
    
    $
    506,031
    
    
    
    9
    %Residential mortgage loans
    
    
    3,741,248
    
    
    
    70
    %
    
    
    3,650,222
    
    
    
    69
    %Commercial  secured by real estate
    
    
    753,735
    
    
    
    14
    %
    
    
    757,112
    
    
    
    14
    %Consumer  other:Personal loans
    
    
    28,473
    
    
    
    1
    %
    
    
    37,844
    
    
    
    1
    %Auto loans
    
    
    34
    
    
    
    0
    %
    
    
    122
    
    
    
    0
    %Credit cards
    
    
    23,489
    
    
    
    1
    %
    
    
    26,034
    
    
    
    1
    %Overdrawn checking accounts
    
    
    604
    
    
    
    0
    %
    
    
    668
    
    
    
    0
    %Revolving lines of credit
    
    
    22,844
    
    
    
    0
    %
    
    
    25,520
    
    
    
    1
    %Lease financing receivables
    
    
    16,132
    
    
    
    0
    %
    
    
    23,158
    
    
    
    0
    %Commercial non-real estate
    
    
    177,415
    
    
    
    3
    %
    
    
    136,210
    
    
    
    3
    %Loans on savings deposits
    
    
    3,841
    
    
    
    0
    %
    
    
    5,240
    
    
    
    0
    %Land secured
    
    
    103,653
    
    
    
    2
    %
    
    
    118,870
    
    
    
    2
    %Loans receivable, gross(2)
    
    
    5,333,887
    
    
    
    100
    %
    
    
    5,287,031
    
    
    
    100
    %Less:Discount on loans transferred(3)
    
    
    (13,313
    )
    
    
    
    
    
    
    (15,735
    )Unearned interest
    
    
    (1,332
    )
    
    
    
    
    
    
    (2,197
    )Deferred loan fees/costs, net
    
    
    (21,441
    )
    
    
    
    
    
    
    (17,386
    )Allowance for loan and lease losses
    
    
    (142,089
    )
    
    
    
    
    
    
    (132,020
    )(178,175
    )
    
    
    
    
    
    
    (167,338
    )Loans receivable, net
    
    $
    5,155,712
    
    
    
    
    
    
    $
    5,119,693
 
 (1)
    
    Includes $289.3 million and $422.6 million of construction loans for residential housing projects as of September 30, 2009 and December 31, 2008, respectively. Also
includes $173.1 million and $83.4 million of construction loans for commercial, condominiums and multifamily projects as of September 30, 2009 and December 31, 2008, respectively.(2)
    
    Includes $370.4 million and $349.5 million of interest-only loans, as of September 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 September 30, 2009 and December
31, 2008, the outstanding balance of these loans transferred was $1.1 billion and $1.2 billion, respectively.  Receivables / Nonrefundable Fees and Other Costs Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases .
 19




---



##### Table of Contents



Receivables-Measurement of Loan Impairment Accounting by Creditors for
Impairment of a Loan
   (In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Impaired loans with allowance
    
    $
    251,087
    
    
    $
    207,949Impaired loans without allowance
    
    
    213,455
    
    
    
    120,378Total impaired loans
    
    $
    464,542
    
    
    $
    328,327Related allowance
    
    $
    49,119
    
    
    $
    45,099Average impaired loan portfolio
    
    $
    399,136
    
    
    $
    317,844
  Receivables- Troubled Debt Restructuring by Creditors Debt-Troubled Debt Restructuring by Debtors, Accounting by Debtors and
Creditors of Troubled Debt Restructurings
  20




---



##### Table of Contents



Contingencies-Loss Contingencies/Recognition Accounting for Contingencies
  ALLOWANCE FOR LOAN AND
LEASE LOSSES
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    146,769
    
    
    $
    122,099
    
    
    $
    132,020
    
    
    $
    124,733Provision for loan and lease losses
    
    
    4,879
    
    
    
    7,209
    
    
    
    38,637
    
    
    
    22,678Losses charged to the allowance
    
    
    (10,388
    )
    
    
    (6,320
    )
    
    
    (29,805
    )
    
    
    (25,165
    )Recoveries
    
    
    829
    
    
    
    155
    
    
    
    1,237
    
    
    
    897Balance at end of period
    
    $
    142,089
    
    
    $
    123,143
    
    
    $
    142,089
    
    
    $
    123,143
 10. Related Party Transactions
  (In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Balance at beginning of period
    
    $
    2,579
    
    
    $
    5,090New loans
    
    
    3,178
    
    
    
    58Repayments
    
    
    (2,109
    )
    
    
    (101
    )Loans sold
    
    
    
    
    
    
    (511
    )Loans of former officers
    
    
    (792
    )
    
    
    (1,957
    )Balance at end of period (1)
    
    $
    2,856
    
    
    $
    2,579
 
 (1)
    
    At September 30, 2009 and December 31, 2008, none of the loans
outstanding to officers, directors and 5% or more stockholders were delinquent.    21




---



##### Table of Contents



11. Accounts Receivable
  Lehman Brothers Transaction
      12 Servicing Activities
  22




---



##### Table of Contents



QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    112,869
    
    
    $
    145,527
    
    
    $
    114,396
    
    
    $
    150,238Sales of servicing asset(1)
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    Adjustment to MSR fair value for
loans repurchased(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (587
    )Capitalization of servicing assets
    
    
    1,790
    
    
    
    2,329
    
    
    
    5,220
    
    
    
    5,304Change in fair value
    
    
    2,299
    
    
    
    (8,349
    )
    
    
    (2,499
    )
    
    
    (15,448
    )Balance at end of period(3)
    
    $
    116,958
    
    
    $
    139,507
    
    
    $
    116,958
    
    
    $
    139,507
 
 (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 $8.9 billion and
$9.6 billion as of September 30, 2009 and 2008, respectively, which includes $3.1 million and
$3.4 million, respectively, of loans being serviced under sub-servicing arrangements.    QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER  30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    47,866
    
    
    $
    49,160
    
    
    $
    52,179
    
    
    $
    51,928Amortization
    
    
    (2,682
    )
    
    
    (1,456
    )
    
    
    (7,002
    )
    
    
    (4,195
    )Gain on the IO value
    
    
    3,896
    
    
    
    40
    
    
    
    3,903
    
    
    
    11Balance at end of period
    
    $
    49,080
    
    
    $
    47,744
    
    
    $
    49,080
    
    
    $
    47,744
   23




---



##### Table of Contents



Servicing
    
    Interest-(Dollars in thousands)
    
    Assets
    
    Only StripsCarrying amount of retained interest
    
    $
    116,958
    
    
    $
    49,080Weighted-average expected life (in years)
    
    
    6.2
    
    
    
    5.2Constant prepayment rate (weighted-average annual rate)
    
    
    10.2
    %
    
    
    10.3
    %Decrease in fair value due to 10% adverse change
    
    
    (5,673
    )
    
    
    (1,517
    )Decrease in fair value due to 20% adverse change
    
    
    (10,965
    )
    
    
    (2,950
    )Residual cash flow discount rate (weighted-average
annual rate)
    
    
    11.4
    %
    
    
    13.0
    %Decrease in fair value due to 10% adverse change
    
    
    (4,456
    )
    
    
    (1,834
    )Decrease in fair value due to 20% adverse change
    
    
    (8,589
    )
    
    
    (3,514
    )
  24




---



##### Table of Contents



(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
    
    
    6.6
    %
    
    
    6.6
    
    
    $
    (3,971
    )
    
    
    (8.1
    )%+100
    
    
    7.8
    %
    
    
    6.1
    
    
    
    (1,351
    )
    
    
    (2.8
    )%+50
    
    
    8.8
    %
    
    
    5.7
    
    
    
    (371
    )
    
    
    (0.8
    )%Base
    
    
    10.3
    %
    
    
    5.2
    
    
    
    0
    
    
    
    0
    %-50
    
    
    12.1
    %
    
    
    4.7
    
    
    
    90
    
    
    
    0.2
    %-100
    
    
    13.2
    %
    
    
    4.5
    
    
    
    865
    
    
    
    1.8
    %-200
    
    
    14.7
    %
    
    
    4.2
    
    
    
    3,021
    
    
    
    6.2
    %
 13. Servicing Related Matters
  14. Other Real Estate Owned
   QUARTER ENDED
    
    
    NINE MONTH PERIODS(In thousands)
    
    SEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    83,964
    
    
    $
    53,731
    
    
    $
    61,340
    
    
    $
    38,154Additions
    
    
    21,278
    
    
    
    9,984
    
    
    
    69,940
    
    
    
    35,530Sales
    
    
    (9,028
    )
    
    
    (6,623
    )
    
    
    (30,341
    )
    
    
    (15,021
    )Retirement
    
    
    
    
    
    
    109
    
    
    
    (2,302
    )
    
    
    (405
    )Lower of cost or market adjustments
    
    
    (3,069
    )
    
    
    382
    
    
    
    (5,492
    )
    
    
    (675
    )Balance at the end of period
    
    $
    93,145
    
    
    $
    57,583
    
    
    $
    93,145
    
    
    $
    57,583
 25




---



##### Table of Contents



15. Deposits
  (In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Brokered certificates of deposit
    
    $
    2,380,237
    
    
    $
    2,652,305Certificates of deposit
    
    
    472,642
    
    
    
    542,074Regular savings
    
    
    360,969
    
    
    
    338,784NOW accounts and other transaction accounts
    
    
    350,223
    
    
    
    356,988Money markets accounts
    
    
    424,188
    
    
    
    276,638Total interest-bearing
    
    
    3,988,259
    
    
    
    4,166,789Non interest-bearing deposits
    
    
    227,055
    
    
    
    235,983Total deposits
    
    $
    4,215,314
    
    
    $
    4,402,772
 16. Repurchase Agreements
  SEPTEMBER 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 3.43% and at
various fixed rates averaging
0.78% at September 30, 2009 and
December 31, 2008, respectively.
    
    $
    50,000
    
    
    $
    281,447Non-callable repurchase
agreements with maturities
ranging from February 2010 to
October 2013 (2008  October
2009 to October 2013), at
various fixed rates averaging
3.24% and 3.96% at September 30,
2009 and December 31, 2008,
respectively.
    
    
    1,821,762
    
    
    
    1,347,500Callable repurchase agreements
with maturities ranging from
March 2010 to February 2014
(2008  September 2009 to
February 2014), at various fixed
rates averaging 4.72% and 4.88%
at September 30, 2009 and
December 31, 2008, respectively,
callable at various dates
beginning on November 2009 (2008
 January 2009).
    
    
    228,500
    
    
    
    278,500$
    2,100,262
    
    
    $
    1,907,447
 26




---



##### Table of Contents



17. Advances from FHLB
  SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Non-callable advances with
maturities ranging from
October 2009 to May 2013
(2008  February 2009 to
May 2013), at various fixed
rates averaging 3.47% and
3.77% at September 30, 2009
and December 31, 2008,
respectively.
    
    $
    992,920
    
    
    $
    974,400Non-callable advances due on
July 6, 2010, tied to
3-month LIBOR adjustable
quarterly, at a rate of
0.54% and 4.17% at September
30, 2009 and December 31,
2008, respectively.
    
    
    200,000
    
    
    
    200,000Non-callable advances with
maturities ranging from
October 2009 to November
2012 (2008  September 2009
to November 2012), tied to
1-month LIBOR adjustable
monthly, at a rate of 0.27%
and 0.49% at September 30,
2009 and December 31, 2008,
respectively.
    
    
    135,000
    
    
    
    145,000Callable advances with
maturities ranging from June
2010 to March 2012 (2008 
July 2009 to March 2012), at
various fixed rates
averaging 5.41% and 5.40%,
at September 30, 2009 and
December 31, 2008,
respectively, callable at
various dates beginning on
October 2009 (2008  January
2009).
    
    
    279,000
    
    
    
    304,000$
    1,606,920
    
    
    $
    1,623,400
  18. Other short-term borrowings
  SEPTEMBER 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 October to December 2009.
    
    
    265,000
    
    
    
    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$
    265,000
    
    
    $
    351,600
  27




---



##### Table of Contents



19. Loans Payable
   SEPTEMBER 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 1.99% and
5.00% at September 30, 2009
and December 31, 2008,
respectively.
    
    $
    325,919
    
    
    $
    344,257Secured borrowings with local
financial institutions,
collateralized by real estate
mortgage loans at fixed
interest rates averaging 7.41%
and 7.42% at September 30,
2009 and December 31, 2008,
respectively.
    
    
    19,545
    
    
    
    22,519$
    345,464
    
    
    $
    366,776
   20. Notes payable
  SEPTEMBER 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.
    
    $
    98,581
    
    
    $
    98,459$30 million notes, net of
discount, bearing interest at
7.00%, due on April 26, 2012,
paying interest monthly.
    
    
    29,769
    
    
    
    29,709$40 million notes, net of
discount, bearing interest at
7.10%, due on April 26, 2017,
paying interest monthly.
    
    
    39,416
    
    
    
    39,374$30 million notes, net of
discount, bearing interest at
7.15%, due on April 26, 2022,
paying interest monthly.
    
    
    29,465
    
    
    
    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 and
principal monthly.
    
