##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 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
    
    66-0312162(State or other jurisdiction of 
incorporation or organization)
    
    (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 o
    
    Non-accelerated filer þ(Do not check if a smaller reporting company)
  o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATIONItem 1    Financial StatementsConsolidated Statements of Financial Condition (Unaudited) as of June 30, 2010 and December 31,
2009
    
    
    3Consolidated Statements of Operations (Unaudited)  Quarters and six month periods ended June
30, 2010 and June 30, 2009
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)  For the six month
periods ended June 30, 2010 and June 30, 2009
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (Unaudited)  Quarters and six month
periods ended June 30, 2010 and June 30, 2009
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  For the six month periods ended June 30,
2010 and June 30, 2009
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2   Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    61Item 3    Quantitative and Qualitative Disclosures about Market Risk
    
    
    114Item 4    Controls and Procedures
    
    
    115PART II  OTHER INFORMATION
    
    
    116Item 1    Legal Proceedings
    
    
    116Item 1A    Risk Factors
    
    
    116Item 2    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    119Item 3    Defaults Upon Senior Securities
    
    
    120Item 4    Removed and Reserved
    
    
    120Item 5    Other Information
    
    
    120Item 6 Exhibits
    
    
    120SIGNATURES
    
    
    124EX-12.1EX-12.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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DORAL FINANCIAL CORPORATION
 
 
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED
 June 30,
    
    
    December 31,(Dollars in thousands, except for share data)
    
    2010
    
    
    2009AssetsCash and due from banks
    
    $
    318,949
    
    
    $
    725,277Other interest-earning assets
    
    
    42,791
    
    
    
    95,000Securities held for trading, at fair value
    
    
    48,561
    
    
    
    47,726Securities available for sale, at fair value (includes $881,674 and $1,402,906
pledged as collateral at June 30, 2010, and December 31, 2009, respectively, that
may be repledged)
    
    
    2,379,712
    
    
    
    2,789,177Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    99,529
    
    
    
    126,285Total investment securities
    
    
    2,527,802
    
    
    
    2,963,188Loans:Loans held for sale, at lower of cost or market
    
    
    382,387
    
    
    
    320,930Loans receivable
    
    
    5,521,784
    
    
    
    5,516,891Less: Unearned interest
    
    
    (530
    )
    
    
    (1,083
    )Less: Allowance for loan and lease losses
    
    
    (134,913
    )
    
    
    (140,774
    )Total net loans receivable
    
    
    5,386,341
    
    
    
    5,375,034Total loans, net
    
    
    5,768,728
    
    
    
    5,695,964Accounts receivable
    
    
    43,626
    
    
    
    60,478Mortgage-servicing advances
    
    
    41,609
    
    
    
    19,592Accrued interest receivable
    
    
    40,984
    
    
    
    41,866Servicing assets, net
    
    
    113,005
    
    
    
    118,493Premises and equipment, net
    
    
    99,883
    
    
    
    101,437Real estate held for sale, net
    
    
    103,177
    
    
    
    94,219Deferred tax asset (DTA)
    
    
    105,393
    
    
    
    131,201Other assets
    
    
    190,945
    
    
    
    185,237Total assets
    
    $
    9,396,892
    
    
    $
    10,231,952LiabilitiesDeposits:Non-interest-bearing deposits
    
    $
    307,930
    
    
    $
    353,516Other retail interest-bearing deposits
    
    
    1,881,990
    
    
    
    1,637,096Brokered certificate of deposits
    
    
    2,750,649
    
    
    
    2,652,409Total deposits
    
    
    4,940,569
    
    
    
    4,643,021Securities sold under agreements to repurchase
    
    
    1,460,800
    
    
    
    2,145,262Advances from FHLB
    
    
    1,217,920
    
    
    
    1,606,920Other short-term borrowings
    
    
    
    
    
    
    110,000Loans payable
    
    
    318,652
    
    
    
    337,036Notes payable
    
    
    267,648
    
    
    
    270,838Accrued expenses and other liabilities
    
    
    246,331
    
    
    
    243,831Total liabilities
    
    
    8,451,920
    
    
    
    9,356,908Commitments
and contingencies (Please refer to Note 25 and 26)Stockholders EquityPreferred
stock, $1 par value; 40,000,000 shares authorized; 6,096,393
shares issued and outstanding, at aggregate liquidation preference value at June
30, 2010 (7,500,850 shares issued and outstanding, at aggregate liquidation
preference value at December 31, 2009):Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    $
    148,700
    
    
    $
    197,388Perpetual cumulative convertible preferred stock
    
    
    203,382
    
    
    
    218,040Mandatorily
convertible preferred stock
    
    
    171,000
    
    
    
    Common stock, $0.01 par value; 300,000,000 shares authorized; 67,293,370 shares
issued and outstanding at June 30, 2010 (97,500,000 shares authorized
and 62,064,304 shares issued and outstanding at December 31, 2009)
    
    
    673
    
    
    
    621Additional paid-in capital
    
    
    1,047,443
    
    
    
    1,010,661Legal surplus
    
    
    23,596
    
    
    
    23,596Accumulated deficit
    
    
    (678,289
    )
    
    
    (463,781
    )Accumulated other comprehensive income (loss), net of income tax expense of $5,813
and a benefit of $18,328 at June 30, 2010 and December 31, 2009, respectively
    
    
    28,467
    
    
    
    (111,481
    )Total stockholders equity
    
    
    944,972
    
    
    
    875,044Total liabilities and stockholders equity
    
    $
    9,396,892
    
    
    $
    10,231,952
  3




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(In thousands, except for share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest income:Loans
    
    $
    78,916
    
    
    $
    81,245
    
    
    $
    160,349
    
    
    $
    162,833Mortgage-backed securities (MBS)
    
    
    18,542
    
    
    
    27,256
    
    
    
    41,789
    
    
    
    54,637Interest-only strips (IOs)
    
    
    1,491
    
    
    
    1,575
    
    
    
    3,034
    
    
    
    3,203Investment securities
    
    
    583
    
    
    
    2,765
    
    
    
    1,448
    
    
    
    7,672Other interest-earning assets
    
    
    1,545
    
    
    
    1,737
    
    
    
    3,685
    
    
    
    2,727Total interest income
    
    
    101,077
    
    
    
    114,578
    
    
    
    210,305
    
    
    
    231,072Interest expense:Deposits
    
    
    27,587
    
    
    
    30,872
    
    
    
    54,287
    
    
    
    69,079Securities sold under agreements to repurchase
    
    
    13,738
    
    
    
    17,481
    
    
    
    31,762
    
    
    
    34,713Advances from FHLB
    
    
    12,921
    
    
    
    15,988
    
    
    
    26,894
    
    
    
    32,002Notes payable
    
    
    5,086
    
    
    
    5,203
    
    
    
    10,196
    
    
    
    10,429Loans payable
    
    
    1,676
    
    
    
    2,538
    
    
    
    3,325
    
    
    
    5,847Other short-term borrowings
    
    
    4
    
    
    
    406
    
    
    
    15
    
    
    
    842Total interest expense
    
    
    61,012
    
    
    
    72,488
    
    
    
    126,479
    
    
    
    152,912Net interest income
    
    
    40,065
    
    
    
    42,090
    
    
    
    83,826
    
    
    
    78,160Provision for loan and lease losses
    
    
    44,617
    
    
    
    10,133
    
    
    
    58,538
    
    
    
    33,758Net interest (loss) income after provision for loan and lease losses
    
    
    (4,552
    )
    
    
    31,957
    
    
    
    25,288
    
    
    
    44,402Non-interest (loss) income:Total other-than-temporary impairment (OTTI) losses
    
    
    
    
    
    
    (35,239
    )
    
    
    (46,912
    )
    
    
    (35,239
    )Portion of loss recognized in other comprehensive income (before taxes)
    
    
    
    
    
    
    28,444
    
    
    
    33,653
    
    
    
    28,444Net credit related OTTI losses
    
    
    
    
    
    
    (6,795
    )
    
    
    (13,259
    )
    
    
    (6,795
    )Net gain (loss) on trading activities
    
    
    8,896
    
    
    
    (5,796
    )
    
    
    10,670
    
    
    
    (13,124
    )Net gain on mortgage loan sales and fees
    
    
    1,811
    
    
    
    3,298
    
    
    
    4,377
    
    
    
    5,017Servicing (loss) income (net of mark-to-market adjustments)
    
    
    (1,354
    )
    
    
    13,960
    
    
    
    5,390
    
    
    
    11,185Net loss on early repayment of debt
    
    
    (2,545
    )
    
    
    
    
    
    
    (3,021
    )
    
    
    Net (loss) gain on investment securities
    
    
    (137,204
    )
    
    
    4,810
    
    
    
    (110,790
    )
    
    
    4,797Commissions, fees and other income
    
    
    10,206
    
    
    
    9,654
    
    
    
    23,027
    
    
    
    19,634Total non-interest (loss) income
    
    
    (120,190
    )
    
    
    19,131
    
    
    
    (83,606
    )
    
    
    20,714Non-interest expenses:Compensation and benefits
    
    
    20,315
    
    
    
    15,823
    
    
    
    36,750
    
    
    