    
    27,903
    
    
    
    31,945$
    272,619
    
    
    $
    276,868
  28




---



##### Table of Contents



21. Income Taxes
 Background
     29




---



##### Table of Contents



Income Tax Expense
  QUARTER ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    

ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Current income tax expense (benefit):Puerto Rico
    
    $
    36
    
    
    $
    349
    
    
    $
    (14,896
    )
    
    $
    1,042United States
    
    
    974
    
    
    
    980
    
    
    
    2,539
    
    
    
    1,811Total current income tax expense (benefit)
    
    
    1,010
    
    
    
    1,329
    
    
    
    (12,357
    )
    
    
    2,853Deferred income tax (benefit) expense:Puerto Rico
    
    
    (10,490
    )
    
    
    (174
    )
    
    
    (9,221
    )
    
    
    3,216United States
    
    
    2,625
    
    
    
    (95
    )
    
    
    1,961
    
    
    
    162Total deferred income tax (benefit)
expense
    
    
    (7,865
    )
    
    
    (269
    )
    
    
    (7,260
    )
    
    
    3,378Total income tax (benefit) expense
    
    $
    (6,855
    )
    
    $
    1,060
    
    
    $
    (19,617
    )
    
    $
    6,231
   Deferred Tax Components
     30




---



##### Table of Contents



Income Taxes Accounting for Income Taxes
       ASC 740 (previously FIN 48)
   31




---



##### Table of Contents



(In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Balance at beginning of period
    
    $
    13,709
    
    
    $
    13,709Additions for tax positions of prior years
    
    
    2,892
    
    
    
    Release of contingencies
    
    
    (13,709
    )
    
    
    Balance at end of period
    
    $
    2,892
    
    
    $
    13,709
 22. Guarantees
    32




---



##### Table of Contents



QUARTER ENDED
    
    
    NINE MONTH PERIOD(In thousands)
    
    SEPTEMBER 30, 2009
    
    
    ENDED SEPTEMBER 30, 2009Balance at beginning of period
    
    $
    8,755
    
    
    $
    8,849Net charge-offs
    
    
    (435
    )
    
    
    (2,564
    )Provision for recourse liability
    
    
    1,124
    
    
    
    3,159Balance at end of period
    
    $
    9,444
    
    
    $
    9,444
 23. Financial Instruments with Off-Balance Sheet Risk
  SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2009
    
    
    2008Commitments to extend credit
    
    $
    102,340
    
    
    $
    125,762Commitments to sell loans
    
    
    172,185
    
    
    
    137,797Commercial, financial and
performance standby letters
of credit
    
    
    25
    
    
    
    325Total
    
    $
    274,550
    
    
    $
    263,884
   Derivatives and Hedging Accounting for
derivatives instruments and hedging activities
   33




---



##### Table of Contents



24. Commitments and Contingencies
  (In thousands)2010
    
    $
    5,9252011
    
    
    5,3302012
    
    
    4,3742013
    
    
    5,8912014
    
    
    3,7382015 and thereafter
    
    
    21,408$
    46,666
    Legal Matters
   Banking Regulatory Matters
  34




---



##### Table of Contents



25. Stock Option and Other Incentive Plans
     35




---



##### Table of Contents



Compensation  Stock
Compensation, Share-Based Payment
  QUARTER ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Stock-based compensation recognized, net
    
    $
    (27
    )
    
    $
    39
    
    
    $
    76
    
    
    $
    39Unrecognized at end of period
    
    $
    268
    
    
    $
    540
    
    
    $
    268
    
    
    $
    540
  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
    %
   36




---



##### Table of Contents



26. Earnings Per Share Data
  QUARTER ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands, except per share amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net Income (Loss):Net income (loss)
    
    $
    13,209
    
    
    $
    (1,756
    )
    
    $
    (24,865
    )
    
    $
    (2,412
    )Convertible preferred stock dividend(1)(2)
    
    
    (3,209
    )
    
    
    (4,096
    )
    
    
    (10,367
    )
    
    
    (12,290
    )Nonconvertible preferred stock dividend(2)
    
    
    
    
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (12,684
    )Effect of conversion of preferred stock(3)
    
    
    
    
    
    
    
    
    
    
    9,369
    
    
    
    Net income (loss) attributable to common shareholders(4)
    
    $
    10,000
    
    
    $
    (10,080
    )
    
    $
    (30,091
    )
    
    $
    (27,386
    )Weighted-Average Number of Common Shares Outstanding(4)(5)
    
    
    57,764,002
    
    
    
    53,810,110
    
    
    
    55,432,220
    
    
    
    53,810,110Net Income (Loss) per Common Share(6)
    
    $
    0.17
    
    
    $
    (0.19
    )
    
    $
    (0.54
    )
    
    $
    (0.51
    )
 
 (1)
    
    For the quarter and nine month period ended September 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 liquidation preference 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 share, respectively, for each of the periods presented.(5)
    
    Potential common shares consist of common stock issuable under the assumed exercise
of stock options 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 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.(6)
    
    For the quarters and nine month periods ended September 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. 27. Fair Value of Assets and Liabilities
  37




---



##### Table of Contents



Fair Value Measurements and Disclosures Fair Value Measurements
 Financial Instruments The Fair Value Option
for Financing Assets and Financing Liabilities
 Financial Instruments 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
    38




---



##### Table of Contents



Securities held for trading: Available for Sale Servicing
assets and interest-only strips, and Derivatives
  Securities available for sale:
 Loans held for sale:
 Loans receivable:
  39




---



##### Table of Contents



Servicing assets and interest-only strips: Transfer and Servicing  Servicing Assets and
Liabilities Accounting for Servicing of Financial Assets
 Real estate held for sale:
 Other assets:
 Premises and equipment:
 Goodwill:
 CB, LLC:
 Derivatives:
 40




---



##### Table of Contents



Cash and due from banks and other interest-earning assets:
 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
  September 30, 2009(In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    49,802
    
    
    $
    
    
    
    $
    
    
    
    $
    49,802
    (1)Securities available for sale
    
    
    3,374,305
    
    
    
    
    
    
    
    2,902,474
    
    
    
    471,831Derivatives(2)
    
    
    368
    
    
    
    
    
    
    
    368
    
    
    
    Servicing assets
    
    
    116,958
    
    
    
    
    
    
    
    
    
    
    
    116,958$
    3,541,433
    
    
    $
    
    
    
    $
    2,902,842
    
    
    $
    638,591Liabilities:Derivatives(3)
    
    $
    13,097
    
    
    $
    
    
    
    $
    13,097
    
    
    $
    
 
 (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




---



##### Table of Contents



QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30, 2009
    
    
    SEPTEMBER 30, 2009Securities
    
    
    Securities
    
    
    
    
    
    
    Securities
    
    
    SecuritiesHeld for
    
    
    Available
    
    
    Servicing
    
    
    Held for
    
    
    Available
    
    
    Servicing(In thousands)
    
    Trading
    
    
    for Sale
    
    
    Assets
    
    
    Trading
    
    
    for Sale
    
    
    AssetsBalance at beginning of period
    
    $
    48,569
    
    
    $
    324,264
    
    
    $
    112,869
    
    
    $
    52,910
    
    
    $
    390,634
    
    
    $
    114,396Change in fair value(1)
    
    
    3,915
    
    
    
    10,298
    
    
    
    2,299
    
    
    
    3,894
    
    
    
    (26,869
    )
    
    
    (2,499
    )Purchases
    
    
    
    
    
    
    159,865
    
    
    
    
    
    
    
    
    
    
    
    159,865
    
    
    
    Other-than-temporary
impairment
    
    
    
    
    
    
    (7,310
    )
    
    
    
    
    
    
    
    
    
    
    (14,105
    )
    
    
    Principal
repayment/amortization
of premium and discount
    
    
    (2,682
    )
    
    
    (15,286
    )
    
    
    
    
    
    
    (7,002
    )
    
    
    (37,694
    )
    
    
    Capitalization/sales, net
    
    
    
    
    
    
    
    
    
    
    1,790
    
    
    
    
    
    
    
    
    
    
    
    5,061Balance at end of period
    
    $
    49,802
    
    
    $
    471,831
    
    
    $
    116,958
    
    
    $
    49,802
    
    
    $
    471,831
    
    
    $
    116,958
 
 (1)
    
    Change in fair value is recognized as part of non-interest income in the Companys Consolidated Statement of Income (Loss) by category, net gain (loss) on securities held for trading, net gain (loss) on investment securities and servicing income, for each of the periods presented. QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30, 2008
    
    
    SEPTEMBER 30, 2008Securities
    
    
    Securities
    
    
    
    
    
    
    Securities
    
    
    SecuritiesHeld for
    
    
    Available
    
    
    Servicing
    
    
    Held for
    
    
    Available
    
    
    Servicing(In thousands)
    
    Trading
    
    
    for Sale
    
    
    Assets
    
    
    Trading
    
    
    for Sale
    
    
    AssetsBalance at beginning of period
    
    $
    50,701
    
    
    $
    20,420
    
    
    $
    145,527
    
    
    $
    67,992
    
    
    $
    6,366
    
    
    $
    150,238Change in fair value(1)
    
    
    (266
    )
    
    
    (934
    )
    
    
    (8,349
    )
    
    
    (539
    )
    
    
    (1,348
    )
    
    
    (15,448
    )Other-than-temporary
impairment
    
    
    
    
    
    
    (920
    )
    
    
    
    
    
    
    
    
    
    
    (920
    )Principal
repayment/amortization
of premium and discount
    
    
    (1,456
    )
    
    
    (160
    )
    
    
    
    
    
    
    (4,286
    )
    
    
    120
    
    
    
    Transfer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,188
    )
    
    
    14,188
    
    
    
    Capitalization/sales, net
    
    
    
    
    
    
    
    
    
    
    2,329
    
    
    
    
    
    
    
    
    
    
    
    4,717Balance at end of period
    
    $
    48,979
    
    
    $
    18,406
    
    
    $
    139,507
    
    
    $
    48,979
    
    
    $
    18,406
    
    
    $
    139,507
 
 (1)
    
    Change in fair value is recognized as part of non-interest income in the Companys Consolidated Statement of Income (Loss) by category, net gain (loss) on securities held for trading, net gain (loss) on investment securities and servicing income, for each of the periods presented.  Assets Recorded at Fair Value on a Nonrecurring Basis
  42




---



##### Table of Contents



(In thousands)
    
    Carrying Value
    
    
    Level 3September 30, 2009Loans receivable (1)
    
    $
    109,621
    
    
    $
    109,621Real estate held for sale(2)
    
    
    28,769
    
    
    
    28,769Total
    
    $
    138,390
    
    
    $
    138,390December 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.  Loss for the quarters
    
    
    Loss for the nine monthLocation of Loss Recognized in
    
    
    ended September 30,
    
    
    periods ended September 30,(In thousands)
    
    the Income Statement
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Provision for loan andLoans receivable(1)
    
    lease losses
    
    $
    (1,223
    )
    
    $
    (5,459
    )
    
    $
    (1,578
    )
    
    $
    (10,487
    )Real estate held for sale(2)
    
    Other expenses
    
    $
    (2,810
    )
    
    $
    
    
    
    $
    (5,567
    )
    
    $
    
 
 (1)
    
    Represents the 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



September 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and due from banks
    
    $
    220,690
    
    
    $
    220,690
    
    
    $
    185,817
    
    
    $
    185,817Other interest-earning assets
    
    
    
    
    
    
    
    
    
    
    1,700
    
    
    
    1,700Securities held for trading
    
    
    50,170
    
    
    
    50,170
    
    
    
    251,877
    
    
    
    251,877Securities available for sale
    
    
    3,374,305
    
    
    
    3,374,305
    
    
    
    3,429,151
    
    
    
    3,429,151Loans held for sale(1)
    
    
    410,190
    
    
    
    416,518
    
    
    
    386,610
    
    
    
    394,051Loans receivable
    
    
    5,155,712
    
    
    
    5,000,490
    
    
    
    5,119,693
    
    
    
    5,117,983Servicing assets
    
    
    116,958
    
    
    
    116,958
    
    
    
    114,396
    
    
    
    114,396Financial liabilities:Deposits
    
    $
    4,215,314
    
    
    $
    4,249,862
    
    
    $
    4,402,772
    
    
    $
    4,414,621Securities sold under agreements to repurchase
    
    
    2,100,262
    
    
    
    2,180,114
    
    
    
    1,907,447
    
    
    
    2,010,465Advances from FHLB
    
    
    1,606,920
    
    
    
    1,672,754
    
    
    
    1,623,400
    
    
    
    1,716,386Other short-term borrowings
    
    
    265,000
    
    
    
    265,071
    
    
    
    351,600
    
    
    
    351,681Loans payable
    
    
    345,464
    
    
    
    345,464
    
    
    
    366,776
    
    
    
    366,776Notes payable
    
    
    272,619
    
    
    
    228,392
    
    
    
    276,868
    
    
    
    123,634Derivatives(2)
    
    
    13,097
    
    
    
    13,097
    
    
    
    15,283
    
    
    
    15,283
 
 (1)
    
    Includes $216.1 million and $165.6 million for September 30, 2009 and December 31, 2008, respectively, related
to GNMA defaulted loans for which the Company has an unconditional buy-back option.(2)
    
    Includes $0.5 million and $0.2 million of derivatives held for trading purposes and $12.6 million and $15.1 million
of derivatives held for purposes other than trading, for September 30, 2009 and December 31, 2008, respectively, as
part of accrued expenses and other liabilities in the Consolidated Statement of Financial Condition. 28. Derivatives
    September 30, 2009
    
    
    December 31, 2008Fair Value
    
    
    
    
    
    
    Fair ValueNotional
    
    
    
    
    
    
    
    
    
    
    Notional(In thousands)
    
    Amount
    
    
    Asset
    
    
    Liability
    
    
    Amount
    
    
    Asset
    
    
    LiabilityCash Flow Hedges:Interest rate swaps
    
    $
    335,000
    
    
    $
    
    
    
    $
    (12,596
    )
    
    $
    345,000
    
    
    $
    
    
    
    $
    (15,096
    )Other Derivatives (non hedges):Interest rate caps
    
    
    270,000
    
    
    
    368
    
    
    
    
    
    
    
    270,000
    
    
    
    287
    
    
    
    Forward contracts
    
    
    265,000
    
    
    
    
    
    
    
    (501
    )
    
    
    35,000
    
    
    
    
    
    
    
    (187
    )Total
    
    $
    870,000
    
    
    $
    368
    
    
    $
    (13,097
    )
    
    $
    650,000
    
    
    $
    287
    
    
    $
    (15,283
    )
 44




---



##### Table of Contents



Cash Flow Hedges
    Loss ReclassifiedLocation of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    from AccumulatedLoss Reclassified
    
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    
    Other Comprehensivefrom Accumulated
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    Loss to Income forOther Comprehensive
    
    
    Notional
    
    
    Fair
    
    
    Income for the
    
    
    the(In thousands)
    
    Loss to Income
    
    
    Amount
    
    
    Value
    
    
    Quarter Ended
    
    
    Quarter EndedCash flow HedgesSeptember 30, 2009Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    335,000
    
    
    $
    (12,596
    )
    
    $
    654
    
    
    $
    (2,491
    )September 30, 2008Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    380,000
    
    
    $
    (2,277
    )
    
    $
    662
    
    
    $
    (1,043
    )
  Loss ReclassifiedLocation of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    from AccumulatedLoss Reclassified
    
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    
    Other Comprehensivefrom Accumulated
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    Loss to Income forOther Comprehensive
    
    
    Notional
    
    
    Fair
    
    
    Income for the Nine
    
    
    the Nine Month(In thousands)
    
    Loss to Income
    
    
    Amount
    
    
    Value
    
    
    Month Period Ended
    
    
    Period EndedCash flow HedgesSeptember 30, 2009Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    335,000
    
    
    $
    (12,596
    )
    
    $
    4,247
    
    
    $
    (6,195
    )September 30, 2008Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    380,000
    
    
    $
    (2,277
    )
    
    $
    418
    
    
    $
    (2,286
    )
 45




---



##### Table of Contents



Trading and Non-Hedging Activities
  Location ofGain (Loss)Recognized in the
    
    
    September 30, 2009Consolidated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Gain for theStatement of Income
    
    
    Notional
    
    
    Fair
    
    
    Net (Loss) Gain for
    
    
    Nine Month Period(In thousands)
    
    (Loss)
    
    
    Amount
    
    
    Value
    
    
    the Quarter Ended
    
    
    EndedDerivatives not
designated as cash
flow hedges:Interest rate caps
    
    Net gain (loss) onsecurities held fortrading
    
    $
    270,000
    
    
    $
    368
    
    
    $
    (117
    )
    
    $
    81Forward contracts
    
    Net gain (loss) onsecurities held fortrading
    
    
    265,000
    
    
    
    (501
    )
    
    
    2,031
    
    
    
    764$
    535,000
    
    
    $
    (133
    )
    
    $
    1,914
    
    
    $
    845
 Location ofGain (Loss)Recognized in the
    
    
    September 30, 2008Consolidated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (Loss) Gain forStatement of Income
    
    
    Notional
    
    
    Fair
    
    
    Net Gain (Loss) for
    
    
    the Nine Month(In thousands)
    
    (Loss)
    
    
    Amount
    
    
    Value
    
    
    the Quarter Ended
    
    
    Period EndedDerivatives not
designated as cash
flow hedges:Interest rate swaps
    
    Net gain (loss) onsecurities held fortrading
    
    $
    
    
    
    $
    
    
    
    $
    81
    
    
    $
    (76
    )Interest rate caps
    
    Net gain (loss) onsecurities held fortrading
    
    
    270,000
    
    
    
    1,770
    
    
    
    (475
    )
    
    
    289Forward contracts
    
    Net gain (loss) onsecurities held fortrading
    
    
    45,000
    
    
    
    231
    
    
    
    (293
    )
    
    
    (1,099
    )$
    315,000
    
    
    $
    2,001
    
    
    $
    (687
    )
    
    $
    (886
    )
    46




---



##### Table of Contents



29. Segment Information
     47




---



##### Table of Contents



(In thousands)
 Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentQuarter Ended September 30, 2009
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    3,713
    
    
    $
    39,046
    
    
    $
    
    
    
    $
    
    
    
    $
    850
    
    
    $
    43,609(Recovery) provision for loan and
lease losses
    
    
    (1,188
    )
    
    
    6,067
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,879Non-interest income
    
    
    10,778
    
    
    
    17,547
    
    
    
    
    
    
    
    2,381
    
    
    
    (3,818
    )
    
    
    26,888Income before income taxes
    
    
    5,487
    
    
    
    169
    
    
    
    
    
    
    
    1,693
    
    
    
    (995
    )
    
    
    6,354Net income (loss)
    
    
    14,624
    
    
    
    (3,467
    )
    
    
    
    
    
    
    3,047
    
    
    
    (995
    )
    
    
    13,209Identifiable assets
    
    
    1,666,658
    
    
    
    9,137,468
    
    
    
    1,659
    
    
    
    20,273
    
    
    
    (802,382
    )
    
    
    10,023,676
 Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentQuarter Ended September 30, 2008
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    4,080
    
    
    $
    42,458
    
    
    $
    
    
    
    $
    
    
    
    $
    502
    
    
    $
    47,040Provision for loan and lease losses
    
    
    789
    
    
    
    6,420
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,209Non-interest income
    
    
    7,824
    
    
    
    7,746
    
    
    
    
    
    
    
    3,139
    
    
    
    (6,788
    )
    
    
    11,921Income (loss) before income taxes
    
    
    1,950
    
    
    
    (1,255
    )
    
    
    (53
    )
    
    
    2,638
    
    
    
    (3,976
    )
    
    
    (696
    )Net income (loss)
    
    
    2,475
    
    
    
    (1,831
    )
    
    
    (33
    )
    
    
    1,609
    
    
    
    (3,976
    )
    
    
    (1,756
    )Identifiable assets
    
    
    1,908,707
    
    
    
    8,817,671
    
    
    
    2,081
    
    
    
    25,984
    
    
    
    (764,535
    )
    
    
    9,989,908
 
 (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)
 Nine Month Period Ended
    
    Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentSeptember 30, 2009
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    11,904
    
    
    $
    107,109
    
    
    $
    
    
    
    $
    
    
    
    $
    2,756
    
    
    $
    121,769(Recovery) provision for loan
and lease losses
    
    
    (3,584
    )
    
    
    42,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,637Non-interest income
    
    
    34,962
    
    
    
    30,434
    
    
    
    
    
    
    
    7,369
    
    
    
    (25,163
    )
    
    
    47,602Income (loss) before income taxes
    
    
    9,397
    
    
    
    (42,572
    )
    
    
    
    
    
    
    5,588
    
    
    
    (16,895
    )
    
    
    (44,482
    )Net income (loss)
    
    
    31,729
    
    
    
    (45,105
    )
    
    
    
    
    
    
    5,651
    
    
    
    (17,140
    )
    
    
    (24,865
    )Identifiable assets
    
    
    1,666,658
    
    
    
    9,137,468
    
    
    
    1,659
    
    
    
    20,273
    
    
    
    (802,382
    )
    
    
    10,023,676
 Nine Month Period Ended
    
    Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentSeptember 30, 2008
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsNet interest income
    
    $
    13,857
    
    
    $
    119,811
    
    
    $
    
    
    
    $
    
    
    
    $
    1,271
    
    
    $
    134,939Provision for loan and lease losses
    
    
    2,430
    
    
    
    20,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,678Non-interest income
    
    
    22,901
    
    
    
    42,053
    
    
    
    144
    
    
    
    9,688
    
    
    
    (20,591
    )
    
    
    54,195(Loss) income before income taxes
    
    
    (4,424
    )
    
    
    13,444
    
    
    
    (56
    )
    
    
    7,615
    
    
    
    (12,760
    )
    
    
    3,819Net income (loss)
    
    
    4,273
    
    
    
    1,477
    
    
    
    (47
    )
    
    
    4,645
    
    
    
    (12,760
    )
    
    
    (2,412
    )Identifiable assets
    
    
    1,908,707
    
    
    
    8,817,671
    
    
    
    2,081
    
    
    
    25,984
    
    
    
    (764,535
    )
    
    
    9,989,908
 
 (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. 48




---



##### Table of Contents



(In thousands)
 Quarter Ended September 30, 2009
    
    Puerto Rico
    
    Mainland U.S.
    
    Eliminations
    
    TotalsNet interest income
    
    $
    41,081
    
    
    $
    2,402
    
    
    $
    126
    
    
    $
    43,609Provision for loan and lease losses
    
    
    4,493
    
    
    
    386
    
    
    
    
    
    
    
    4,879Non-interest income
    
    
    26,593
    
    
    
    449
    
    
    
    (154
    )
    
    
    26,888Income (loss) before income taxes
    
    
    6,823
    
    
    
    (470
    )
    
    
    1
    
    
    
    6,354Net income (loss)
    
    
    15,286
    
    
    
    (2,078
    )
    
    
    1
    
    
    
    13,209Identifiable assets
    
    
    9,927,588
    
    
    
    360,916
    
    
    
    (264,828
    )
    
    
    10,023,676
 Quarter Ended September 30, 2008
    
    Puerto Rico
    
    Mainland U.S.
    
    Eliminations
    
    TotalsNet interest income
    
    $
    43,988
    
    
    $
    3,014
    
    
    $
    38
    
    
    $
    47,040Provision for loan and lease losses
    
    
    6,938
    
    
    
    271
    
    
    
    
    
    
    
    7,209Non-interest income
    
    
    11,478
    
    
    
    532
    
    
    
    (89
    )
    
    
    11,921(Loss) income before income taxes
    
    
    (2,558
    )
    
    
    1,861
    
    
    
    1
    
    
    
    (696
    )Net (loss) income
    
    
    (2,734
    )
    
    
    977
    
    
    
    1
    
    
    
    (1,756
    )Identifiable assets
    
    
    9,920,667
    
    
    
    238,566
    
    
    
    (169,325
    )
    
    
    9,989,908
 (In thousands)
 Nine Month Period EndedSeptember 30, 2009
    
    Puerto Rico
    
    Mainland U.S.
    
    Eliminations
    
    TotalsNet interest income
    
    $
    113,238
    
    
    $
    8,200
    
    
    $
    331
    
    
    $
    121,769Provision for loan and lease losses
    
    
    38,049
    
    
    
    588
    
    
    
    
    
    
    
    38,637Non-interest income
    
    
    46,684
    
    
    
    1,332
    
    
    
    (414
    )
    
    
    47,602(Loss) income before income taxes
    
    
    (47,366
    )
    
    
    2,884
    
    
    
    
    
    
    
    (44,482
    )Net (loss) income
    
    
    (24,996
    )
    
    
    376
    
    
    
    (245
    )
    
    
    (24,865
    )Identifiable assets
    
    
    9,927,588
    
    
    
    360,916
    
    
    
    (264,828
    )
    
    
    10,023,676
 Nine Month Period EndedSeptember 30, 2008
    
    Puerto Rico
    
    Mainland U.S.
    
    Eliminations
    
    TotalsNet interest income
    
    $
    128,587
    
    
    $
    6,214
    
    
    $
    138
    
    
    $
    134,939Provision for loan and lease losses
    
    
    21,990
    
    
    
    688
    
    
    
    
    
    
    
    22,678Non-interest income
    
    
    52,531
    
    
    
    1,958
    
    
    
    (294
    )
    
    
    54,195Income before income taxes
    
    
    237
    
    
    
    3,570
    
    
    
    12
    
    
    
    3,819Net (loss) income
    
    
    (4,022
    )
    
    
    1,598
    
    
    
    12
    
    
    
    (2,412
    )Identifiable assets
    
    
    9,920,667
    
    
    
    238,566
    
    
    
    (169,325
    )
    
    
    9,989,908
 30. Subsequent Events
  Preferred stock conversion
 49




---



##### 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;
 50




---



##### Table of Contents




    
    the commercial soundness of our various counterparties of financing and other
securities transactions,
which could lead to possible losses when the collateral held by us to secure the obligations
of the counterparty is not sufficient or to possible delays or losses in recovering any
excess collateral belonging to us held by the counterparty;
    
    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 II, Item 1A Risk Factorsin this
Quarterly Report on Form 10-Q, as updated from time to time in the Companys future reports
filed with the SEC.
 51




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net income attributable to common shareholders for the third quarter of 2009 of
$10.0 million, resulted in a diluted earnings per share of $0.17, compared to a net
loss attributable to common shareholders for the corresponding 2008 period of $10.1
million, or a diluted loss per share of $0.19, resulting in a $0.36 improvement in the
quarterly earnings per share.
    
    Net interest income for the third quarter of 2009 was $43.6 million, compared to
$47.0 million for the corresponding period in 2008. The decrease of $3.4 million in net
interest income for 2009, compared to 2008, resulted from a reduction in interest
income of $19.4 million, partially offset by a reduction in interest expense of $16.0
million. The reduction in interest income resulted from (i) a 0.67% reduction in yield
on assets reflecting the lower market interest rate environment and a higher level of
non-performing loans; and (ii) a $290.2 million decrease in average interest-earning
assets, particularly the investment securities average balance which decreased by
$941.0 million primarily driven by $1.4 billion of securities sold during the second
and third quarters of 2009, offset by growth in mortgage backed securities and other
interest-earning assets. The decrease in interest expense resulted from a 0.69%
decrease in the rate payable on liabilities primarily reflected in lower costs of
deposits and certain loans payable combined with slight decline in average
interest-bearing liabilities. Average interest-earning assets decreased from $9.6
billion for the third quarter of 2008 to $9.3 billion for the corresponding 2009
period, while the average interest-bearing liabilities decreased from $8.5 billion to
$8.3 billion, respectively. The reduction in leverage, combined with a decline in
interest expense, resulted in a contraction of net interest margin from 1.96% in the
third quarter of 2008 to 1.87% in the corresponding 2009 period.
    
    Doral Financials provision for loan and lease losses for the quarter ended
September 30, 2009 amounted to $4.9 million, compared to $7.2 million for the
corresponding 2008 period. The $2.3
 52




---



##### Table of Contents



million decrease in the provision was driven by
decreases in the provisions for the commercial and construction (including land) portfolios of $2.0
million and $4.7 million, respectively, partially offset by
increases in the provisions for the mortgage
and consumer loan portfolios of $3.2 million and $1.0 million, respectively. Third
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.
 
    
    Non-interest income for the third quarter of 2009 was $26.9 million, compared to
$11.9 million for the corresponding period in 2008. The increase in non-interest income
of $15.0 million for the third quarter of 2009, compared to the same period in 2008,
resulted from (i) an increase of $11.3 million in servicing income from a positive
change in the fair value of the Companys mortgage servicing assets; (ii) a net gain on
the sale of investment securities of $1.0 million; (iii) an increase in the gain on
securities held for trading primarily driven by a gain of $3.9 million on the IO value;
(iv) an increase in other income of $1.5 million related to a gain of $2.0 million from
the redemption of shares of VISA, Inc., pursuant to their global restructuring
agreement; partially offset (v) by an increase of $6.4 million in other-than-temporary
impairment losses realized on investment securities.
    
    Non-interest expense for the third quarter of 2009 was $59.3 million, compared to
$52.4 million for the corresponding period in 2008. Non-interest expense for
the third quarter of 2009 were impacted by decreases in operating expenses for
compensation and benefits, advertising, occupancy and depreciation and amortization
expenses, offset by increases of (i) $1.4 million in professional expenses; (ii) $4.4
million in the FDIC insurance expense; (iii) an increase of $3.6
million in OREO losses and other related expenses driven by appraisals adjustments
during the quarter; and (iv) an increase of $3.7 million in other expenses primarily related to an increase of
$3.5 million in the provision for recourse driven by continued deterioration of the portfolio.
    
    An income tax benefit of $6.9 million for the third quarter of 2009 related to the
effect on deferred tax assets of certain tax agreements.
    
    The Company reported other comprehensive income of $36.2 million for the third
quarter of 2009 compared to other comprehensive loss of $62.3 million for the
corresponding 2008 period. The Companys other comprehensive income for the third
quarter of 2009 resulted principally from the increase in value of securities in its
available for sale investment portfolio. As of September 30, 2009, the Companys
accumulated other comprehensive loss (net of income tax benefit) totaled $103.9
million, compared to $123.2 million as of December 31, 2008.
    
    Doral Financials loan production for the third quarter of 2009 was $248.5 million,
compared to $318.3 million for the comparable 2008 period, a decrease of approximately
22%. The decrease in Doral Financials loan production for the third quarter of 2009
resulted from significant decreases in residential mortgage and construction lending
activity levels in Puerto Rico. The decrease in Doral Financials originated loans is
due to a number of factors including deteriorating economic conditions, competition
from other financial institutions, changes in laws and regulations and the general
economic conditions in Puerto Rico.
    