    38,651Professional services
    
    
    15,420
    
    
    
    7,391
    
    
    
    29,212
    
    
    
    13,518FDIC insurance expense
    
    
    5,574
    
    
    
    6,144
    
    
    
    10,765
    
    
    
    8,081Occupancy expenses
    
    
    4,322
    
    
    
    2,914
    
    
    
    8,303
    
    
    
    6,915Advertising
    
    
    4,073
    
    
    
    1,424
    
    
    
    5,571
    
    
    
    2,872Communication expenses
    
    
    4,056
    
    
    
    4,005
    
    
    
    8,000
    
    
    
    8,413Depreciation and amortization
    
    
    3,110
    
    
    
    3,217
    
    
    
    6,257
    
    
    
    6,670EDP expenses
    
    
    2,878
    
    
    
    3,167
    
    
    
    6,657
    
    
    
    6,783Taxes, other than payroll and income taxes
    
    
    2,591
    
    
    
    2,423
    
    
    
    5,155
    
    
    
    4,911Office expenses
    
    
    1,112
    
    
    
    1,203
    
    
    
    2,397
    
    
    
    2,669Other
    
    
    6,398
    
    
    
    6,553
    
    
    
    13,583
    
    
    
    14,01969,849
    
    
    
    54,264
    
    
    
    132,650
    
    
    
    113,502Other reserves and OREO:Reserve on claim receivable from LBI
    
    
    10,819
    
    
    
    
    
    
    
    10,819
    
    
    
    Lower of cost or market adjustments for other real estate owned (OREO)
    
    
    22,457
    
    
    
    1,078
    
    
    
    26,272
    
    
    
    1,920(Gain) loss on sales of OREO
    
    
    (21
    )
    
    
    (288
    )
    
    
    61
    
    
    
    (479
    )OREO other related expenses
    
    
    978
    
    
    
    472
    
    
    
    1,678
    
    
    
    1,00934,233
    
    
    
    1,262
    
    
    
    38,830
    
    
    
    2,450Total non-interest expenses
    
    
    104,082
    
    
    
    55,526
    
    
    
    171,480
    
    
    
    115,952Loss before income taxes
    
    
    (228,824
    )
    
    
    (4,438
    )
    
    
    (229,798
    )
    
    
    (50,836
    )Income tax expense (benefit)
    
    
    4,487
    
    
    
    (12,654
    )
    
    
    7,016
    
    
    
    (12,762
    )Net (loss) income
    
    $
    (233,311
    )
    
    $
    8,216
    
    
    $
    (236,814
    )
    
    $
    (38,074
    )Net (loss) income attributable to common shareholders(1)
    
    $
    (235,726
    )
    
    $
    14,524
    
    
    $
    (214,508
    )
    
    $
    (40,091
    )Net (loss) income per common share (1) (2)
    
    $
    (3.50
    )
    
    $
    0.27
    
    
    $
    (3.30
    )
    
    $
    (0.74
    )
 
 (1)
    
    For the quarters and six month periods ended June 30,
2010 and 2009, net (loss) income
 per common share represents the basic and diluted loss per common share, respectively,
for each of the periods presented. Please refer to Note 29 for additional information
regarding net income (loss) attributable to common shareholders.(2)
    
    For the six month periods ended June 30, 2010 and 2009,
net (loss) income  per
common share included $26.6 million and $9.4 million, respectively, related to the effect of the
preferred stock exchange. Please refer to Note 29 for additional information.  4




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  (UNAUDITED)
 Six Month Periods EndedJune 30,(In thousands)
    
    
    2010
    
    
    2009Preferred Stock:Balance at beginning of period
    
    $
    415,428
    
    
    $
    573,250Conversion of preferred stock to common stock at par value:Noncumulative nonconvertible
    
    
    (48,687
    )
    
    
    (30,862
    )Cumulative convertible
    
    
    (14,659
    )
    
    
    (74,747
    )Preferred stock issued
    
    
    171,000
    
    
    
    Balance at end of period
    
    
    523,082
    
    
    
    467,641Common Stock:Balance at beginning of period
    
    
    621
    
    
    
    538Common stock issued/converted:Noncumulative nonconvertible
    
    
    40
    
    
    
    14Cumulative convertible
    
    
    12
    
    
    
    26Balance at end of period
    
    
    673
    
    
    
    578Additional Paid-In Capital:Balance at beginning of period
    
    
    1,010,661
    
    
    
    849,172Stock-based compensation recognized
    
    
    73
    
    
    
    103Conversion of preferred stock to common stock at par value:Noncumulative nonconvertible
    
    
    17,010
    
    
    
    5,697Cumulative convertible
    
    
    19,699
    
    
    
    85,530Balance at end of period
    
    
    1,047,443
    
    
    
    940,502Legal Surplus
    
    
    23,596
    
    
    
    23,596Accumulated Deficit:Balance at beginning of period
    
    
    (463,781
    )
    
    
    (418,168
    )Net loss
    
    
    (236,814
    )
    
    
    (38,074
    )Cash dividend accrued on preferred stock
    
    
    (4,279
    )
    
    
    (3,061
    )Cash dividends paid on preferred stock
    
    
    
    
    
    
    (8,325
    )Effect of conversion of preferred stock:Noncumulative nonconvertible
    
    
    31,637
    
    
    
    23,917Cumulative convertible
    
    
    (5,052
    )
    
    
    (14,548
    )Balance at end of period
    
    
    (678,289
    )
    
    
    (458,259
    )Accumulated Other Comprehensive Income (Loss), Net of Tax:Balance at beginning of period
    
    
    (111,481
    )
    
    
    (123,217
    )Other comprehensive income (loss), net of deferred tax
    
    
    139,948
    
    
    
    (16,938
    )Balance at end of period
    
    
    28,467
    
    
    
    (140,155
    )Total stockholders equity
    
    $
    944,972
    
    
    $
    833,903
  5




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##### Table of Contents



DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPRENHENSIVE (LOSS) INCOME


(UNAUDITED)
 Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Net (loss) income
    
    $
    (233,311
    )
    
    $
    8,216
    
    
    $
    (236,814
    )
    
    $
    (38,074
    )Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities arising during the period
    
    
    41,660
    
    
    
    14,497
    
    
    
    72,418
    
    
    
    (1,474
    )Non-credit portion of OTTI losses
    
    
    
    
    
    
    (28,444
    )
    
    
    (33,653
    )
    
    
    (28,444
    )Reclassification of net realized losses included in net (loss)
income
    
    
    129,749
    
    
    
    6,161
    
    
    
    122,172
    
    
    
    5,764Other comprehensive income (loss) on investment securities, before
tax
    
    
    171,409
    
    
    
    (7,786
    )
    
    
    160,937
    
    
    
    (24,154
    )Income tax (expense) benefit related to investment securities
    
    
    (25,712
    )
    
    
    1,168
    
    
    
    (24,141
    )
    
    
    3,623Other comprehensive income (loss) on investment securities, net of
tax
    
    
    145,697
    
    
    
    (6,618
    )
    
    
    136,796
    
    
    
    (20,531
    )Other comprehensive income on cash flow hedges(1)
    
    
    1,594
    
    
    
    2,388
    
    
    
    3,152
    
    
    
    3,593Other comprehensive income (loss)
    
    
    147,291
    
    
    
    (4,230
    )
    
    
    139,948
    
    
    
    (16,938
    )Comprehensive (loss) income
    
    $
    (86,020
    )
    
    $
    3,986
    
    
    $
    (96,866
    )
    
    $
    (55,012
    )Accumulated other comprehensive income (loss), net of taxOther comprehensive income (loss) on investment securities
    
    $
    36,502
    
    
    $
    (105,884
    )
    
    $
    36,502
    
    
    $
    (105,884
    )Other comprehensive losses on investment securities on which OTTI
has been recognized
    
    
    (3,563
    )
    
    
    (24,177
    )
    
    
    (3,563
    )
    
    
    (24,177
    )Total other comprehensive income (loss) on investment securities
    
    
    32,939
    
    
    
    (130,061
    )
    
    
    32,939
    
    
    
    (130,061
    )Other comprehensive loss on cash flow hedge(1)
    
    
    (4,472
    )
    
    
    (10,094
    )
    
    
    (4,472
    )
    
    
    (10,094
    )Total accumulated other comprehensive income (loss), net of tax
    
    $
    28,467
    
    
    $
    (140,155
    )
    
    $
    28,467
    
    
    $
    (140,155
    )
 
 (1)
    
    For the quarters and six month periods ended June 30, 2010 and 2009, other
comprehensive loss on cash flow hedges includes $1.7 million and $3.9 million related to a deferred
tax asset valuation allowance.  6




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##### Table of Contents



DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)
 Six Month Periods Ended June 30,(In thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (236,814
    )
    
    $
    (38,074
    )Adjustments to reconcile net loss to net cash provided by operating activities:Stock-based compensation
    
    
    73
    
    
    
    103Depreciation and amortization
    
    
    6,257
    
    
    
    6,670Mark-to-market adjustment of servicing assets
    
    
    8,480
    
    
    
    4,798Deferred tax expense
    
    
    3,126
    
    
    
    605Provision for loan and lease losses
    
    
    58,538
    
    
    