    Total assets as of September 30, 2009 amounted to $10.0 billion compared to $10.1
billion as of December 31, 2008. A decrease of $248.2 million in the Companys
investment securities portfolio was partially offset by increases in loans of $69.7
million and cash and due from banks of $33.2 million. Total liabilities were $9.1
billion at September 30, 2009, compared to $9.2 billion at December 31, 2008. Total
liabilities declined due to decreases of $272.1 million in brokered deposits and $86.6
million in other short-term borrowings, partially offset by an increase of $192.8
million in securities sold under agreements to repurchase.
    
    Non-performing assets as of September 30, 2009 were $909.9 million, an increase of
$130.7 million since December 31, 2008. Non-performing loans (which are included in
non-performing assets) as of
September 30, 2009 were $816.7 million, an increase of $99.0 million since December 31,
2008. The increment in non-performing assets resulted from increases in the construction
and residential mortgage portfolio as a direct consequence of the depressed housing
market and overall
 53




---



##### Table of Contents



macroeconomic trends in Puerto Rico. The increase in non-performing
assets occurred principally during the first quarter of 2009. Non-performing assets as
of September 30, 2009 increased only by $20.1 million when compared to June 30, 2009.
  TABLE A  SELECTED FINANCIAL DATA
 NINE MONTHQUARTER ENDED
    
    
    PERIODS ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(Dollars in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Selected Income Statement Data:Interest income
    
    $
    113,403
    
    
    $
    132,816
    
    
    $
    344,475
    
    
    $
    396,570Interest expense
    
    
    69,794
    
    
    
    85,776
    
    
    
    222,706
    
    
    
    261,631Net interest income
    
    
    43,609
    
    
    
    47,040
    
    
    
    121,769
    
    
    
    134,939Provision for loan and lease losses
    
    
    4,879
    
    
    
    7,209
    
    
    
    38,637
    
    
    
    22,678Net interest income after provision for loan and lease losses
    
    
    38,730
    
    
    
    39,831
    
    
    
    83,132
    
    
    
    112,261Total non-interest income
    
    
    26,888
    
    
    
    11,921
    
    
    
    47,602
    
    
    
    54,195Non-interest expenses
    
    
    59,264
    
    
    
    52,448
    
    
    
    175,216
    
    
    
    162,637Income (loss) before income taxes
    
    
    6,354
    
    
    
    (696
    )
    
    
    (44,482
    )
    
    
    3,819Income tax (benefit) expense (1)
    
    
    (6,855
    )
    
    
    1,060
    
    
    
    (19,617
    )
    
    
    6,231Net income (loss)
    
    $
    13,209
    
    
    $
    (1,756
    )
    
    $
    (24,865
    )
    
    $
    (2,412
    )Net income (loss) attributable to common shareholders
    
    $
    10,000
    
    
    $
    (10,080
    )
    
    $
    (30,091
    )
    
    $
    (27,386
    )Net income (loss) per common share(2)
    
    $
    0.17
    
    
    $
    (0.19
    )
    
    $
    (0.54
    )
    
    $
    (0.51
    )Cash Dividends Accrued, Preferred Stock
    
    $
    3,209
    
    
    $
    8,324
    
    
    $
    14,595
    
    
    $
    24,974Book Value Per Common Share
    
    $
    7.14
    
    
    $
    10.85
    
    
    $
    7.14
    
    
    $
    10.85Weighted  Average Common Shares Outstanding
    
    
    57,764,002
    
    
    
    53,810,110
    
    
    
    55,432,220
    
    
    
    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
    
    $
    3,550,760
    
    
    $
    3,211,712
    
    
    $
    3,550,760
    
    
    $
    3,211,712Total loans, net(3)
    
    
    5,565,902
    
    
    
    5,511,253
    
    
    
    5,565,902
    
    
    
    5,511,253Servicing assets, net
    
    
    116,958
    
    
    
    139,507
    
    
    
    116,958
    
    
    
    139,507Total assets
    
    
    10,023,676
    
    
    
    9,989,908
    
    
    
    10,023,676
    
    
    
    9,989,908Deposit accounts
    
    
    4,215,314
    
    
    
    4,301,797
    
    
    
    4,215,314
    
    
    
    4,301,797Total borrowings
    
    
    4,590,265
    
    
    
    4,251,164
    
    
    
    4,590,265
    
    
    
    4,251,164Total liabilities
    
    
    9,143,556
    
    
    
    8,832,806
    
    
    
    9,143,556
    
    
    
    8,832,806Preferred stock
    
    
    467,641
    
    
    
    573,250
    
    
    
    467,641
    
    
    
    573,250Common stock
    
    
    578
    
    
    
    538
    
    
    
    578
    
    
    
    538Stockholders equity
    
    
    880,120
    
    
    
    1,157,102
    
    
    
    880,120
    
    
    
    1,157,102Selected Average Balance Sheet Data for Period End:Total interest-earning assets
    
    
    9,266,490
    
    
    
    9,556,734
    
    
    
    9,447,210
    
    
    
    9,339,746Total assets
    
    
    9,773,663
    
    
    
    10,292,749
    
    
    
    9,958,474
    
    
    
    10,107,742Total interest-bearing liabilities
    
    
    8,325,996
    
    
    
    8,494,528
    
    
    
    8,469,155
    
    
    
    8,243,007Preferred equity
    
    
    467,641
    
    
    
    573,250
    
    
    
    529,923
    
    
    
    573,250Total stockholders equity
    
    
    801,845
    
    
    
    1,163,132
    
    
    
    821,607
    
    
    
    1,218,612Operating Data:Loan production
    
    $
    248,529
    
    
    $
    318,251
    
    
    $
    782,807
    
    
    $
    1,073,634Loan servicing portfolio(4)
    
    
    8,917,697
    
    
    
    9,567,985
    
    
    
    8,917,697
    
    
    
    9,567,985Selected Financial Ratios(5)Performance:Net interest margin
    
    
    1.87
    %
    
    
    1.96
    %
    
    
    1.72
    %
    
    
    1.93
    %Return on average assets
    
    
    0.54
    %
    
    
    (0.07
    )%
    
    
    (0.33
    )%
    
    
    (0.03
    )%Return on average common equity(5) (6)
    
    
    11.87
    %
    
    
    (6.80
    )%
    
    
    (13.79
    )%
    
    
    (5.67
    )%Capital:Leverage ratio
    
    
    8.46
    %
    
    
    9.92
    %
    
    
    8.46
    %
    
    
    9.92
    %Tier 1 risk-based capital ratio
    
    
    13.53
    %
    
    
    16.52
    %
    
    
    13.53
    %
    
    
    16.52
    %Total risk-based capital ratio
    
    
    15.34
    %
    
    
    17.93
    %
    
    
    15.34
    %
    
    
    17.93
    %Asset quality:Total NPAs as a percentage of the loan portfolio, net, and
OREO (excluding GNMA defaulted loans)
    
    
    16.72
    %
    
    
    13.50
    %
    
    
    16.72
    %
    
    
    13.50
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    9.08
    %
    
    
    7.34
    %
    
    
    9.08
    %
    
    
    7.34
    %Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    2.68
    %
    
    
    2.34
    %
    
    
    2.68
    %
    
    
    2.34
    %Provision for loan losses to net charge-offs
    
    
    51.04
    %
    
    
    116.93
    %
    
    
    135.25
    %
    
    
    93.45
    %Net charge-offs on an annualized basis to average
loans receivable outstanding
    
    
    0.72
    %
    
    
    0.47
    %
    
    
    0.73
    %
    
    
    0.94
    %Allowance for loan and lease losses to net
charge-offs on an annualized basis
    
    
    374.68
    %
    
    
    496.63
    %
    
    
    372.01
    %
    
    
    252.33
    %Other ratios:Average common equity to average assets
    
    
    3.42
    %
    
    
    5.73
    %
    
    
    2.93
    %
    
    
    6.38
    %Tier 1 common equity to risk-weighted assets
    
    
    6.45
    %
    
    
    7.07
    %
    
    
    6.45
    %
    
    
    7.07
    %
 54




---



##### Table of Contents



(1)
    
    See Note 21 of the consolidated financial statements for an explanation of the computation of income tax benefit.(2)
    
    For the quarters and nine month periods ended September 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 $4.4 billion and $3.9 billion of mortgage loans owned by Doral Financial at September 30, 2009 and
2008, respectively.(5)
    
    Average balances are computed on a daily basis.(6)
    
    Includes $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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
 NET INTEREST INCOME
   55




---



##### Table of Contents



56




---



##### Table of Contents



TABLE B  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 QUARTER ENDED SEPTEMBER 30,2009
    
    
    2008AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,671,294
    
    
    $
    78,653
    
    
    
    5.50
    %
    
    $
    5,633,559
    
    
    $
    87,055
    
    
    
    6.15
    %Mortgage-backed securities
    
    
    2,972,288
    
    
    
    30,026
    
    
    
    4.01
    %
    
    
    2,432,288
    
    
    
    28,336
    
    
    
    4.63
    %Interest-only strips (IOs)
    
    
    44,608
    
    
    
    1,347
    
    
    
    11.98
    %
    
    
    48,203
    
    
    
    1,975
    
    
    
    16.30
    %Investment securities
    
    
    199,893
    
    
    
    1,580
    
    
    
    3.14
    %
    
    
    1,140,883
    
    
    
    12,723
    
    
    
    4.44
    %Other interest-earning assets
    
    
    378,407
    
    
    
    1,797
    
    
    
    1.88
    %
    
    
    301,801
    
    
    
    2,727
    
    
    
    3.59
    %Total interest-earning assets/interest income
    
    
    9,266,490
    
    
    $
    113,403
    
    
    
    4.86
    %
    
    
    9,556,734
    
    
    $
    132,816
    
    
    
    5.53
    %Total non-interest-earning assets
    
    
    507,173
    
    
    
    
    
    
    
    
    
    
    
    736,015Total assets
    
    $
    9,773,663
    
    
    
    
    
    
    
    
    
    
    $
    10,292,749LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,946,111
    
    
    $
    28,615
    
    
    
    2.88
    %
    
    $
    3,880,171
    
    
    $
    36,197
    
    
    
    3.71
    %Repurchase agreements
    
    
    1,840,621
    
    
    
    17,770
    
    
    
    3.83
    %
    
    
    2,227,336
    
    
    
    22,097
    
    
    
    3.95
    %Advances from FHLB
    
    
    1,557,503
    
    
    
    15,778
    
    
    
    4.02
    %
    
    
    1,730,815
    
    
    
    17,934
    
    
    
    4.12
    %Other short-term borrowings
    
    
    358,348
    
    
    
    227
    
    
    
    0.25
    %
    
    
    
    
    
    
    
    
    
    
    Loans payable
    
    
    350,012
    
    
    
    2,226
    
    
    
    2.52
    %
    
    
    376,993
    
    
    
    4,263
    
    
    
    4.50
    %Notes payable
    
    
    273,401
    
    
    
    5,178
    
    
    
    7.51
    %
    
    
    279,213
    
    
    
    5,285
    
    
    
    7.53
    %Total interest-bearing liabilities/interest expense
    
    
    8,325,996
    
    
    $
    69,794
    
    
    
    3.33
    %
    
    
    8,494,528
    
    
    $
    85,776
    
    
    
    4.02
    %Total non-interest-bearing liabilities
    
    
    645,822
    
    
    
    
    
    
    
    
    
    
    
    635,089Total liabilities
    
    
    8,971,818
    
    
    
    
    
    
    
    
    
    
    
    9,129,617Stockholders equity
    
    
    801,845
    
    
    
    
    
    
    
    
    
    
    
    1,163,132Total liabilities and stockholders equity
    
    $
    9,773,663
    
    
    
    
    
    
    
    
    
    
    $
    10,292,749Net interest-earning assets
    
    $
    940,494
    
    
    
    
    
    
    
    
    
    
    $
    1,062,206Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    43,609
    
    
    
    
    
    
    
    
    
    
    $
    47,040Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.53
    %
    
    
    
    
    
    
    
    
    
    
    1.51
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.87
    %
    
    
    
    
    
    
    
    
    
    
    1.96
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    111.30
    %
    
    
    
    
    
    
    
    
    
    
    112.50
    %
 
 (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 $0.3 million and $0.3 million for the third 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 yield 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




---



##### Table of Contents



TABLE C  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 NINE MONTH PERIODS ENDED SEPTEMBER 30,2009
    
    
    2008AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,644,597
    
    
    $
    241,486
    
    
    
    5.72
    %
    
    $
    5,545,650
    
    
    $
    258,347
    
    
    
    6.22
    %Mortgage-backed securities
    
    
    3,025,735
    
    
    
    84,663
    
    
    
    3.74
    %
    
    
    2,006,439
    
    
    
    77,374
    
    
    
    5.15
    %Interest-only strips
    
    
    54,706
    
    
    
    4,550
    
    
    
    11.12
    %
    
    
    49,930
    
    
    
    5,405
    
    
    
    14.46
    %Investment securities
    
    
    357,558
    
    
    
    9,252
    
    
    
    3.46
    %
    
    
    1,163,894
    
    
    
    41,401
    
    
    
    4.75
    %Other interest-earning assets
    
    
    364,614
    
    
    
    4,524
    
    
    
    1.66
    %
    
    
    573,833
    
    
    
    14,043
    
    
    
    3.27
    %Total interest-earning assets/interest income
    
    
    9,447,210
    
    
    $
    344,475
    
    
    
    4.88
    %
    
    
    9,339,746
    
    
    $
    396,570
    
    
    
    5.67
    %Total non-interest-earning assets
    
    
    511,264
    
    
    
    
    
    
    
    
    
    
    
    767,996Total assets
    
    $
    9,958,474
    
    
    
    
    
    
    
    
    
    
    $
    10,107,742LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,900,065
    
    
    $
    97,694
    
    
    
    3.35
    %
    
    $
    3,929,883
    
    
    $
    116,113
    
    
    
    3.95
    %Repurchase agreements
    
    
    1,810,589
    
    
    
    52,483
    
    
    
    3.88
    %
    
    
    1,982,643
    
    
    
    62,501
    
    
    
    4.21
    %Advances from FHLB
    
    
    1,588,021
    
    
    
    47,780
    
    
    
    4.02
    %
    
    
    1,666,818
    
    
    
    52,741
    
    
    
    4.23
    %Other short-term borrowings
    
    
    538,182
    
    
    
    1,069
    
    
    
    0.27
    %
    
    
    
    
    
    
    
    
    
    
    Loans payable
    
    
    357,389
    
    
    
    8,073
    
    
    
    3.02
    %
    
    
    384,151
    
    
    
    14,340
    
    
    
    4.99
    %Notes payable
    
    
    274,909
    
    
    
    15,607
    
    
    
    7.59
    %
    
    
    279,512
    
    
    
    15,936
    
    
    
    7.62
    %Total interest-bearing liabilities/interest expense
    
    
    8,469,155
    
    
    $
    222,706
    
    
    
    3.52
    %
    
    
    8,243,007
    
    
    $
    261,631
    
    
    
    4.24
    %Total non-interest-bearing liabilities
    
    
    667,712
    
    
    
    
    
    
    
    
    
    
    
    646,123Total liabilities
    
    
    9,136,867
    
    
    
    
    
    
    
    
    
    
    
    8,889,130Stockholders equity
    
    
    821,607
    
    
    
    
    
    
    
    
    
    
    
    1,218,612Total liabilities and stockholders equity
    
    $
    9,958,474
    
    
    
    
    
    
    
    
    
    
    $
    10,107,742Net interest-earning assets
    
    $
    978,055
    
    
    
    
    
    
    
    
    
    
    $
    1,096,739Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    121,769
    
    
    
    
    
    
    
    
    
    
    $
    134,939Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.36
    %
    
    
    
    
    
    
    
    
    
    
    1.43
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.72
    %
    
    
    
    
    
    
    
    
    
    
    1.93
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    111.55
    %
    
    
    
    
    
    
    
    
    
    
    113.31
    %
 
 (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 $0.9 million and $1.0 million for the nine month period ended September 30, 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 yield 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




---



##### Table of Contents



TABLE D  NET INTEREST INCOME VARIANCE ANALYSIS
 QUARTER ENDEDSEPTEMBER 30,2009 COMPARED TO 2008INCREASE (DECREASE) DUE TO:(In thousands)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    3,864
    
    
    $
    (12,266
    )
    
    $
    (8,402
    )Mortgage-backed securities
    
    
    19,867
    
    
    
    (18,177
    )
    
    
    1,690Interest-only strips
    
    
    (138
    )
    
    
    (490
    )
    
    
    (628
    )Investment securities
    
    
    (8,224
    )
    
    
    (2,919
    )
    
    
    (11,143
    )Other interest-earning assets
    
    
    3,265
    
    
    
    (4,195
    )
    
    
    (930
    )TOTAL INTEREST INCOME VARIANCE
    
    $
    18,634
    
    
    $
    (38,047
    )
    
    $
    (19,413
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    4,012
    
    
    $
    (11,594
    )
    
    $
    (7,582
    )Repurchase agreements
    
    
    (3,683
    )
    
    
    (644
    )
    
    
    (4,327
    )Advances from FHLB
    
    
    (1,735
    )
    
    
    (421
    )
    
    
    (2,156
    )Other short-term borrowings
    
    
    114
    
    
    
    113
    
    
    
    227Loans payable
    
    
    (285
    )
    
    
    (1,752
    )
    
    
    (2,037
    )Notes payable
    
    
    (95
    )
    
    
    (12
    )
    
    
    (107
    )TOTAL INTEREST EXPENSE VARIANCE
    
    $
    (1,672
    )
    
    $
    (14,310
    )
    
    $
    (15,982
    )NET INTEREST INCOME VARIANCE
    
    $
    20,306
    
    
    $
    (23,737
    )
    
    $
    (3,431
    )
  59




---



##### Table of Contents



TABLE E  NET INTEREST INCOME VARIANCE ANALYSIS
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,2009 COMPARED TO 2008INCREASE (DECREASE) DUE TO:(In thousands)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    7,011
    
    
    $
    (23,872
    )
    
    $
    (16,861
    )Mortgage-backed securities
    
    
    41,503
    
    
    
    (34,214
    )
    
    
    7,289Interest-only strips
    
    
    726
    
    
    
    (1,581
    )
    
    
    (855
    )Investment securities
    
    
    (23,095
    )
    
    
    (9,054
    )
    
    
    (32,149
    )Other interest-earning assets
    
    
    (4,050
    )
    
    
    (5,469
    )
    
    
    (9,519
    )TOTAL INTEREST INCOME VARIANCE
    
    $
    22,095
    
    
    $
    (74,190
    )
    
    $
    (52,095
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    (876
    )
    
    $
    (17,543
    )
    
    $
    (18,419
    )Repurchase agreements
    
    
    (5,264
    )
    
    
    (4,754
    )
    
    
    (10,018
    )Advances from FHLB
    
    
    (2,420
    )
    
    
    (2,541
    )
    
    
    (4,961
    )Other short-term borrowings
    
    
    535
    
    
    
    534
    
    
    
    1,069Loans payable
    
    
    (940
    )
    
    
    (5,327
    )
    
    
    (6,267
    )Notes payable
    
    
    (266
    )
    
    
    (63
    )
    
    
    (329
    )TOTAL INTEREST EXPENSE VARIANCE
    
    $
    (9,231
    )
    
    $
    (29,694
    )
    
    $
    (38,925
    )NET INTEREST INCOME VARIANCE
    
    $
    31,326
    
    
    $
    (44,496
    )
    
    $
    (13,170
    )
  PROVISION FOR LOAN AND LEASE LOSSES
  60




---



##### Table of Contents




    
    An increase in the residential mortgage loan and consumer loan provision of $3.2
million and $1.0 million, respectively, due to deterioration of the Puerto Rico economy
driving higher consumer delinquency levels and lower residential real estate absorption
levels.
    
    A decrease in the construction (including land) loans provision of $4.7 million
resulting from lowering the threshold over which loans are individually measured for
impairment ($1.5 million) and higher specific reserves established for a few loans during
the third quarter of 2008.
    
    A decrease in the commercial loan provision of $2.0 million largely resulting from a
change in the threshold for impairment testing (from $2.0 million to
$1.0 million) together with a change in the methodology to reserve for commercial loans with a balance under $2.0 million based on
delinquency levels.
    
    Changes in conditions related to managements reserve for emerging market risks and a
loss reserve component based on macro economic or general market factors that led to a
reduction of those reserves.
      61




---



##### Table of Contents



NON-INTEREST INCOME
 TABLE F  NON-INTEREST INCOME
 QUARTER ENDED
    
    
    NINE MONTH PERIODS ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    $ Variance
    
    
    2009
    
    
    2008
    
    
    $ VarianceNet other-than-temporary impairment losses
    
    $
    (7,310
    )
    
    $
    (920
    )
    
    $
    (6,390
    )
    
    $
    (14,105
    )
    
    $
    (920
    )
    
    $
    (13,185
    )Net gain on mortgage loan sales and fees
    
    
    2,637
    
    
    
    3,918
    
    
    
    (1,281
    )
    
    
    7,654
    
    
    
    10,144
    
    
    
    (2,490
    )Net gain (loss) on securities held for trading
    
    
    661
    
    
    
    (11
    )
    
    
    672
    
    
    
    2,444
    
    
    
    428
    
    
    
    2,016Gain on IO valuation
    
    
    3,896
    
    
    
    40
    
    
    
    3,856
    
    
    
    3,903
    
    
    
    11
    
    
    
    3,892Gain (loss) on MSR economic hedge(1)
    
    
    3,405
    
    
    
    2,556
    
    
    
    849
    
    
    
    (10,791
    )
    
    
    2,097
    
    
    
    (12,888
    )Loss on derivatives
    
    
    (1,490
    )
    
    
    (687
    )
    
    
    (803
    )
    
    
    (2,208
    )
    
    
    (886
    )
    
    
    (1,322
    )Net gain (loss) on securities held for trading,
including gains and losses on the fair value of
IOs
    
    
    6,472
    
    
    
    1,898
    
    
    
    4,574
    
    
    
    (6,652
    )
    
    
    1,650
    
    
    
    (8,302
    )Net gain (loss) on investment securities
    
    
    1,024
    
    
    
    (4,173
    )
    
    
    5,197
    
    
    
    5,821
    
    
    
    (3,979
    )
    
    
    9,800Servicing incomeServicing fees
    
    
    6,970
    
    
    
    7,686
    
    
    
    (716
    )
    
    
    21,945
    
    
    
    23,885
    
    
    
    (1,940
    )Late charges
    
    
    2,041
    
    
    
    2,144
    
    
    
    (103
    )
    
    
    6,376
    
    
    
    6,634
    
    
    
    (258
    )Prepayment penalties
    
    
    21
    
    
    
    65
    
    
    
    (44
    )
    
    
    283
    
    
    
    313
    
    
    
    (30
    )Other servicing fees
    
    
    122
    
    
    
    102
    
    
    
    20
    
    
    
    396
    
    
    
    505
    
    
    
    (109
    )Interest income (loss) on serial notes and
others
    
    
    497
    
    
    
    (1,023
    )
    
    
    1,520
    
    
    
    (3,366
    )
    
    
    (5,541
    )
    
    
    2,175Mark-to-market adjustment of servicing assets
    
    
    2,299
    
    
    
    (8,349
    )
    
    
    10,648
    
    
    
    (2,499
    )
    
    
    (15,448
    )
    
    
    12,949Total servicing income
    
    
    11,950
    
    
    
    625
    
    
    
    11,325
    
    
    
    23,135
    
    
    
    10,348
    
    
    
    12,787Commissions, fees and other income:Retail banking fees
    
    
    7,487
    
    
    
    7,542
    
    
    
    (55
    )
    
    
    21,696
    
    
    
    20,511
    
    
    
    1,185Insurance agency commissions
    
    
    2,381
    
    
    
    2,885
    
    
    
    (504
    )
    
    
    7,268
    
    
    
    8,146
    
    
    
    (878
    )Asset management fees and commissions
    
    
    82
    
    
    
    
    
    
    
    82
    
    
    
    339
    
    
    
    149
    
    
    
    190Other income
    
    
    2,165
    
    
    
    146
    
    
    
    2,019
    
    
    
    2,446
    
    
    
    8,146
    
    
    
    (5,700
    )Total commissions, fees and other income
    
    
    12,115
    
    
    
    10,573
    
    
    
    1,542
    
    
    
    31,749
    
    
    
    36,952
    
    
    
    (5,203
    )Total non-interest income
    
    $
    26,888
    
    
    $
    11,921
    
    
    $
    14,967
    
    
    $
    47,602
    
    
    $
    54,195
    
    
    $
    (6,593
    )
 
 (1)
    
    Includes $3.4 million and $3.1 million of gains on forward contracts for the quarter and nine month period ended September 30, 2009.  
    
    During the third quarter of 2009 it was determined that four of the Companys non-agency
collateralized mortgage obligations (CMO), representing an aggregate amortized cost of
$255.9 million as of September 30, 2009, were other-than-temporarily impaired and
recognized a credit loss of $7.3 million on these securities during the quarter. Please
refer to Note 6 in the accompanying Notes to the Consolidated Financial Statements for
additional information on OTTI.
    
    An improvement of $4.6 million in the net gain (loss) on securities held for trading was
driven by (i) a $3.9 million increase in the valuation of the IO resulting from a
generalized reduction in rates across all terms of Libor-Swap curve during the third
quarter, short-term and long-term interest rate drops and slower prepayment speed
expectation were the most important drivers for the increase in value of the IO during the
quarter, and (ii) a $0.8 million improvement on the value of the economic hedge on the
mortgage servicing rights (MSRs) resulting from a change in the hedging strategy during
the second quarter of 2009 from the use of U.S. Treasuries to forward contracts and to the
decrease in forecasted prepayment speeds.
    
    Net gain on investment securities of $1.0 million resulted from the sale of $189.8
million of mortgage-backed securities and other debt securities during the third quarter of
2009 as part of the execution of the Companys Asset Replacement Program.
    
    An improvement in the mark-to-market adjustment of mortgage servicing assets of $10.6
million primarily driven by the decrease in forecasted prepayment
speed.
 62




---



##### Table of Contents




    
    An increase in commissions, fees and other income of $1.5 million was related to a gain
of $2.0 million recognized during the quarter from the redemption of shares of VISA, Inc.,
pursuant to their global restructuring agreement, partially offset by a decrease in
insurance agency commissions of $0.5 million due to lower originations in 2009.
  
    
    OTTI losses of $14.1 million were recognized on six of the Companys securities. Two of
these securities, for which losses of $1.1 million were recognized, were determined to be
other-than-temporarily impaired during the second quarter of 2009, a third security was
determined to be other-than-temporarily impaired during the second quarter of 2009, and
also during the third quarter of 2009, with recognized losses of $5.7 million and $2.6
million, respectively, and the other three securities, for which a loss of $4.7 million was
recognized, was determined to be other-than-temporarily impaired during the third quarter
of 2009. Please refer to Note 6 in the accompanying Notes to the Consolidated Financial
Statements for additional information on OTTI.
    
    The net loss on securities held for trading was driven principally by a loss
of $13.8 million related to the U.S. Treasuries that were serving as an economic hedge on
the Companys capitalized MSR during the first half of 2009 as the spreads between
declining mortgage rates and the U.S. Treasury curve compressed as a result of the U.S.
Federal Reserve Bank Monetary Policy implemented at the end of 2008 designed to promote
mortgage loan originations and reduce mortgage loan interest rates. This loss was partially
offset by an improvement on the economic hedge on the MSRs due to a change in the hedging
strategy during the second quarter of 2009 from the use of U.S. Treasuries to forward
contracts and to the decrease in forecasted prepayment speeds.
    
    Net gain on investment securities of $5.8 million resulted from the sale of
approximately $1.4 billion of mortgage-backed securities, primarily CMO floaters, and other
debt securities during the second and third quarter of 2009 as a result of the execution of
the Companys Asset Replacement Program.
    
    An improvement in the mark-to-market adjustment of the mortgage servicing assets of
$12.9 million was principally related to the decline in interest rates that caused the
increase in expected prepayment speed during the first quarter of 2009, partially offset by
a subsequent decrease in forecasted prepayment speeds during the second and third quarters of 2009.
Please refer to explanation for the quarter above.
    