    33,758Provision for claim receivable
    
    
    10,819
    
    
    
    Net premium amortization (discount accretion) on loans, investment securities and debt
    
    
    8,417
    
    
    
    (282
    )Origination and purchases of loans held for sale
    
    
    (160,982
    )
    
    
    (241,679
    )Principal repayments and sales of loans held for sale
    
    
    95,065
    
    
    
    127,169Loss (gain) on sale of securities
    
    
    108,150
    
    
    
    (9,033
    )Net OTTI losses
    
    
    13,259
    
    
    
    6,795Net loss on early repayment of liabilities
    
    
    3,021
    
    
    
    Unrealized loss on trading securities
    
    
    61
    
    
    
    16,298Purchases of securities held for trading
    
    
    
    
    
    
    (180,405
    )Principal repayment and sales of securities held for trading
    
    
    151,492
    
    
    
    586,670Amortization and net gain in the fair value of IOs
    
    
    1,011
    
    
    
    4,313Unrealized loss (gain) on derivative instruments
    
    
    1,594
    
    
    
    (121
    )Increase in derivative instruments
    
    
    (5,224
    )
    
    
    Decrease (increase) in accounts receivable
    
    
    6,033
    
    
    
    (1,255
    )(Increase) decrease in mortgage servicing advances
    
    
    (22,017
    )
    
    
    2,045Decrease in accrued interest receivable
    
    
    882
    
    
    
    143Decrease (increase) in other assets
    
    
    92,366
    
    
    
    (38,038
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    65,365
    
    
    
    (15,555
    )Total adjustments
    
    
    445,786
    
    
    
    302,999Net cash provided by operating activities
    
    
    208,972
    
    
    
    264,925Cash flows from investing activities:Purchases of securities available for sale
    
    
    (1,430,635
    )
    
    
    (1,586,960
    )Principal repayment and sales of securities available for sale
    
    
    1,852,364
    
    
    
    1,927,127Decrease (increase) in FHLB stock
    
    
    26,756
    
    
    
    (1,303
    )Originations, purchases and repurchases of loans receivable
    
    
    (592,890
    )
    
    
    (335,761
    )Principal repayment of loans receivable
    
    
    262,558
    
    
    
    134,284Proceeds from sales of servicing assets
    
    
    192
    
    
    
    159Purchases of premises and equipment
    
    
    (4,455
    )
    
    
    (5,157
    )Proceeds from sales of real estate held for sale
    
    
    10,492
    
    
    
    20,076Net cash provided by investing activities
    
    
    124,382
    
    
    
    152,465Cash flows from financing activities:Increase (decrease) in deposits
    
    
    297,548
    
    
    
    (338,515
    )Decrease in securities sold under agreements to repurchase
    
    
    (687,483
    )
    
    
    (131,263
    )Proceeds from advances from FHLB
    
    
    575,000
    
    
    
    350,000Repayment of advances from FHLB
    
    
    (964,000
    )
    
    
    (393,000
    )Proceeds from other short-term borrowings
    
    
    345,000
    
    
    
    2,328,000Repayment of other short-term borrowings
    
    
    (455,000
    )
    
    
    (2,122,600
    )Repayment of secured borrowings
    
    
    (18,384
    )
    
    
    (13,942
    )Repayment of notes payable
    
    
    (3,363
    )
    
    
    (3,118
    )Issuance of preferred stock
    
    
    171,000
    
    
    
    Payment associated with conversion of preferred stock
    
    
    
    
    
    
    (4,972
    )Dividends paid
    
    
    
    
    
    
    (8,325
    )Net cash used in financing activities
    
    
    (739,682
    )
    
    
    (337,735
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (406,328
    )
    
    $
    79,655Cash and cash equivalents at beginning of period
    
    
    725,277
    
    
    
    187,517Cash and cash equivalents at the end of period
    
    $
    318,949
    
    
    $
    267,172Cash and cash equivalents includes:Cash and due from banks
    
    $
    318,949
    
    
    $
    265,363Other interest-earning assets
    
    
    
    
    
    
    1,809$
    318,949
    
    
    $
    267,172Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    148,851
    
    
    $
    219,617Loans foreclosed
    
    $
    51,965
    
    
    $
    46,361Capitalization of servicing assets
    
    $
    3,184
    
    
    $
    3,430Reclassification of loans held for investment portfolio to the held for sale portfolio
    
    $
    95,648
    
    
    $
    Reclassification of loans held for sale portfolio to the held for investment portfolio
    
    $
    210
    
    
    $
    Supplemental information for cash flows:Cash used to pay interest
    
    $
    131,546
    
    
    $
    165,683Cash used to pay income taxes
    
    $
    2,267
    
    
    $
    2.365
  7




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##### Table of Contents



DORAL FINANCIAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Nature of Operations and Basis of Presentation
    
    
    9Note 2  Recent Accounting Pronouncements
    
    
    9Note 3  Cash and Due from Banks
    
    
    11Note 4  Other Interest-Earning Assets
    
    
    12Note 5  Securities Held for Trading
    
    
    12Note 6  Securities Available for Sale
    
    
    12Note 7  Investments in an Unrealized Loss Position
    
    
    14Note 8  Pledged Assets
    
    
    18Note 9
 Loans Held for Sale and Loans Receivable
    
    
    18Note 10  Allowance for loan and lease losses
    
    
    21Note 11  Related Party Transactions
    
    
    22Note 12  Accounts Receivable and Other Assets
    
    
    22Note 13  Servicing Activities
    
    
    23Note 14  Sale and Securitization of Mortgage Loans
    
    
    26Note 15  Servicing Related Matters
    
    
    27Note 16  Other Real Estate Owned
    
    
    27Note 17  Deposits
    
    
    28Note 18  Securities Sold Under Agreements to Repurchase
    
    
    28Note 19  Advances from FHLB
    
    
    29Note 20  Other Short-Term Borrowings
    
    
    30Note 21  Loans Payable
    
    
    30Note 22  Notes Payable
    
    
    31Note 23  Income Taxes
    
    
    31Note 24  Guarantees
    
    
    35Note 25  Financial Instruments with Off-Balance Sheet Risk
    
    
    36Note 26  Commitments and Contingencies
    
    
    37Note 27  Capital Stock
    
    
    38Note 28  Stock Options and Other Incentive Plans
    
    
    39Note 29
 (Losses) Earnings per Share Data
    
    
    41Note 30  Fair Value of Assets and Liabilities
    
    
    41Note 31  Derivatives
    
    
    50Note 32  Variable Interest Entities
    
    
    53Note 33  Segment Information
    
    
    55Note 34  Subsequent Events
    
    
    57
 8




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##### Table of Contents



1. Nature of Operations and Basis of Presentation
        Recent Accounting Pronouncements
 Accounting Standard Update No. 2010-11 Derivatives and Hedging (Topic 815): Scope Exception Related
to Embedded Credit Derivatives (ASU No. 2010-11). ASU No. 2010-11 Topic 815 Derivatives
and Hedging.
 9




---



##### Table of Contents



Accounting Standards Update No. 2010-13 CompensationStock Compensation (Topic 718): Effect of
Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades, a consensus of the FASB Emerging Issues Task Force
(ASU No. 2010-13). ASU No. 2010-13 FASB Accounting Standards Codification Topic 718,
CompensationStock Compensation
  Accounting Standards Update No. 2010-18 Receivables (Topic 310): Effect of a Loan Modification When
the Loan Is Part of a Pool That Is Accounted for as a Single Asset, a consensus of the FASB
Emerging Issues Task Force (ASU No. 2010-18) ASU No. 2010-18 (Subtopic 310-30, ReceivablesLoans and Debt Securities Acquired with Deteriorated
Credit Quality.) ASU Subtopic 310-30
 Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses (ASU No. 2010-20).
 Changes in Accounting Standards Adopted in the Financial Statements
 Accounting Standard Codification (ASC) 810, Consolidation,  ASC
810, FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities ASC 860, Transfers and Servicing.
  10




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##### Table of Contents



ASC 860, Transfer and Servicing ASC 860 ASC 860 ASC 860 Accounting Standard Update No.
2010-06- Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements (ASU No. 210-06). ASU No. 2010-06 Subtopic 820-10 Fair Value Measurements and Disclosures-Overall,
  Accounting Standard Update No. 2010-09 Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements (ASU No. 2010-09). ASU
No. 2010-09, Topic 855 Subsequent Events,
 3. Cash and due from banks
  11




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##### Table of Contents



4. Other Interest-Earning Assets
  5. Securities Held for Trading
  (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Mortgage-Backed Securities
    
    $
    832
    
    
    $
    893Variable Rate IOs
    
    
    44,401
    
    
    
    45,342Fixed Rate IOs
    
    
    311
    
    
    
    381Derivatives(1)
    
    
    3,017
    
    
    
    1,110Total
    
    $
    48,561
    
    
    $
    47,726
 
 (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 $405.0 million as of June 30, 2010 and $480.0 million as of
December 31, 2009. Notional amounts indicate the volume of derivatives activity, but
do not represent Doral Financials exposure to market or credit risk.  6. Securities Available for Sale
   12




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##### Table of Contents



As of June 30, 2010
 Weighted-Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    YieldMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    61
    