    A decrease in other income of $5.7 million primarily related to a gain of $5.2 million
recognized in 2008 from the redemption of shares of VISA, Inc. and to income associated
with the sale of certain units of a residential housing project which the Company took
possession of in 2005 amounting to $1.3 million, partially offset by a gain of $2.0 million
during the third quarter of 2009 related to redemption of shares of VISA, Inc., an increase
in retail banking fees of $1.2 million was due primarily to higher ATM and POS commissions,
was partially offset by lower insurance commissions of $0.9 million. Please refer to
explanation for the quarter above.
 63




---



##### Table of Contents



NON-INTEREST EXPENSE
 TABLE G  NON-INTEREST EXPENSE
 QUARTER ENDED SEPTEMBER 30,
    
    
    NINE MONTH PERIODS ENDED SEPTEMBER 30,(In thousands)
    
    2009
    
    
    2008
    
    
    Variance
    
    
    2009
    
    
    2008
    
    
    VarianceCompensation and benefits
    
    $
    14,459
    
    
    $
    17,542
    
    
    $
    (3,083
    )
    
    $
    53,110
    
    
    $
    53,677
    
    
    $
    (567
    )Taxes, other than payroll and income taxes
    
    
    2,567
    
    
    
    2,550
    
    
    
    17
    
    
    
    7,478
    
    
    
    7,351
    
    
    
    127Advertising
    
    
    1,806
    
    
    
    2,752
    
    
    
    (946
    )
    
    
    4,678
    
    
    
    7,257
    
    
    
    (2,579
    )Professional services
    
    
    7,252
    
    
    
    5,834
    
    
    
    1,418
    
    
    
    20,770
    
    
    
    17,859
    
    
    
    2,911Communication expenses
    
    
    4,208
    
    
    
    4,626
    
    
    
    (418
    )
    
    
    12,621
    
    
    
    13,252
    
    
    
    (631
    )EDP expenses
    
    
    3,968
    
    
    
    3,468
    
    
    
    500
    
    
    
    10,751
    
    
    
    7,943
    
    
    
    2,808Occupancy expenses
    
    
    3,788
    
    
    
    5,221
    
    
    
    (1,433
    )
    
    
    10,703
    
    
    
    13,723
    
    
    
    (3,020
    )Office expenses
    
    
    1,430
    
    
    
    1,252
    
    
    
    178
    
    
    
    4,099
    
    
    
    4,402
    
    
    
    (303
    )Depreciation and amortization
    
    
    3,086
    
    
    
    4,170
    
    
    
    (1,084
    )
    
    
    9,756
    
    
    
    12,297
    
    
    
    (2,541
    )FDIC insurance expense
    
    
    5,468
    
    
    
    1,100
    
    
    
    4,368
    
    
    
    13,549
    
    
    
    3,419
    
    
    
    10,130OREO losses and other related expenses
    
    
    3,224
    
    
    
    (371
    )
    
    
    3,595
    
    
    
    5,674
    
    
    
    (262
    )
    
    
    5,936Corporate insurance
    
    
    1,210
    
    
    
    1,157
    
    
    
    53
    
    
    
    3,403
    
    
    
    3,538
    
    
    
    (135
    )Other expenses
    
    
    6,798
    
    
    
    3,147
    
    
    
    3,651
    
    
    
    18,624
    
    
    
    18,181
    
    
    
    443Total non-interest expense
    
    $
    59,264
    
    
    $
    52,448
    
    
    $
    6,816
    
    
    $
    175,216
    
    
    $
    162,637
    
    
    $
    12,579
  
    
    The decrease in compensation and benefits of $3.1 million is primarily related to a
decrease of $2.6 million in salaries as a result of a 18% workforce reduction between
periods.
    
    An increase of $1.4 million in professional expenses related to the addition
of resources to help manage legacy portfolios.
    
    A decrease of $1.4 million in occupancy expenses related to an impairment
charge of $1.4 million during the third quarter of 2008 on a residential housing project
which the Company took possession of in 2005.
    
    An increase of $4.4 million in the FDIC insurance expense related to a
significant increase in rates and assessment bases adopted by the FDIC in the third quarter
of 2009.
    
    An increase of $3.6 million in OREO losses and other related
expenses associated with appraisal adjustments during the quarter.
    
    An increase of $3.7 million in other expenses primarily related to an increase of $3.5 million in the provision for recourse driven by continued deterioration of the portfolio.
  
    
    A decrease of $2.6 million in advertising principally related to cost control measures
implemented by the Company throughout 2008, and during the nine month period ended
September 30, 2009. During 2008, the Company incurred higher advertising expenses related
to its re-branding.
    
    An increase of $2.9 million in professional services expenses driven by amounts advanced
to cover legal expenses of the Companys former officers and to the management of legacy
portfolios.
    
    An increase of $2.8 million in EDP expenses primarily related to certain initiatives to
optimize and update the Companys banking and mortgage platforms and to the increase
related to the Companys outsourcing services.
    
    A decrease of $3.0 million in occupancy expenses mainly driven by decreases in utilities
expenses resulting from the Company implementation of strict cost control measures. Also,
this decrease in occupancy expenses was related to non-recurring charges made during 2008.
Please refer to quarterly explanation above for additional information.
    
    A decrease of $2.5 million in depreciation expenses related to intangibles, software and
building improvements fully depreciated or amortized during 2009.
    
    An increase of $10.1 million in the FDIC insurance expense primarily related to (i) $4.2
million of the FDIC special assessment expense during the second
quarter of 2009 and (ii) to an increase during the third quarter of 2009 of $4.4 million. Please refer to quarterly
explanation above for additional information.
 64




---



##### Table of Contents




    
    An increase of $5.9 million in OREO losses and other related expenses related to as a result of higher levels of repossessed units, higher expenses to maintain the properties in saleable conditions and adjustments to appraisals made during the quarter. Please refer to quarterly explanation above for additional information.
 INCOME TAXES
       Income Taxes Accounting for Income Taxes
 65




---



##### Table of Contents



BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
   66




---



##### Table of Contents



TABLE H  LOAN PRODUCTION
 Quarters Ended
    
    
    Nine Month Periods EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except for average initial loan balance)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008FHA/VA mortgage loansNumber of loans
    
    
    642
    
    
    
    787
    
    
    
    1,907
    
    
    
    2,008Volume of loans
    
    $
    77,945
    
    
    $
    103,948
    
    
    $
    258,874
    
    
    $
    246,197Percent of total volume
    
    
    31
    %
    
    
    33
    %
    
    
    33
    %
    
    
    23
    %Average initial loan balance
    
    $
    121,410
    
    
    $
    132,081
    
    
    $
    135,749
    
    
    $
    122,608Conventional conforming mortgage loansNumber of loans
    
    
    213
    
    
    
    169
    
    
    
    697
    
    
    
    645Volume of loans
    
    $
    26,922
    
    
    $
    20,605
    
    
    $
    87,672
    
    
    $
    77,479Percent of total volume
    
    
    11
    %
    
    
    6
    %
    
    
    11
    %
    
    
    7
    %Average initial loan balance
    
    $
    126,394
    
    
    $
    121,923
    
    
    $
    125,785
    
    
    $
    120,122Conventional non-conforming mortgage loans(1)Number of loans
    
    
    490
    
    
    
    1,006
    
    
    
    1,801
    
    
    
    3,186Volume of loans
    
    $
    76,682
    
    
    $
    119,179
    
    
    $
    278,304
    
    
    $
    410,808Percent of total volume
    
    
    31
    %
    
    
    38
    %
    
    
    36
    %
    
    
    38
    %Average initial loan balance
    
    $
    156,494
    
    
    $
    118,468
    
    
    $
    154,527
    
    
    $
    128,942Construction developments loansNumber of loans
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    24Volume of loans
    
    $
    
    
    
    $
    38,284
    
    
    $
    
    
    
    $
    82,880Percent of total volume
    
    
    0
    %
    
    
    12
    %
    
    
    0
    %
    
    
    8
    %Average initial loan balance
    
    $
    
    
    
    $
    3,480,364
    
    
    $
    
    
    
    $
    3,453,333Disbursement under existing construction development loansVolume of loans
    
    $
    11,136
    
    
    $
    18,083
    
    
    $
    41,125
    
    
    $
    69,696Percent of total volume
    
    
    5
    %
    
    
    6
    %
    
    
    5
    %
    
    
    7
    %Commercial loans(2)Number of loans
    
    
    25
    
    
    
    11
    
    
    
    49
    
    
    
    189Volume of loans
    
    $
    55,244
    
    
    $
    4,333
    
    
    $
    103,158
    
    
    $
    122,227Percent of total volume
    
    
    22
    %
    
    
    1
    %
    
    
    13
    %
    
    
    11
    %Average initial loan balance
    
    $
    2,209,760
    
    
    $
    393,909
    
    
    $
    2,105,265
    
    
    $
    646,704Consumer loans(2)Number of loans
    
    
    107
    
    
    
    643
    
    
    
    591
    
    
    
    7,215Volume of loans
    
    $
    600
    
    
    $
    9,219
    
    
    $
    4,474
    
    
    $
    57,747Percent of total volume
    
    
    0
    %
    
    
    3
    %
    
    
    1
    %
    
    
    5
    %Average initial loan balance
    
    $
    5,607
    
    
    $
    14,337
    
    
    $
    7,570
    
    
    $
    8,004Other(3)Number of loans
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    3Volume of loans
    
    $
    
    
    
    $
    4,600
    
    
    $
    9,200
    
    
    $
    6,600Percent of total volume
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Total loansNumber of loans
    
    
    1,477
    
    
    
    2,629
    
    
    
    5,046
    
    
    
    13,270Volume of loans
    
    $
    248,529
    
    
    $
    318,251
    
    
    $
    782,807
    
    
    $
    1,073,634
 
 (1)
    
    Includes $0.4 million and $6.9 million in second mortgages for the quarters ended September 30, 2009 and 2008, respectively, and $1.9 million and $24.5 million in second mortgages for the nine
month periods ended September 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.    67




---



##### Table of Contents



TABLE I  LOAN ORIGINATION SOURCES
 NINE MONTH PERIODS ENDED SEPTEMBER 30,2009
    
    2008Puerto
    
    
    
    
    
    
    
    
    
    PuertoRico
    
    US
    
    Total
    
    Rico
    
    US
    
    TotalRetail
    
    
    68
    %
    
    
    
    
    
    
    68
    %
    
    
    55
    %
    
    
    
    
    
    
    55
    %Wholesale(1)
    
    
    12
    %
    
    
    
    
    
    
    12
    %
    
    
    13
    %
    
    
    
    
    
    
    13
    %Housing Developments(2)
    
    
    2
    %
    
    
    3
    %
    
    
    5
    %
    
    
    6
    %
    
    
    8
    %
    
    
    14
    %Other(3)
    
    
    1
    %
    
    
    14
    %
    
    
    15
    %
    
    
    10
    %
    
    
    8
    %
    
    
    18
    %
 
 (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
  68




---



##### Table of Contents



TABLE J  LOANS SERVICED FOR THIRD PARTIES
 AS OF SEPTEMBER 30,(Dollars in Thousands, Except for Average Size of Loans Serviced)
    
    2009
    
    
    2008Composition of Portfolio Serviced for Third Parties at Period End:GNMA
    
    $
    2,367,668
    
    
    $
    2,197,416FHLMC/FNMA
    
    
    3,167,297
    
    
    
    3,528,940Other conventional mortgage loans(1)(2)
    
    
    3,382,732
    
    
    
    3,841,629Total portfolio serviced for third parties
    
    $
    8,917,697
    
    
    $
    9,567,985Activity
of Portfolio Serviced for Third Parties at Period End:Beginning servicing portfolio
    
    $
    9,460,350
    
    
    $
    10,072,538Additions to servicing portfolio
    
    
    345,925
    
    
    
    301,386Servicing released due to repurchases
    
    
    (51,269
    )
    
    
    (53,493
    )MSRs sales(3)
    
    
    (7,111
    )
    
    
    Run-off(4)
    
    
    (830,198
    )
    
    
    (752,446
    )Ending servicing portfolio
    
    $
    8,917,697
    
    
    $
    9,567,985Selected Data Regarding Mortgage Loans Serviced for Third Parties:Number of loans
    
    
    105,976
    
    
    
    113,504Weighted- average interest rate
    
    
    6.34
    %
    
    
    6.48
    %Weighted- average remaining maturity (months)
    
    
    243
    
    
    
    247Weighted- average gross servicing fee rate
    
    
    0.39
    %
    
    
    0.39
    %Average servicing portfolio(5)
    
    $
    9,177,648
    
    
    $
    9,798,979Principal prepayments
    
    $
    545,997
    
    
    $
    499,277Constant prepayment rate
    
    
    7.35
    %
    
    
    6.36
    %Average size of loans
    
    $
    84,148
    
    
    $
    84,296Servicing assets, net
    
    $
    116,958
    
    
    $
    139,507Mortgage-servicing advances
    
    $
    22,222
    
    
    $
    23,264Delinquent Mortgage Loans and Pending Foreclosures at Period End:60-89 days past due
    
    
    2.48
    %
    
    
    2.19
    %90 days or more past due
    
    
    4.86
    %
    
    
    2.70
    %Total delinquencies excluding foreclosures
    
    
    7.34
    %
    
    
    4.89
    %Foreclosures pending
    
    
    3.01
    %
    
    
    2.48
    %
 
 (1)
    
    Excludes $4.4 billion and $3.9 billion of mortgage loans owned by Doral Financial at September 30, 2009 and 2008, respectively.(2)
    
    Includes portfolios of $158.9 million and $184.4 million at September 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 $4.3 billion and $3.7 billion as of September 30, 2009 and 2008, respectively.   69




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  Liquidity of the Holding Company
      70




---



##### Table of Contents



Liquidity of the Banking Subsidiaries
  Cash Sources and Uses
    Primary Sources of Cash
  71




---



##### Table of Contents



TABLE K  SOURCES OF BORROWINGS
 AS OF SEPTEMBER 30, 2009
    
    AS OF DECEMBER 31, 2008AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGE(Dollars in thousands)
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,215,314
    
    
    
    2.50
    %
    
    $
    4,402,772
    
    
    
    3.58
    %Repurchase Agreements
    
    
    2,100,262
    
    
    
    3.40
    %
    
    
    1,907,447
    
    
    
    3.62
    %Advances from FHLB
    
    
    1,606,920
    
    
    
    3.18
    %
    
    
    1,623,400
    
    
    
    3.83
    %Other Short-Term Borrowings
    
    
    265,000
    
    
    
    0.25
    %
    
    
    351,600
    
    
    
    0.52
    %Loans Payable
    
    
    345,464
    
    
    
    7.26
    %
    
    
    366,776
    
    
    
    7.27
    %Notes Payable
    
    
    272,619
    
    
    
    7.30
    %
    
    
    276,868
    
    
    
    7.31
    %
   TABLE L  AVERAGE DEPOSIT BALANCE
 NINE MONTH PERIOD ENDED
    
    
    YEAR ENDEDSEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    485,981
    
    
    
    3.46
    %
    
    $
    543,081
    
    
    
    4.17
    %Brokered certificates of deposits
    
    
    2,320,911
    
    
    
    3.97
    %
    
    
    2,451,523
    
    
    
    4.51
    %Regular passbook savings
    
    
    362,639
    
    
    
    1.71
    %
    
    
    332,032
    
    
    
    2.56
    %NOW accounts and other transaction accounts
    
    
    349,483
    
    
    
    1.32
    %
    
    
    381,848
    
    
    
    1.57
    %Money market accounts
    
    
    381,051
    
    
    
    2.84
    %
    
    
    294,847
    
    
    
    3.07
    %Total interest-bearing
    
    
    3,900,065
    
    
    