    
    $
    2
    
    
    $
    
    
    
    $
    63
    
    
    
    6.67
    %Due over ten years
    
    
    78,091
    
    
    
    1,272
    
    
    
    
    
    
    
    79,363
    
    
    
    3.49
    %FHLMC and FNMADue from one to five years
    
    
    265
    
    
    
    11
    
    
    
    
    
    
    
    276
    
    
    
    4.90
    %Due from five to ten years
    
    
    574,532
    
    
    
    10,992
    
    
    
    
    
    
    
    585,524
    
    
    
    3.09
    %Due over ten years
    
    
    944,280
    
    
    
    15,484
    
    
    
    
    
    
    
    959,764
    
    
    
    2.99
    %CMO Government Sponsored AgenciesDue from five to ten years
    
    
    32,286
    
    
    
    124
    
    
    
    160
    
    
    
    32,250
    
    
    
    3.86
    %Due over ten years
    
    
    671,547
    
    
    
    17,703
    
    
    
    1,411
    
    
    
    687,839
    
    
    
    3.50
    %Non-Agency CMOsDue over ten years
    
    
    11,687
    
    
    
    
    
    
    
    4,192
    
    
    
    7,495
    
    
    
    12.17
    %Debt SecuritiesFNMA NotesDue within one year
    
    
    3,131
    
    
    
    20
    
    
    
    
    
    
    
    3,151
    
    
    
    3.37
    %P.R. Housing BankDue from five to ten years
    
    
    345
    
    
    
    14
    
    
    
    
    
    
    
    359
    
    
    
    4.92
    %Due over ten years
    
    
    1,735
    
    
    
    29
    
    
    
    
    
    
    
    1,764
    
    
    
    5.49
    %OtherDue from one to five years
    
    
    20,000
    
    
    
    49
    
    
    
    
    
    
    
    20,049
    
    
    
    5.50
    %Due over ten years
    
    
    3,000
    
    
    
    
    
    
    
    1,185
    
    
    
    1,815
    
    
    
    5.80
    %$
    2,340,960
    
    
    $
    45,700
    
    
    $
    6,948
    
    
    $
    2,379,712
    
    
    
    3.26
    %
 13




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##### Table of Contents



As of December 31, 2009
 Weighted-Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    YieldMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    85
    
    
    $
    7
    
    
    $
    
    
    
    $
    92
    
    
    
    6.67
    %Due over ten years
    
    
    93,586
    
    
    
    745
    
    
    
    61
    
    
    
    94,270
    
    
    
    3.65
    %FHLMC and FNMADue from five to ten years
    
    
    302
    
    
    
    13
    
    
    
    
    
    
    
    315
    
    
    
    4.83
    %Due over ten years
    
    
    804,441
    
    
    
    19,829
    
    
    
    676
    
    
    
    823,594
    
    
    
    4.45
    %CMO Government Sponsored AgenciesDue from five to ten years
    
    
    57,584
    
    
    
    690
    
    
    
    175
    
    
    
    58,099
    
    
    
    3.73
    %Due over ten years
    
    
    1,424,235
    
    
    
    12,663
    
    
    
    6,984
    
    
    
    1,429,914
    
    
    
    3.48
    %Non-Agency CMOsDue over ten years
    
    
    418,299
    
    
    
    
    
    
    
    147,699
    
    
    
    270,600
    
    
    
    3.03
    %Debt SecuritiesFHLB NotesDue within one year
    
    
    2,056
    
    
    
    17
    
    
    
    
    
    
    
    2,073
    
    
    
    4.16
    %FNMA NotesDue within one year
    
    
    46,064
    
    
    
    85
    
    
    
    
    
    
    
    46,149
    
    
    
    0.89
    %P.R. Housing BankDue from five to ten years
    
    
    645
    
    
    
    16
    
    
    
    
    
    
    
    661
    
    
    
    4.92
    %Due over ten years
    
    
    1,980
    
    
    
    37
    
    
    
    
    
    
    
    2,017
    
    
    
    5.49
    %OtherDue within one year
    
    
    6,538
    
    
    
    62
    
    
    
    
    
    
    
    6,600
    
    
    
    4.26
    %Due from one to five years
    
    
    47,548
    
    
    
    388
    
    
    
    
    
    
    
    47,936
    
    
    
    5.31
    %Due from five to ten years
    
    
    5,000
    
    
    
    207
    
    
    
    
    
    
    
    5,207
    
    
    
    5.50
    %Due over ten years
    
    
    3,000
    
    
    
    
    
    
    
    1,350
    
    
    
    1,650
    
    
    
    5.80
    %$
    2,911,363
    
    
    $
    34,759
    
    
    $
    156,945
    
    
    $
    2,789,177
    
    
    
    3.68
    %
 7. Investments in an Unrealized Loss Position
  14




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##### Table of Contents



Securities Available for Sale
 As of June 30, 2010Less 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 SecuritiesCMOs Government
Sponsored Agencies
    
    
    3
    
    
    $
    43,356
    
    
    $
    1,411
    
    
    
    1
    
    
    $
    1,779
    
    
    $
    160
    
    
    
    4
    
    
    $
    45,135
    
    
    $
    1,571Non-Agency CMOs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    7,495
    
    
    
    4,192
    
    
    
    3
    
    
    
    7,495
    
    
    
    4,192Debt SecuritiesOther
    
    
    1
    
    
    
    1,815
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,815
    
    
    
    1,1854
    
    
    $
    45,171
    
    
    $
    2,596
    
    
    
    4
    
    
    $
    9,274
    
    
    $
    4,352
    
    
    
    8
    
    
    $
    54,445
    
    
    $
    6,948
 Securities Available for Sale
 As of December 31, 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
    
    
    1
    
    
    $
    49,255
    
    
    $
    61
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    1
    
    
    $
    49,255
    
    
    $
    61FNMA/FHLMC
    
    
    5
    
    
    
    162,454
    
    
    
    676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    162,454
    
    
    
    676CMO Government
Sponsored Agencies
    
    
    9
    
    
    
    403,114
    
    
    
    7,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    403,114
    
    
    
    7,159Non-Agency CMOs
    
    
    1
    
    
    
    2,163
    
    
    
    233
    
    
    
    11
    
    
    
    268,437
    
    
    
    147,466
    
    
    
    12
    
    
    
    270,600
    
    
    
    147,699Debt SecuritiesOther
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,650
    
    
    
    1,350
    
    
    
    1
    
    
    
    1,650
    
    
    
    1,35016
    
    
    $
    616,986
    
    
    $
    8,129
    
    
    
    12
    
    
    $
    270,087
    
    
    $
    148,816
    
    
    
    28
    
    
    $
    887,073
    
    
    $
    156,945
  Investments-Debt and Equity Securities/Transition and Open
Effective Date Information (ASC 320-10-65)
 
    
    If the Company intends to sell the investment security and its fair value is less than its
amortized cost.
    
    If, based on available evidence, it is more likely than not that the Company will decide or
be required to sell the investment security before the recovery of its amortized cost basis.
    
    If the Company does not expect to recover the entire amortized cost basis of the investment
security. This occurs when the present value of cash flows expected to be collected is less
than the amortized cost basis of the security. In determining whether a credit loss exists,
the Company uses its best estimate of the present value of cash flows expected to be collected
from the investment security. Cash flows expected to be collected are 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.
 15




---



##### Table of Contents



Investments  Other/Beneficial
Interest in Securitized Financial Assets
  16




---



##### Table of Contents



As of
    
    
    Quarter Ended
    
    
    Six Month Period EndedJune 30, 2010
    
    
    June 30, 2010
    
    
    June 30, 2010Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 InvestmentsU.S. Non-Agency CMOs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13 ,257
    
    
    $
    33,653
    
    
    $
    46,910P.R. Non-Agency CMOs
    
    
    8,156
    
    
    
    3,629
    
    
    
    4,527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2$
    8,156
    
    
    $
    3,629
    
    
    $
    4,527
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,259
    
    
    $
    33,653
    
    
    $
    46,912
 As of
    
    
    Quarter Ended
    
    
    Six Month Period EndedJune 30, 2009
    
    
    June 30, 2009
    
    
    June 30, 2009Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 InvestmentsU.S. Non-Agency CMOs
    
    $
    58,175
    
    
    $
    24,543
    
    
    $
    33,632
    
    
    $
    5,681
    
    
    $
    24,543
    
    
    $
    30,224
    
    
    $
    5,681
    
    
    $
    24,543
    
    
    $
    30,224P.R. Non-Agency CMOs
    
    
    10,744
    
    
    
    3,901
    
    
    
    6,843
    
    
    
    1,114
    
    
    
    3,901
    
    
    
    5,015
    
    
    
    1,114
    
    
    
    3,901
    
    
    
    5,015$
    68,919
    
    
    $
    28,444
    
    
    $
    40,475
    
    
    $
    6,795
    
    
    $
    28,444
    
    
    $
    35,239
    
    
    $
    6,795
    
    
    $
    28,444
    
    
    $
    35,239
  Quarter Ended June 30,
    
    
    Six Month Periods Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    1,193
    
    
    $
    920
    
    
    $
    1,191
    
    
    $
    920Additions:Credit losses for which
OTTI was not previously
recognized
    
    
    
    
    
    
    6,685
    
    
    
    
    
    
    
    6,685Additional OTTI credit
losses for which an
other-than-temporary
charge was previously
recognized
    
    
    
    
    
    
    110
    
    
    
    2
    
    
    
    110Balance at end of period
    
    $
    1,193
    
    
    $
    7,715
    
    
    $
    1,193
    
    
    $
    7,715
 17




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8. Pledged Assets
  (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Securities available for sale
    
    $
    1,769,515
    
    
    $
    2,498,149Loans held for sale
    
    
    131,096
    
    
    
    143,111Loans receivable
    
    
    2,652,615
    
    
    
    2,868,697Total pledged assets
    
    $
    4,553,226
    
    
    $
    5,509,957
 9. Loans Held for Sale and Loans Receivable
  (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Conventional single family residential
    
    $
    119,276
    
    
    $
    137,134FHA/VA
    
    
    137,759
    
    
    
    151,187Construction
    
    
    95,648
    
    
    
    Commercial loans to financial institutions
    
    
    15,608
    
    
    
    17,059Commercial real estate
    
    
    14,096
    
    
    
    15,550Total loans held for sale (1)
    
    $
    382,387
    
    
    $
    320,930
 
 (1)
    
    At June 30, 2010 and December 31, 2009, the loans held for sale
portfolio include $1.1 million of interest-only loans.     18




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June 30, 2010
    
    
    December 31, 2009(In thousands)
    
    PR
    
    
    US
    
    
    Total
    
    
    PR
    
    
    US
    
    
    TotalConsumerResidential mortgage(1)
    
    $
    3,578,108
    
    
    $
    96,812
    
    
    $
    3,674,920
    
    
    $
    3,630,883
    
    
    $
    59,748
    
    
    $
    3,690,631FHA/VA guaranteed residential mortgage
    
    
    230,488
    
    
    
    
    
    
    
    230,488
    
    
    
    168,645
    
    
    
    
    
    
    
    168,645Personal
    
    
    20,378
    
    
    
    
    
    
    
    20,378
    
    
    
    25,164
    
    
    
    
    
    
    
    25,164Revolving lines of credit
    
    
    19,748
    
    
    
    
    
    
    
    19,748
    
    
    
    22,062
    
    
    
    
    
    
    
    22,062Credit cards
    
    
    19,692
    
    
    
    
    
    
    
    19,692
    
    
    
    22,802
    
    
    
    
    
    
    
    22,802Lease financing receivables
    
    
    9,435
    
    
    
    
    
    
    
    9,435
    
    
    
    13,656
    
    
    
    
    
    
    
    13,656Loans on savings deposits
    
    
    3,215
    
    
    
    
    
    
    
    3,215
    
    
    
    3,249
    
    
    
    
    
    
    
    3,249Other consumer
    
    
    864
    
    
    
    2
    
    
    
    866
    
    
    
    628
    
    
    
    1
    
    
    
    629Total consumer
    
    
    3,881,928
    
    
    
    96,814
    
    
    
    3,978,742
    
    
    
    3,887,089
    
    
    
    59,749
    
    
    
    3,946,838CommercialCommercial real estate
    
    
    667,730
    
    
    
    60,878
    
    
    
    728,608
    
    
    
    686,299
    
    
    
    54,130
    
    
    
    740,429Commercial and industrial
    
    
    48,078
    
    
    
    426,983
    
    
    
    475,061
    
    
    
    53,753
    
    
    
    258,599
    
    
    
    312,352Construction
    
    
    122,631
    
    
    
    104,215
    
    
    
    226,846
    
    
    
    348,432
    
    
    
    103,954
    
    
    
    452,386Land secured
    
    
    155,726
    
    
    
    
    
    
    
    155,726
    
    
    
    100,450
    
    
    
    
    
    
    
    100,450Total commercial
    
    
    994,165
    
    
    
    592,076
    
    
    
    1,586,241
    
    
    
    1,188,934
    
    
    
    416,683
    
    
    
    1,605,617Loans receivable, gross(2)
    
    
    4,876,093
    
    
    
    688,890
    
    
    
    5,564,983
    
    
    
    5,076,023
    
    
    
    476,432
    
    
    
    5,552,455Less:Discount on loans transferred(3)
    
    
    (11,659
    )
    
    
    
    
    
    
    (11,659
    )
    
    
    (13,190
    )
    
    
    
    
    
    
    (13,190
    )Unearned interest
    
    
    (530
    )
    
    
    
    
    
    
    (530
    )
    
    
    (1,083
    )
    
    
    
    
    
    
    (1,083
    )Deferred loan fees/costs, net
    
    
    (28,288
    )
    
    
    (3,252
    )
    
    
    (31,540
    )
    
    
    (21,133
    )
    
    
    (1,241
    )
    
    
    (22,374
    )Allowance for loan and lease losses
    
    
    (131,493
    )
    
    
    (3,420
    )
    
    
    (134,913
    )
    
    
    (136,878
    )
    
    
    (3,896
    )
    
    
    (140,774
    )(171,970
    )
    
    
    (6,672
    )
    
    
    (178,642
    )
    
    
    (172,284
    )
    
    
    (5,137
    )
    
    
    (177,421
    )Loans receivable, net
    
    $
    4,704,123
    
    
    $
    682,218
    
    
    $
    5,386,341
    
    
    $
    4,903,739
    
    
    $
    471,295
    
    
    $
    5,375,034
 
 (1)
    
    Includes $262.5 million and $270.0 million of balloon loans, as of June 30, 2010 and December 31, 2009, respectively.(2)
    
    Includes $363.6 million and $388.2 million of interest-only loans, as of June 30, 2010 and December 31, 2009,
respectively.(3)
    
    Related to $1.4 billion of loans transferred during 2007, from the loans held for sale to the loans receivable
portfolio. As of June 30, 2010 and December 31, 2009, the outstanding balance of these loans transferred was $1.0 billion and
$1.1 billion, respectively.   Receivables-Measurement of Loan Impairment Summary of Significant
Accounting Policies
  (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Impaired loans with allowance
    
    $
    444,125
    
    
    $
    346,145Impaired loans without allowance
    
    
    165,517
    
    
    
    184,601Total impaired loans
    
    $
    609,642
    
    
    $
    530,746Related allowance
    
    $
    52,862
    
    
    $
    48,223Average impaired loan portfolio
    
    $
    572,580
    
    
    $
    449,741
 19




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June 30, 2010
    
    
    December 31, 2009(In thousands)
    
    PR
    
    
    US
    
    
    Total
    
    
    PR
    
    
    US
    
    
    TotalNon-performing consumerResidential mortgage(1)(2)
    
    $
    402,560
    
    
    $
    416
    
    
    $
    402,976
    
    
    $
    397,596
    
    
    $
    102
    
    
    $
    397,698Personal
    
    
    553
    
    
    
    
    
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    Revolving lines of credit
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    519
    
    
    
    
    
    
    
    519Lease financing receivables
    
    
    471
    
    
    
    
    
    
    
    471
    
    
    
    1,091
    
    
    
    
    
    
    
    1,091Other consumer
    
    
    23
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing consumer
    
    
    403,622
    
    
    
    416
    
    
    
    404,038
    
    
    
    399,206
    
    
    
    102
    
    
    
    399,308Non-performing commercialCommercial real estate
    
    
    169,243
    
    
    
    
    
    
    
    169,243
    
    
    
    130,811
    
    
    
    
    
    
    
    130,811Commercial and industrial
    
    
    3,343
    
    
    
    
    
    
    
    3,343
    
    
    
    933
    
    
    
    
    
    
    
    933Construction
    
    
    164,061
    
    
    
    3,910
    
    
    
    167,971
    
    
    
    251,971
    
    
    
    21,610
    
    
    
    273,581Land secured
    
    
    87,127
    
    
    
    
    
    
    
    87,127
    
    
    
    33,373
    
    
    
    
    
    
    
    33,373Total non-performing commercial
    
    
    423,774
    
    
    
    3,910
    
    
    
    427,684
    
    
    
    417,088
    
    
    
    21,610
    
    
    
    438,698Total non-performing loans
    
    $
    827,396
    
    
    $
    4,326
    
    
    $
    831,722
    
    
    $
    816,294
    
    
    $
    21,712
    
    
    $
    838,006
 
 (1)
    
    Does not include approximately $83.2 million and $86.8 million
of GNMA defaulted loans over 90 days delinquent (for which the Company
has the option, but not an obligation, to buy back from the pools serviced), included
as part of the loans held for sale portfolio as of June 30, 2010
and December 31, 2009, respectively.(2)
    
    As of June 30, 3010 and December 31, 2009, excludes $112.5 million
and $10.3 million, respectively, of non-performing FHA/VA guaranteed loans
that due to the nature of their guarantees, present little credit loss to the Company.   June 30, 2010
    
    
    December 31, 200990 days and over
    
    
    
    
    
    
    90 days and over(In thousands)
    
    TDRs
    
    
    delinquency
    
    
    TDRs
    
    
    delinquencyConsumerResidential mortgage
    
    $
    509,678
    
    
    $
    126,369
    
    
    $
    428,746
    
    
    $
    89,551FHA/VA guaranteed residential mortgage
    
    
    2,404
    
    
    