    3.35
    %
    
    
    4,003,331
    
    
    
    3.91
    %Non-interest bearing
    
    
    243,103
    
    
    
    
    
    
    
    254,566
    
    
    
    Total deposits
    
    $
    4,143,168
    
    
    
    3.15
    %
    
    $
    4,257,897
    
    
    
    3.68
    %
  TABLE M  CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    540,970Over three through six months
    
    
    336,698Over six through twelve months
    
    
    532,660Over twelve months
    
    
    1,165,187Total
    
    $
    2,575,515
 72




---



##### Table of Contents



Other Uses of Cash
  73




---



##### Table of Contents



ASSETS AND LIABILITIES
   CAPITAL
  74




---



##### Table of Contents



Earnings per Share The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock).
   Regulatory Capital Requirements
  75




---



##### Table of Contents



TABLE N  REGULATORY CAPITAL RATIOS
 AS OF SEPTEMBER 30, 2009DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital Ratio (Total capital to risk- weighted assets)
    
    
    15.3
    %
    
    
    13.6
    %
    
    
    16.7
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    13.5
    %
    
    
    12.3
    %
    
    
    16.2
    %Leverage Ratio(1)
    
    
    8.5
    %
    
    
    6.5
    %
    
    
    12.7
    %
 
 (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 September 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
  76




---



##### Table of Contents



Housing and Urban Development Requirements
   FAIR VALUE OF FINANCIAL INSTRUMENTS
    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.
  77




---



##### Table of Contents



OFF-BALANCE SHEET ACTIVITIES
    78




---



##### Table of Contents



QUARTER ENDED
    
    
    NINE MONTH PERIOD(In thousands)
    
    SEPTEMBER 30, 2009
    
    
    ENDED SEPTEMBER 30, 2009Balance at beginning of period
    
    $
    8,755
    
    
    $
    8,849Net charge-offs
    
    
    (435
    )
    
    
    (2,564
    )Provision for recourse liability
    
    
    1,124
    
    
    
    3,159Balance at end of period
    
    $
    9,444
    
    
    $
    9,444
     79




---



##### Table of Contents



CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE O  CONTRACTUAL OBLIGATIONS
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,215,314
    
    
    $
    3,026,502
    
    
    $
    850,577
    
    
    $
    180,313
    
    
    $
    157,922Repurchase agreements(1) (2)
    
    
    2,100,262
    
    
    
    1,094,762
    
    
    
    299,000
    
    
    
    706,500
    
    
    
    Advances from FHLB(1) (2)
    
    
    1,606,920
    
    
    
    912,500
    
    
    
    445,420
    
    
    
    249,000
    
    
    
    Other short-term borrowings
    
    
    265,000
    
    
    
    265,000
    
    
    
    
    
    
    
    
    
    
    
    Loans payable(3)
    
    
    345,464
    
    
    
    40,220
    
    
    
    74,982
    
    
    
    60,195
    
    
    
    170,067Notes payable
    
    
    272,619
    
    
    
    6,232
    
    
    
    43,228
    
    
    
    9,677
    
    
    
    213,482Other liabilities
    
    
    109,416
    
    
    
    109,416
    
    
    
    
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    46,666
    
    
    
    5,925
    
    
    
    9,704
    
    
    
    9,629
    
    
    
    21,408Total Contractual Cash Obligations
    
    $
    8,961,661
    
    
    $
    5,460,557
    
    
    $
    1,722,911
    
    
    $
    1,215,314
    
    
    $
    562,879
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $228.5 million of repurchase agreements with an average rate of 4.72% 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 March 2010 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 10.3% 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
    
    $
    102,340
    
    
    $
    82,136
    
    
    $
    19,204
    
    
    $
    1,000
    
    
    $
    Commitments to sell loans
    
    
    172,185
    
    
    
    172,185
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    25
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    791,760
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    791,760Total
    
    $
    1,066,310
    
    
    $
    254,346
    
    
    $
    19,204
    
    
    $
    1,000
    
    
    $
    791,760
 
 (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
    80




---



##### 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.
    
    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
 81




---



##### Table of Contents



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
 Hedging related to Mortgage Banking Activities
 82




---



##### Table of Contents




    
    The valuation of MSRs are recorded in earnings immediately within the accounting period
in which the changes in value occur, whereas the impact of changes in interest rates are
reflected in originations with a time lag and effects on servicing fee income occurs over
time. Thus, even when mortgage activities could be protected from adverse changes in
interest rates over a period of time (on a cumulative basis) they may display large
variations in income from period to period.
    
    The degree to which the natural hedge associated to mortgage banking (i.e. originating
and servicing) offsets changes in servicing asset valuations may be imperfect, as it may
vary over time.
    
    Origination volumes, the valuation of servicing assets, economic hedging activities and
other related costs are impacted by multiple factors, which include, changes in the mix of
new business, changes in the term structure of interest rates, changes in mortgage spreads
(mortgage basis) to other rate benchmarks, and rate volatility, among others. Interrelation
of all these factors is hard to predict and, as such, the ability to perfectly hedge their
effects is limited.
 Doral Financials Risk Profile
    Market Value
    
    Net Interest IncomeAs of September 30, 2009
    
    Of Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (8.3
    )%
    
    
    (2.8
    )%- 100 BPS
    
    
    2.7
    %
    
    
    3.2
    %Market Value
    
    Net InterestAs of December 31, 2008
    
    of 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. 83




---



##### Table of Contents



(In thousands)
    
    September 30, 2009
    
    December 31, 2008Change in Fair
    
    Change in FairChange in Interest
    
    Value of Available
    
    Value of AvailableRates (Basis Points)
    
    for Sale Securities
    
    for Sale Securities+200
    
    $
    (220,043
    )
    
    $
    (169,044
    )+100
    
    
    (93,937
    )
    
    
    (72,832
    )Base
    
    
    
    
    
    
    -100
    
    
    110,631
    
    
    
    47,100-200
    
    
    212,387
    
    
    
    80,303
 Derivatives
  84




---



##### Table of Contents



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
    
    
    $
    115,000
    
    
    September, 2011
    
    1-month LIBOR over 5.50%
    
    
    134
    
    
    
    215,000
    
    
    September, 2012
    
    1-month LIBOR over 6.00%
    
    
    143
    
    
    
    2435,000
    
    
    October, 2010
    
    1-month LIBOR over 5.00%
    
    
    199
    
    
    
    115,000
    
    
    October, 2011
    
    1-month LIBOR over 5.00%
    
    
    172
    
    
    
    615,000
    
    
    October, 2012
    
    1-month LIBOR over 5.50%
    
    
    182
    
    
    
    3450,000
    
    
    November, 2012
    
    1-month LIBOR over 6.50%
    
    
    228
    
    
    
    8450,000
    
    
    November, 2012
    
    1-month LIBOR over 5.50%
    
    
    545
    
    
    
    11750,000
    
    
    November, 2012
    
    1-month LIBOR over 6.00%
    
    
    350
    
    
    
    99$
    270,000
    
    
    
    
    
    
    
    
    $
    2,158
    
    
    $
    368
  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%
    
    $
    (5,112
    )8,000
    
    
    September, 2010
    
    
    4.62
    %
    
    1-month LIBOR plus 0.02%
    
    
    (328
    )3,000
    
    
    September, 2011
    
    
    4.69
    %
    
    1-month LIBOR plus 0.02%
    
    
    (207
    )10,000
    
    
    October, 2009
    
    
    4.30
    %
    
    1-month LIBOR plus 0.04%
    
    
    (35
    )8,000
    
    
    October, 2010
    
    
    4.37
    %
    
    1-month LIBOR plus 0.02%
    
    
    (328
    )6,000
    
    
    October, 2011
    
    
    4.51
    %
    
    1-month LIBOR plus 0.05%
    
    
    (390
    )5,000
    
    
    October, 2012
    
    
    4.62
    %
    
    1-month LIBOR plus 0.05%
    
    
    (426
    )20,000
    
    
    November, 2009
    
    
    4.35
    %
    
    1-month LIBOR plus 0.02%
    
    
    (140
    )15,000
    
    
    November, 2010
    
    
    4.42
    %
    
    1-month LIBOR
    
    
    (666
    )15,000
    
    
    November, 2011
    
    
    4.55
    %
    
    1-month LIBOR plus 0.02%
    
    
    (1,021
    )45,000
    
    
    November, 2012
    
    
    4.62
    %
    
    1-month LIBOR plus 0.02%
    
    
    (3,943
    )$
    335,000
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (12,596
    )
 Freestanding Derivatives.
 85




---



##### Table of Contents



Derivatives  Hedge Accounting.
  TABLE S  DERIVATIVES POSITIONS
 September 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCash flow HedgesInterest rate swaps
    
    $
    335,000
    
    
    $
    (12,596
    )
    
    $
    345,000
    
    
    $
    (15,096
    )Other derivativesInterest rate caps
    
    
    270,000
    
    
    
    368
    
    
    
    270,000
    
    
    
    287Forward contracts
    
    
    265,000
    
    
    
    (501
    )
    
    
    35,000
    
    
    
    (187
    )535,000
    
    
    
    (133
    )
    
    
    305,000
    
    
    
    100$
    870,000
    
    
    $
    (12,729
    )
    
    $
    650,000
    
    
    $
    (14,996
    )
  TABLE T  FAIR VALUE RECONCILIATION
 Nine Month Period Ended(In thousands)
    
    September 30, 2009Fair value of contracts outstanding at the beginning of the period
    
    $
    100Changes in fair values during the period
    
    
    (233
    )Fair value of contracts outstanding at the end of the period
    
    $
    (133
    )
 TABLE U  SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of September 30, 2009
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValuePrices actively quoted
    
    $
    (501
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (501
    )Prices provided by
internal sources
    
    
    1
    
    
    
    33
    
    
    
    334
    
    
    
    
    
    
    
    368$
    (500
    )
    
    $
    33
    
    
    $
    334
    
    
    $
    
    
    
    $
    (133
    )
 86




---



##### Table of Contents



TABLE V  DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    September 30, 2009Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    215,000
    
    
    $
    341
    
    
    $
    
    
    
    $
    341
    
    
    
    2.70A+
    
    
    2
    
    
    
    415,000
    
    
    
    27
    
    
    
    (12,879
    )
    
    
    (12,852
    )
    
    
    1.21A
    
    
    1
    
    
    
    240,000
    
    
    
    
    
    
    
    (218
    )
    
    
    (218
    )
    
    
    0.12Total Derivatives
    
    
    4
    
    
    $
    870,000
    
    
    $
    368
    
    
    $
    (13,097
    )
    
    $
    (12,729
    )
    
    
    1.28
 
 (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). (Dollars in thousands)
    
    December 31, 2008Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    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
  87




---



##### Table of Contents



Receivables- Troubled Debt
Restructuring by Creditors Debt-Troubled Debt Restructuring by Debtors Accounting by Debtors and Creditors of Troubled Debt Restructurings) Receivables-Measurement of Loan Impairment Accounting by Creditors for
Impairment of a Loan)
 88




---



##### Table of Contents



Non-performing Assets and Allowance for Loan and Lease Losses
   89




---



##### Table of Contents



TABLE W
NON-PERFORMING ASSETS  (Dollars in thousands)
 AS OF
    
    
    AS OFSEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Non-performing loans:Residential mortgage loans  held for sale (1)
    
    $
    4,088
    
    
    $
    4,942Residential mortgage loans  held for investment
    
    
    381,075
    
    
    
    346,579Total non-performing residential mortgage loans(2)
    
    
    385,163
    
    
    
    351,521Other lending activities:Construction loans
    
    
    257,728
    
    
    
    215,080Commercial real estate loans
    
    
    131,561
    
    
    
    116,841Commercial real estate loans  held for sale
    
    
    63
    
    
    
    1,130Consumer loans
    
    
    588
    
    
    
    685Commercial non-real estate loans
    
    
    2,062
    
    
    
    1,751Lease financing receivable
    
    
    1,198
    
    
    
    1,053Land loans
    
    
    38,321
    
    
    
    29,613Total non-performing other lending activities
    
    
    431,521
    
    
    
    366,153Total non-performing loans
    
    
    816,684
    
    
    
    717,674Repossessed Units
    
    
    104
    
    
    
    191OREO(3)
    
    
    93,145
    
    
    
    61,340Total NPAs of Doral Financial (consolidated)
    
    $
    909,933
    
    
    $
    779,205Loans past due 90 days and still accruingConsumer loans(4)
    
    $
    2,713
    
    
    $
    2,603Commercial non-real estate loans(4)
    
    
    1,091
    
    
    
    1,428Total loans past due 90 days and still accruing
    
    $
    3,804
    
    
    $
    4,031Total NPAs as a percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
    
    
    16.72
    %
    
    
    14.42
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    9.08
    %
    
    
    7.69
    %Total non-performing loans to total loans (excluding GNMA
defaulted loans)
    
    
    14.87
    %
    
    
    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)
    
    
    17.49
    %
    
    
    18.55
    %
 
 (1)
    
    Does not include approximately $170.0 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 September 30, 2009 and
December 31, 2008, respectively.(2)
    
    Includes approximately $9.1 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 September 30, 2009 and December 31, 2008,
respectively.(3)
    
    Excludes FHA and VA claims amounting to $13.2 million and $17.0 million as of September 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. 90




---



##### Table of Contents



TABLE X
COMPOSITION OF MORTGAGE NON-PERFORMING ASSETS
 COLLATERAL TYPE
    
    LOAN TO VALUE
    
    DISTRIBUTIONFHA/VA loans
    
    
    
    
    
    
    2.6
    %Loans with private mortgage insurance
    
    
    
    
    
    
    7.3
    %Loans with no mortgage insurance
    
    
    < 60
    %
    
    
    16.2
    %61-80
    %
    
    
    47.9
    %81-90
    %
    
    
    16.0
    %Over 91%
    
    
    10.0
    %Total loans
    
    
    
    
    
    
    100.0
    %
     91




---



##### Table of Contents



As of
    
    As of(Dollars in thousands)
    
    September 30, 2009
    
    December 31, 2008Construction loans(1) (2)
    
    $
    462,419
    
    
    $
    506,031Total undisbursed funds under existing commitments(2) (3)
    
    
    56,393
    
    
    
    54,160Total non-performing construction loans(2)
    
    
    257,728
    
    
    
    215,080Net charge offs  Construction loans(2)
    
    
    7,412
    
    
    
    21,749Allowance for loan losses  Construction loans(2)
    
    
    47,631
    
    
    
    45,159Non-performing construction loans to total construction loans
    
    
    55.7
    %
    
    
    42.5
    %Allowance for loan losses  construction loans to total
construction loans
    
    
    10.3
    %
    
    
    8.9
    %Net charge-offs on an annualized basis to total construction loans
    
    
    2.1
    %
    
    
    4.3
    %
 
 (1)
    