    873
    
    
    
    556
    
    
    
    220Personal
    
    
    1,574
    
    
    
    181
    
    
    
    1,301
    
    
    
    Total consumer
    
    
    513,656
    
    
    
    127,423
    
    
    
    430,603
    
    
    
    89,771CommercialCommercial real estate
    
    $
    57,481
    
    
    
    25,106
    
    
    
    51,194
    
    
    
    15,078Commercial and industrial
    
    
    5,471
    
    
    
    
    
    
    
    2,482
    
    
    
    Construction
    
    
    76,875
    
    
    
    66,022
    
    
    
    108,776
    
    
    
    97,737Land secured
    
    
    28,294
    
    
    
    1,311
    
    
    
    1,119
    
    
    
    579Total commercial
    
    
    168,121
    
    
    
    92,439
    
    
    
    163,571
    
    
    
    113,394Total TDRs
    
    $
    681,777
    
    
    $
    219,862
    
    
    $
    594,174
    
    
    $
    203,165
  20




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Quarter Ended June 30,
    
    
    Six Month Periods Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009ConsumerResidential mortgage
    
    $
    98,824
    
    
    $
    83,861
    
    
    $
    147,558
    
    
    $
    129,829FHA/VA guaranteed residential mortgage
    
    
    315
    
    
    
    65
    
    
    
    464
    
    
    
    213Personal
    
    
    148
    
    
    
    436
    
    
    
    335
    
    
    
    436Total consumer
    
    
    99,287
    
    
    
    84,362
    
    
    
    148,357
    
    
    
    130,478CommercialCommercial real estate
    
    $
    468
    
    
    $
    9,810
    
    
    $
    7,794
    
    
    $
    16,305Commercial and industrial
    
    
    3,000
    
    
    
    
    
    
    
    3,000
    
    
    
    Construction
    
    
    
    
    
    
    46,310
    
    
    
    
    
    
    
    46,310Land secured
    
    
    22,754
    
    
    
    579
    
    
    
    26,374
    
    
    
    784Total commercial
    
    
    26,222
    
    
    
    56,699
    
    
    
    37,168
    
    
    
    63,399Total TDRs
    
    $
    125,509
    
    
    $
    141,061
    
    
    $
    185,525
    
    
    $
    193,877
 10. Allowance for Loan and Lease Losses
  Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    147,481
    
    
    $
    143,900
    
    
    $
    140,774
    
    
    $
    132,020Provision for loan and lease losses
    
    
    44,617
    
    
    
    10,133
    
    
    
    58,538
    
    
    
    33,758Losses charged to the allowance
    
    
    (57,500
    )
    
    
    (7,447
    )
    
    
    (65,150
    )
    
    
    (19,417
    )Recoveries
    
    
    315
    
    
    
    183
    
    
    
    751
    
    
    
    408Balance at end of period
    
    $
    134,913
    
    
    $
    146,769
    
    
    $
    134,913
    
    
    $
    146,769
  21




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11. Related Party Transactions
  (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Balance at beginning of period
    
    $
    2,840
    
    
    $
    2,579New loans
    
    
    
    
    
    
    3,178Repayments
    
    
    (35
    )
    
    
    (2,129
    )Loans of former officers
    
    
    
    
    
    
    (788
    )Balance at end of period (1)
    
    $
    2,805
    
    
    $
    2,840
 
 (1)
    
    At June 30, 2010 and December 31, 2009, none of the loans outstanding to
officers, directors and 5% or more stockholders were delinquent.    12. Accounts Receivable and Other Assets
  Lehman Brothers Transaction
    22




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13. Servicing Activities
   23




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##### Table of Contents



Quarters Ended
    
    
    Six Month PeriodsJune 30,
    
    
    Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    118,236
    
    
    $
    104,426
    
    
    $
    118,493
    
    
    $
    114,396Capitalization of servicing assets
    
    
    1,407
    
    
    
    2,047
    
    
    
    3,184
    
    
    
    3,430Sales of servicing asset(1)
    
    
    (162
    )
    
    
    (159
    )
    
    
    (192
    )
    
    
    (159
    )MSR reversal on loans repurchased(2)
    
    
    (1,029
    )
    
    
    (272
    )
    
    
    (1,165
    )
    
    
    (530
    )Change in fair value
    
    
    (5,447
    )
    
    
    6,827
    
    
    
    (7,315
    )
    
    
    (4,268
    )Balance at end of period(3)
    
    $
    113,005
    
    
    $
    112,869
    
    
    $
    113,005
    
    
    $
    112,869
 
 (1)
    
    Amount represents MSRs sales related to $22.5 million and $7.1 million in principal balance of mortgage loans for the
corresponding quarters of 2010 and 2009, respectively, and $24.0 million and $7.1 million for the corresponding six month period
ended 2010 and 2009, respectively.(2)
    
    Amount represents the adjustment of MSR fair value related to the repurchase of $74.5 million and $23.3 million in
principal balance of mortgage loans serviced for others for the
quarter ended June 30, 2010 and 2009, and $84.6 million and $43.2
million for the six months period ended June 30, 2010 and 2009, respectively.(3)
    
    Outstanding balance of loans serviced for third parties amounted to $8.3 billion and $9.1 billion as of June 30, 2010
and 2009, respectively, which includes $2.8 million and $3.2 million, respectively, of loans being serviced under sub-servicing
arrangements.      24




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##### Table of Contents



Servicing(Dollars in thousands)
    
    Assets
    
    
    Interest-Only StripsCarrying amount of retained interest
    
    $
    113,005
    
    
    $
    44,712Weighted-average expected life (in years)
    
    
    6.5
    
    
    
    4.9Constant prepayment rate
(weighted-average annual rate)
    
    
    9.3
    %
    
    
    11.1
    %Decrease in fair value due to 10% adverse change
    
    $
    (4,232
    )
    
    $
    (1,400
    )Decrease in fair value due to 20%  adverse change
    
    $
    (8,214
    )
    
    $
    (2,727
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.3
    %
    
    
    13.0
    %Decrease in fair value due to 10% adverse change
    
    $
    (4,502
    )
    
    $
    (1,438
    )Decrease in fair value due to 20% adverse change
    
    $
    (9,295
    )
    
    $
    (2,752
    )
      25




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##### Table of Contents



Quarters Ended
    
    
    Six Month PeriodsJune  30,
    
    
    Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    43,584
    
    
    $
    49,744
    
    
    $
    45,723
    
    
    $
    52,179Amortization
    
    
    (2,729
    )
    
    
    (2,447
    )
    
    
    (5,527
    )
    
    
    (4,320
    )Gain on the IO value
    
    
    3,857
    
    
    
    569
    
    
    
    4,516
    
    
    
    7Balance at end of period
    
    $
    44,712
    
    
    $
    47,866
    
    
    $
    44,712
    
    
    $
    47,866
   (Dollars in thousands)Change in
    
    
    
    
    
    Weighted-AverageInterest Rates
    
    Constant Prepayment
    
    Expected Life
    
    Change in Fair(Basis Points)
    
    Rate
    
    (Years)
    
    Value of IOs
    
    Percentage of Change+200
    
    
    7.0
    %
    
    
    6.4
    
    
    $
    (4,361
    )
    
    
    (9.8
    )%+100
    
    
    8.9
    %
    
    
    5.6
    
    
    
    (2,556
    )
    
    
    (5.7
    )%+50
    
    
    9.9
    %
    
    
    5.3
    
    
    
    (1,253
    )
    
    
    (2.8
    )%Base
    
    
    11.1
    %
    
    
    4.9
    
    
    
    
    
    
    
    0
    %-50
    
    
    12.6
    %
    
    
    4.5
    
    
    
    1,116
    
    
    
    2.5
    %-100
    
    
    13.5
    %
    
    
    4.3
    
    
    
    2,206
    
    
    
    4.9
    %-200
    
    
    14.6
    %
    
    
    4.1
    
    
    
    3,847
    
    
    
    8.6
    %
 14. Sale and Securitization of Mortgage Loans
    26




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15.
    
    Servicing Related Matters
  16. Other Real Estate Owned
   (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Residential
    
    $
    71,622
    
    
    $
    76,461Commercial
    
    
    14,336
    
    
    
    14,283Land
    
    
    10,821
    
    
    
    1,597Construction
    
    
    6,398
    
    
    
    1,878Balance at end of period
    
    $
    103,177
    
    
    $
    94,219
 27




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##### Table of Contents



Quarters Ended
    
    
    Six Month PeriodsJune 30,
    
    
    Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    100,345
    
    
    $
    70,208
    
    
    $
    94,219
    
    
    $
    61,340Additions
    
    
    37,368
    
    
    
    28,500
    
    
    
    56,090
    
    
    
    48,662Sales
    
    
    (6,161
    )
    
    
    (13,432
    )
    
    
    (13,139
    )
    
    
    (21,313
    )Retirement
    
    
    (1,735
    )
    
    
    283
    
    
    
    (4,124
    )
    
    
    (2,301
    )Lower of cost or market
adjustments
    
    
    (26,640
    )
    
    
    (1,595
    )
    
    
    (29,869
    )
    
    
    (2,424
    )Balance at end of period
    
    $
    103,177
    
    
    $
    83,964
    
    
    $
    103,177
    
    
    $
    83,964
   17. Deposits
  (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Brokered certificates of deposit
    
    $
    2,750,649
    
    
    $
    2,652,409Certificates of deposit
    
    
    688,123
    
    
    
    507,987Money markets accounts
    
    
    413,554
    
    
    
    408,152NOW accounts and other
transactions accounts
    
    
    396,590
    
    
    
    364,469Regular savings
    
    
    383,723
    
    
    
    356,488Total interest-bearing
    
    
    4,632,639
    
    
    
    4,289,505Non interest-bearing deposits
    
    
    307,930
    
    
    
    353,516Total deposits
    
    $
    4,940,569
    
    
    $
    4,643,021
  18. Securities Sold Under Agreements to Repurchase
  28




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(Dollars in thousands)
    
    June 30, 2010
    
    
    December 31, 2009Non-callable repurchase
agreements with maturities less
than or equal to 90 days, at a
fixed rate of 5.96%, and at
various fixed rates averaging
1.89%, as of June 30, 2010 and
December 31, 2009, respectively.
    
    $
    60,000
    
    
    $
    216,262Non-callable repurchase
agreements with maturities
ranging from February 2011 to
June 2015 (2009  May 2010 to
October 2013), at various fixed
rates averaging 2.87%, and 3.32%,
as of June 30, 2010, and December
31, 2009, respectively.
    
    
    1,300,800
    
    
    
    1,700,500Callable repurchase agreements
with a maturity of February 2014
(2009 - March 2010 to February
2014), at a fixed rate of 2.98%,
and various fixed rates averaging
4.72%, as of June 30, 2010 and
December 31, 2009, respectively,
callable at various dates
beginning on July 2010 (2009 -
February 2010).
    
    
    100,000
    
    
    
    228,500$
    1,460,800
    
    
    $
    2,145,262
  19. Advances from FHLB
  June 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009Non-callable advances with maturities ranging from July 2010 to May 2013 (2009  January 2010 to May
2013), at various fixed rates averaging 3.97% and 3.25%, as of June 30, 2010, and December 31, 2009,
respectively.(1)
    
    $
    693,920
    
    
    $
    1,022,920Non-callable advances with maturities ranging from September 2010 to November 2012 (2009 - September 2010
to November 2012), tied to 1-month LIBOR adjustable monthly, at various variable rates averaging 0.37% and
0.25%, as of June 30, 2010, and December 31, 2009, respectively.
    
    
    105,000
    
    
    
    105,000Non-callable advances due on July 6, 2010, tied to 3-month LIBOR adjustable quarterly, at a rate of 0.22%
and 0.25%, as of June 30, 2010, and December 31, 2009, respectively.
    
    
    200,000
    
    
    
    200,000Callable structured advances with maturities ranging from October 2010 to March 2012 (2009  June 2010 to
March 2012), at various fixed rates averaging 5.26% and 5.41%, at June 30, 2010 and December 31, 2009,
respectively, callable at various dates beginning on July 2010 (2009  February 2010).
    
    
    219,000
    
    
    
    279,000$
    1,217,920
    
    
    $
    1,606,920
 
 (1)
    
    Includes one structured advance with an outstanding balance of $30.0 million.    29




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##### Table of Contents



20. Other short-term borrowings
  December 31,(In thousands)
    
    2009Borrowings with the Federal Reserve Bank, collateralized
by securities at a fixed rate of 0.25%, maturing in
January 2010.
    
    $
    110,000
  21. Loans Payable
   June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Secured borrowings with local
financial institutions,
collateralized by residential
mortgage loans, at variable
interest rates tied to 3-month
LIBOR averaging 1.81% and 1.99% at
June 30, 2010 and December 31,
2009, respectively.
    
    $
    301,209
    
    
    $
    318,180Secured borrowings with local
financial institutions,
collateralized by residential
mortgage loans at fixed interest
rates averaging 7.23% and 7.41% at
June 30, 2010 and December 31,
2009.
    
    
    17,443
    
    
    
    18,856$
    318,652
    
    
    $
    337,036
   30




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22. Notes payable
  June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009$100 million notes, net of discount,
bearing interest at 7.65%, due on March
26, 2016, paying interest monthly.
    
    $
    98,710
    
    
    $
    98,623$30 million notes, net of discount,
bearing interest at 7.00%, due on April
26, 2012, paying interest monthly.
    
    
    29,832
    
    
    
    29,789$40 million notes, net of discount,
bearing interest at 7.10%, due on April
26, 2017, paying interest monthly.
    
    
    39,461
    
    
    
    39,431$30 million notes, net of discount,
bearing interest at 7.15%, due on April
26, 2022, paying interest monthly.
    
    
    29,485
    
    
    
    29,472Bonds payable secured by mortgage on
building at fixed rates ranging from
6.75% to 6.90%, with maturities ranging
from December 2010 to December 2029
(2009 - December 2014 to December
2029), paying interest monthly.
    
    
    38,940
    
    
    
    39,420Bonds 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 principal and interest
monthly.
    
    
    23,620
    
    
    
    26,503$
    267,648
    
    
    $
    270,838
  23. Income Taxes
 Background
    31




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##### Table of Contents



Income
Tax Expense (Benefit)
  Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Current income tax expense (benefit):Puerto Rico
    
    $
    
    
    
    $
    (15,275
    )
    
    $
    
    
    
    $
    (14,932
    )United States
    
    
    3,615
    
    
    
    853
    
    
    
    3,890
    
    
    
    1,565Total current income tax expense (benefit)
    
    
    3,615
    
    
    
    (14,422
    )
    
    
    3,890
    
    
    
    (13,367
    )Deferred income tax expense:Puerto Rico
    
    
    1,008
    
    
    
    2,384
    
    
    
    2,795
    
    
    
    1,269United States
    
    
    (136
    )
    
    
    (616
    )
    
    
    331
    
    
    
    (664
    )Total deferred income tax expense
    
    
    872
    
    
    
    1,768
    
    
    
    3,126
    
    
    
    605Total income tax expense (benefit)
    
    $
    4,487
    
    
    $
    (12,654
    )
    
    $
    7,016
    
    
    $
    (12,762
    )
   Deferred Tax Components
   32




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##### Table of Contents



Income Taxes
   June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Deferred income tax asset resulting from:Differential in tax basis of IOs sold
    
    $
    237,721
    
    
    $
    237,324Net operating loss carry-forwards
    
    
    155,421
    
    
    
    128,710Allowance for loan and lease losses
    
    
    52,856
    
    
    
    55,175Capital loss carry-forward
    
    
    29,345
    
    
    
    6,791Reserve for losses on OREO
    
    
    19,086
    
    
    
    7,391Other
    
    
    51,984
    
    
    
    81,739Gross deferred tax asset
    
    
    546,413
    
    
    
    517,130Valuation allowance
    
    
    (441,020
    )
    
    
    (385,929
    )Net deferred tax asset
    
    $
    105,393
    
    
    $
    131,201
 33




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##### Table of Contents



June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Differential in tax basis of IOs sold
    
    $
    143,729
    
    
    $
    143,259Net operating loss carry-forwards
    
    
    143,908
    
    
    
    114,284Allowance for loan and lease losses
    
    
    51,282
    
    
    
    53,382Capital loss carry-forward
    
    
    29,342
    
    
    
    6,788Reserve for losses on OREO
    
    
    19,040
    
    
    
    7,391Other
    
    
    53,719
    
    
    
    60,825Total Valuation allowance
    
    $
    441,020
    
    
    $
    385,929
      Accounting for Uncertainty in Income Taxes
   34




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##### Table of Contents



(In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Balance at beginning of period
    
    $
    3,475
    
    
    $
    13,709Additions for tax positions of prior years
    
    
    280
    
    
    
    2,892Additions for tax positions of current year
    
    
    
    
    
    
    583Release of contingencies
    
    
    (583
    )
    
    
    (13,709
    )Balance at end of period
    
    $
    3,172
    
    
    $
    3,475
 24. Guarantees
     35




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Quarter Ended
    
    
    Six Month Period Ended(In thousands)
    
    June 30, 2010
    
    
    June 30, 2010Balance at beginning of period
    
    $
    9,337
    
    
    $
    9,440Net charge-offs / termination
    
    
    (1,002
    )
    
    
    (1,472
    )Provision for recourse liability
    
    
    890
    
    
    
    1,257Balance at end of period
    
    $
    9,225
    
    
    $
    9,225
 25. Financial Instruments with Off-Balance Sheet Risk
  June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Commitments to extend credit
    
    $
    80,647
    
    
    $
    85,124Commitments to sell loans
    
    
    128,155
    
    
    
    76,176Commercial, financial and performance standby letters of credit.
    