    Includes $289.3 million and $422.6 million of construction loans for residential housing projects as of September 30, 2009 and December 31,
2008, respectively. Also includes $173.1 million and $83.4 million of construction loans for commercial, condominiums and multifamily projects as of September
30, 2009 and December 31, 2008, respectively.(2)
    
    Excludes land loans.(3)
    
    Includes undisbursed funds to matured loans and loans in non-accrual status that still disbursing funds. 92




---



##### Table of Contents



TABLE Y
ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    146,769
    
    
    $
    122,099
    
    
    $
    132,020
    
    
    $
    124,733Provision (recovery) for loan and lease losses:Construction loans
    
    
    (1,168
    )
    
    
    1,870
    
    
    
    9,884
    
    
    
    1,986Residential mortgage loans
    
    
    7,232
    
    
    
    4,048
    
    
    
    19,151
    
    
    
    10,972Commercial real estate loans
    
    
    (4,196
    )
    
    
    (1,152
    )
    
    
    (1,264
    )
    
    
    1,949Consumer loans
    
    
    2,605
    
    
    
    1,612
    
    
    
    7,236
    
    
    
    5,538Lease financing
    
    
    178
    
    
    
    (36
    )
    
    
    579
    
    
    
    201Commercial non-real estate loans
    
    
    656
    
    
    
    (362
    )
    
    
    3,482
    
    
    
    716Land secured loans
    
    
    (428
    )
    
    
    1,229
    
    
    
    (431
    )
    
    
    1,316Total provision for loan and lease losses
    
    
    4,879
    
    
    
    7,209
    
    
    
    38,637
    
    
    
    22,678Charge-offs:Construction loans
    
    
    (2,505
    )
    
    
    (3,905
    )
    
    
    (8,059
    )
    
    
    (12,238
    )Residential mortgage loans
    
    
    (810
    )
    
    
    (217
    )
    
    
    (3,029
    )
    
    
    (1,416
    )Commercial real estate loans
    
    
    (3,098
    )
    
    
    138
    
    
    
    (5,133
    )
    
    
    (3,889
    )Consumer loans
    
    
    (2,827
    )
    
    
    (1,547
    )
    
    
    (8,190
    )
    
    
    (5,713
    )Lease financing
    
    
    (333
    )
    
    
    (376
    )
    
    
    (612
    )
    
    
    (843
    )Commercial non-real estate loans
    
    
    (815
    )
    
    
    (413
    )
    
    
    (4,782
    )
    
    
    (1,066
    )Total charge-offs
    
    
    (10,388
    )
    
    
    (6,320
    )
    
    
    (29,805
    )
    
    
    (25,165
    )Recoveries:Construction loans
    
    
    647
    
    
    
    
    
    
    
    647
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Commercial real estate loans
    
    
    23
    
    
    
    11
    
    
    
    49
    
    
    
    88Consumer loans
    
    
    132
    
    
    
    105
    
    
    
    459
    
    
    
    538Lease financing
    
    
    16
    
    
    
    9
    
    
    
    56
    
    
    
    210Commercial non-real estate loans
    
    
    11
    
    
    
    30
    
    
    
    24
    
    
    
    61Total recoveries
    
    
    829
    
    
    
    155
    
    
    
    1,237
    
    
    
    897Net charge-offs
    
    
    (9,559
    )
    
    
    (6,165
    )
    
    
    (28,568
    )
    
    
    (24,268
    )Balance at end of period
    
    $
    142,089
    
    
    $
    123,143
    
    
    $
    142,089
    
    
    $
    123,143Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    2.68
    %
    
    
    2.34
    %
    
    
    2.68
    %
    
    
    2.34
    %Provision for loan losses to net charge-offs
    
    
    51.04
    %
    
    
    116.93
    %
    
    
    135.25
    %
    
    
    93.45
    %Net charge-offs on an annualized basis to average
loans receivable outstanding
    
    
    0.72
    %
    
    
    0.47
    %
    
    
    0.73
    %
    
    
    0.94
    %Allowance for loan and lease losses to net
charge-offs on an annualized basis
    
    
    374.68
    %
    
    
    496.63
    %
    
    
    372.01
    %
    
    
    252.33
    %
  93




---



##### Table of Contents



TABLE
Z  ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE
LOSSES
 September 30, 2009
    
    
    December 31, 2008(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans receivable:Construction
    
    $
    47,631
    
    
    
    9
    %
    
    $
    45,159
    
    
    
    9
    %Residential mortgage loans
    
    
    49,150
    
    
    
    70
    %
    
    
    33,026
    
    
    
    69
    %Commercial  secured by real estate
    
    
    20,728
    
    
    
    14
    %
    
    
    27,076
    
    
    
    14
    %Consumer
    
    
    7,469
    
    
    
    2
    %
    
    
    7,964
    
    
    
    3
    %Lease financing receivable
    
    
    1,335
    
    
    
    0
    %
    
    
    1,312
    
    
    
    0
    %Commercial non-real estate
    
    
    3,014
    
    
    
    3
    %
    
    
    4,290
    
    
    
    3
    %Land secured
    
    
    12,762
    
    
    
    2
    %
    
    
    13,193
    
    
    
    2
    %Total
    
    $
    142,089
    
    
    
    100
    %
    
    $
    132,020
    
    
    
    100
    %
   
    
    An increase in the residential mortgage loan and consumer loan provision of $3.2
million and $1.0 million, respectively, due to deterioration of the Puerto Rico economy
driving higher consumer delinquency levels and lower residential real estate absorption
levels.
    
    A decrease in the construction (including land) loans provision of $4.7 million
resulting from lowering the threshold over which loans are individually measured for
impairment ($1.5 million) and higher specific reserves established for a few loans during
the third quarter of 2008.
    
    A decrease in the commercial loan provision of $2.0 million largely resulting from a
change in the threshold for impairment testing (from $2.0 million to $1.0
million) together with a change in the methodology to reserve for commercial loans with a
balance under $2.0 million based on
delinquency levels.
    
    Changes in conditions related to managements reserve for emerging market risks and a
loss reserve component based on macro economic or general market factors that led to a
reduction of those reserves.
    94




---



##### Table of Contents



Receivables-Measurement of Loan Impairment Accounting by
Creditors for Impairment of a Loan
   (In thousands)
    
    SEPTEMBER 30, 2009
    
    
    DECEMBER 31, 2008Impaired loans with allowance
    
    $
    251,087
    
    
    $
    207,949Impaired loans without allowance
    
    
    213,455
    
    
    
    120,378Total impaired loans
    
    $
    464,542
    
    
    $
    328,327Related allowance
    
    $
    49,119
    
    
    $
    45,099Average impaired loan portfolio
    
    $
    399,136
    
    
    $
    317,844
  Contingencies- Loss
Contingencies/Recognition Accounting for Contingencies
  95




---



##### Table of Contents



Counterparty Risk
   Operational Risk
  Overview of Operational Risk Management
  96




---



##### Table of Contents



Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions; Puerto Rico Economy and Fiscal Condition
        Fiscal Condition.
 97




---



##### Table of Contents



Rating Downgrades.
 Fiscal Stabilization Plan.
  Economic Reconstruction Plan.
   98




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 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
  99




---



##### Table of Contents



Risks Related to Our Business
 For the nine months period ended September 30, 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.
     The actions of the U.S. government, U.S. Federal Reserve, U.S. Treasury and other government and
regulatory bodies for the purpose of stabilizing the U.S. financial markets, or market response to
those actions may not achieve the intended effect.
  100




---



##### Table of Contents



Current levels of market volatility are unprecedented.
  The soundness of other financial institutions could affect us.
  101




---



##### Table of Contents



An additional loss may have to be accrued by Doral Financial with respect to a pending Lehman
Brothers Inc. claim.
   5
    Difficult market conditions have already affected our industry and may adversely affect us.
  102




---



##### Table of Contents




    
    We expect to face increased regulation of our industry, including as a result of the
EESA and the new Financial Stability Plan. Compliance with such regulation may increase
our costs and limit our ability to pursue business opportunities.
    
    Our ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage, and underwrite our customers become less
predictive of future behaviors.
    
    The processes we use to estimate losses inherent in our credit exposure requires
difficult, subjective, and complex judgments, including forecast of economic conditions and
how these economic conditions might impair the ability of our borrowers to repay their
loans, which may no longer be capable of accurate estimation and which may, in turn, impact
the reliability of the processes.
    
    Our ability to borrow from other financial institutions or to engage in sales of
mortgage loans to third parties (including mortgage loan securitization transactions with
government sponsored entities) on favorable terms or at all could be adversely affected by
further disruptions in the capital markets or other events, including deteriorating
investor expectations.
    
    Competition in our industry could intensify as a result of increasing consolidation of
financial services companies in connection with current market conditions.
    
    We may be required to pay in the future significantly higher FDIC assessments on our
deposits if market conditions do not improve or if market conditions deteriorate.
    
    Higher credit losses because of federal or state legislation or regulatory action that
either (i) reduces the amount that our borrowers are required to pay us, or (ii) limits our
ability to foreclose on properties or collateral or makes foreclosures less economically
viable. In particular, there is legislation pending in the U.S. Congress that would allow a
Chapter 13 bankruptcy plan to cram down the value of certain mortgages on a consumers
principal residence to its market value and/or reset debtor interest rate and monthly
payments to an amount that permits them to remain in their homes.
 Doral Financials business is concentrated in Puerto Rico and continued weakness of Puerto Rico
economy may continue to adversely affect Doral Financial.
  103




---



##### Table of Contents



Deteriorating credit quality particularly in real estate loans has adversely impacted Doral
Financial and may continue to adversely impact Doral Financial.
  Doral Financial is subject to default risk in its loan portfolio.
  Changes in interest rates could affect Doral Financials income and cash flows.
  The hedging transactions that the Company enters into may not be effective in managing the exposure
to interest rate risk.
  104




---



##### Table of Contents



Increases in FDIC insurance assessments may have a material adverse effect on Doral Financials
earnings.
     Our risk management policies and procedures may leave us exposed to unidentified or unanticipated
risk, which could negatively affect us.
  105




---



##### Table of Contents



The preparation of Doral Financials financial statements requires the use of estimates that may
vary from actual results.
   Defective and repurchased loans may harm Doral Financials business and financial condition.
  
    
    compliance with laws and regulations;
    
    underwriting standards;
    
    the accuracy of information in the loan documents and loan file; and
    
    the characteristics and enforceability of the loan.
  Doral Financial is exposed to credit risk from mortgage loans held pending sale and mortgage loans
that have been sold subject to recourse arrangements.
  106




---



##### Table of Contents



Doral Financial is subject to risks in servicing loans for others.
  Unforeseen disruptions in the brokered deposits market could compromise Doral Financials liquidity
position.
  Adverse credit market conditions may affect Doral Financials ability to meet its liquidity needs.
   Doral Financial may fail to retain and attract key employees and management personnel.
  Competition with other financial institutions could adversely affect the profitability of Doral
Financials operations.
  107




---



##### Table of Contents



Doral Financial operates within a highly regulated industry and its business and results are
significantly affected by the regulations to which it is subject; changes in statutes and
regulations could adversely affect Doral Financial.
    Financial Regulatory
Reform-A New Foundation: Rebuilding Financial Regulation and Supervision
  Damage to Doral Financials reputation could damage Doral Financials businesses.
  108




---



##### Table of Contents



Doral Financial and its banking subsidiaries are subject to the supervision and regulation of
various banking regulators and have entered into consent orders with these regulators, and these
regulators could take action against the Company or its banking subsidiaries.
   Changes in accounting standards issued by the Financial Accounting Standards Board or other
standard-setting bodies may adversely affect Doral Financials financial statements
  Doral Financial has been the subject of an investigation by the U.S. Attorneys Office for the
Southern District of New York, which could require it to pay substantial fines or penalties.
  109




---



##### Table of Contents



Doral Financial may be required to advance significant amounts to cover the reasonable legal and
other expenses of its former officers and directors.
  Risks Related to Our Common Stock
 Additional issuances of common stock or securities convertible into common stock may further dilute
existing holders of our common stock; we may not receive stockholder approval to increase our
authorized capital to raise additional equity capital.
    Dividends on our common stock have been suspended; Doral Financial may not be able to pay dividends
on its common stock in the future.
  110




---



##### Table of Contents



The market price of our common stock may be subject to continued significant fluctuations and volatility.
  
    
    changes or perceived changes in the condition, operations, results or prospects of
our businesses and market assessments of these changes or perceived changes;
    
    announcements of strategic developments, acquisitions and other material events by us
or our competitors;
    
    changes in governmental regulations or proposals, or new government regulations or
proposals, affecting us, including those relating to the current financial crisis and
global economic downturn and those that may be specifically directed to us;
    
    the continued decline, failure to stabilize or lack of improvement in general market
and economic conditions in our principal markets;
    
    the departure of key personnel;
    
    changes in the credit, mortgage and real estate markets;
    
    operating results that vary from expectations of management, securities analysts and
investors; and
    
    operating and stock price performance of companies that investors deem comparable to
us.
 All of our debt obligations and our preferred stock will have priority over our common stock with
respect to payment in the event of a liquidation, dissolution or winding up.
  Our certificate of incorporation, our by-laws, certain banking law provisions and our security
holders and registration rights agreement contain provisions that could discourage an acquisition
or change of control of the Company.
  Our controlling shareholder is able to determine the outcome of any matter that may be submitted
for a vote of the shareholders.
 111




---



##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 .
 
 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).4.1
    
    
    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
 112




---



##### Table of Contents



ExhibitNumber
    
    DescriptionNovember 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).4.14
    
    
    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
 113




---



##### Table of Contents



ExhibitNumber
    
    Descriptionreference 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 10.11 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).10.9
    
    
    Employment Agreement, dated as of June 1, 2007, between Doral Financial
Corporation and Christopher Poulton (Incorporated herein by reference to
exhibit number 10.10 to Doral 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).10.12
    
    
    Doral Financial 2008 Stock Incentive Plan (Incorporated herein by reference to
Annex A to the Definitive Proxy Statement for the Doral Financial 2008 Annual
Stockholders Meeting filed with the Commission on April 11, 2008).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).
 114




---



##### Table of Contents



ExhibitNumber
    
    Description10.14
    
    
    Summary of Doral Financials 2007 Key Incentive Plan (Incorporated herein by
reference to Exhibit 10.15 to Amendment No. 1 to Doral Financials Registration
Statement of Form S-4 filed with the Commission on September 29, 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.
 115




---



##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
(Registrant)Date: November 6, 2009
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: November 6, 2009
    /s/ Robert E. WalhmanRobert E. WahlmanExecutive Vice President and
Chief Financial Officer 116