    
    25
    
    
    
    25Total
    
    $
    208,827
    
    
    $
    161,325
   Derivatives and Hedging
   36




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##### Table of Contents



26. Commitments and Contingencies
  (In thousands)2011
    
    $
    5,5272012
    
    
    4,7632013
    
    
    5,3282014
    
    
    3,9452015
    
    
    3,6932016 and thereafter
    
    
    18,630$
    41,886
    Legal Matters
   Banking Regulatory Matters
  37




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27. Capital Stock
   38




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##### Table of Contents



28. Stock Option and Other Incentive Plans
 Stock Compensation
    39




---



##### Table of Contents



Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Stock-based compensation recognized, net
    
    $
    56
    
    
    $
    52
    
    
    $
    73
    
    
    $
    103Unrecognized at end of period:Stock options
    
    $
    214
    
    
    $
    386
    
    
    $
    214
    
    
    $
    386Restricted stock
    
    $
    8,182
    
    
    $
    
    
    
    $
    8,182
    
    
    $
    
  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
    %
   40




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##### Table of Contents



29. (Losses) Earnings Per Share Data
  Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net (Loss) Income:Net (loss) income
    
    $
    (233,311
    )
    
    $
    8,216
    
    
    $
    (236,814
    )
    
    $
    (38,074
    )Non-convertible preferred stock dividend(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,228
    )Convertible preferred stock dividend(1)(2)
    
    
    (2,415
    )
    
    
    (3,061
    )
    
    
    (4,279
    )
    
    
    (7,158
    )Effect of conversion of preferred stock(3)
    
    
    
    
    
    
    9,369
    
    
    
    26,585
    
    
    
    9,369Net (loss) income attributable to common shareholders
    
    $
    (235,726
    )
    
    $
    14,524
    
    
    $
    (214,508
    )
    
    $
    (40,091
    )Weighted-Average Number of Common Shares
Outstanding(4)
    
    
    67,285,568
    
    
    
    54,679,097
    
    
    
    64,920,036
    
    
    
    54,247,004Net (Loss) Income per Common Share(5)
    
    $
    (3.50
    )
    
    $
    0.27
    
    
    $
    (3.30
    )
    
    $
    (0.74
    )
 
 (1)
    
    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.(2)
    
    For the quarter ended June 30, 2010, there were 813,526
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 1,081,014 for the
corresponding 2009. 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.(3)
    
    The carrying value of the noncumulative preferred stock
exceeded the fair value of consideration transferred and, accordingly, the
difference between the liquidation preference of the preferred stock retired
and the market value of the common stock issued and the cash tendered (in 2009)
amounted to $31.6 million and $23.9 million for the six month periods ended
June 30, 2010 and 2009, respectively, and was credited to retained earnings. In
the case of the convertible preferred stock, the fair value of stock exchanged
for the preferred stock converted exceeded the fair value of the stock issuable
pursuant to the original conversion terms and, accordingly, this excess or
inducement amounted to $5.1 million and $14.5 million for the six month periods
ended June 30, 2010 and 2009, respectively, was charged to retained earnings.
As a result, both transactions impacted the net (loss) income attributable to
common shareholders.(4)
    
    Potential common shares consist of common stock issuable under
the assumed exercise of stock options and unvested shares of restricted stock
using the treasury stock method. This method assumes that the potential common
shares are issued and the proceeds from exercise in addition to the amount of
compensation cost attributed to future services are used to purchase common
stock at the exercise date. The difference between the number of potential
shares issued and the shares purchased is added as incremental shares to the
actual number of shares outstanding to compute diluted earnings per share.
Stock options and unvested shares of restricted stock that result in lower
potential shares issued than shares purchased under the treasury stock method
are not included in the computation of dilutive (loss) earnings per share since
their inclusion would have an antidilutive effect in earnings per share. As of
June 30, 2010, there were 60,000 stock options granted   and 3,000,000 restricted
stock units. Also, mandatorily convertible preferred stock amounting
to 60,000,386
were excluded from the computation of dilutive earnings per share since their
inclusion would also have an antidilutive effect in earnings (losses) per
share.(5)
    
    For the quarters and six month period ended June 30, 2010, net
income (loss) per common share represents both the basic and diluted income
(loss) per common share, respectively, for each of the periods presented. 30. Fair Value of Assets and Liabilities
  41




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Fair Value Measurements and Disclosures
 Financial Instruments
 Financial Instruments
 ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
 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
   42




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##### 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:
  43




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##### Table of Contents



Servicing assets and interest-only strips: Transfer and Servicing 
Servicing Assets and Liabilities
 Real estate held for sale:
 Other assets:
 Premises and equipment:
 Goodwill:
 CB, LLC:
 Derivatives:
 44




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##### 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
 45




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##### Table of Contents



Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
  June 30, 2010(In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    45,544
    
    
    $
    
    
    
    $
    
    
    
    $
    45,544
    (1)Securities available for sale
    
    
    2,379,712
    
    
    
    
    
    
    
    2,360,859
    
    
    
    18,853Derivatives(2)
    
    
    3,017
    
    
    
    
    
    
    
    3,017
    
    
    
    Servicing assets
    
    
    113,005
    
    
    
    
    
    
    
    
    
    
    
    113,005$
    2,541,278
    
    
    $
    
    
    
    $
    2,363,876
    
    
    $
    177,402Liabilities:Derivatives(3)
    
    $
    7,694
    
    
    $
    
    
    
    $
    7,694
    
    
    $
    
 
 (1)
    
    Includes $44.7 million of interest-only strips, of which variable IOs
represent substantially all of the balance.(2)
    
    Included as part of securities held for trading in the Consolidated Statement of
Financial Condition.(3)
    
    Included as part of accrued expenses and other liabilities in the Consolidated
Statement of Financial Condition. December 31, 2009(In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    46,616
    
    
    $
    
    
    
    $
    
    
    
    $
    46,616


    (1)Securities available for sale
    
    
    2,789,177
    
    
    
    
    
    
    
    2,507,396
    
    
    
    281,781Derivatives(2)
    
    
    1,110
    
    
    
    
    
    
    
    1,110
    
    
    
    Servicing assets
    
    
    118,493
    
    
    
    
    
    
    
    
    
    
    
    118,493$
    2,955,396
    
    
    $
    
    
    
    $
    2,508,506
    
    
    $
    446,890Liabilities:Derivatives(3)
    
    $
    12,596
    
    
    $
    
    
    
    $
    12,596
    
    
    $
    
 
 (1)
    
    Includes $45.7 million of interest-only strips, of which variable IOs
represent substantially all of the balance.(2)
    
    Included as part of securities held for trading in the Consolidated
Statement of Financial Condition.(3)
    
    Included as part of accrued expenses and other liabilities in the
Consolidated Statement of Financial Condition. 46




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Quarter Ended
    
    
    Six Month Period EndedJune 30, 2010
    
    
    June 30, 2010Securities
    
    
    Securities
    
    
    
    
    
    
    Securities
    
    
    SecuritiesHeld for
    
    
    Available
    
    
    Servicing
    
    
    Held for
    
    
    Available
    
    
    Servicing(In thousands)
    
    Trading(1)
    
    
    for Sale(2)
    
    
    Assets(3)
    
    
    Trading(1)
    
    
    for Sale(2)
    
    
    Assets(3)Balance at beginning of period
    
    $
    44,380
    
    
    $
    272,921
    
    
    $
    118,236
    
    
    $
    46,616
    
    
    $
    281,781
    
    
    $
    118,493Change in fair value
    
    
    3,893
    
    
    
    
    
    
    
    (5,447
    )
    
    
    4,455
    
    
    
    
    
    
    
    (7,315
    )Sales
    
    
    
    
    
    
    (248,760
    )
    
    
    
    
    
    
    
    
    
    
    (234,090
    )
    
    
    Other-than-temporary impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,259
    )
    
    
    Principal repayment/amortization
of premium and discount
    
    
    (2,729
    )
    
    
    (5,308
    )
    
    
    
    
    
    
    (5,527
    )
    
    
    (15,579
    )
    
    
    Capitalization/sales, net
    
    
    
    
    
    
    
    
    
    
    1,245
    
    
    
    
    
    
    
    
    
    
    
    2,992Reversal of loans purchased (4)
    
    
    
    
    
    
    
    
    
    
    (1,029
    )
    
    
    
    
    
    
    
    
    
    
    (1,165
    )Balance at end of period
    
    $
    45,544
    
    
    $
    18,853
    
    
    $
    113,005
    
    
    $
    45,544
    
    
    $
    18,853
    
    
    $
    113,005
 
 (1)
    
    Securities held for trading classified as Level 3 include IOs and
residual CMO certificates. Change in fair value is recognized as part of non-interest income
in the Companys Consolidated Statement of Operations as net (loss) gain on trading
activities, which includes $3.8 million and $4.5 million of changes in fair value of IOs and
$35,000 and $(62,000) of changes in fair value of residual CMO certificates for the
quarter and six month period ended June 30, 2010, respectively. Amortization of IO is
recognized as part of interest income as Interest-only strips and includes $2.7 million and
$5.5 million for the quarter and six month period ended June 30, 2010, respectively.(2)
    
    Level 3 securities available for sale include non-agency and agency CMOs. OTTI is
recognized as part of non-interest income in the Companys Consolidated Statement of
Operations. Amortization of premium and discount is recognized as part of interest income as
mortgage-backed securities, which includes $0.5 million and $1.1 million for the quarter and
six month period ended June 30, 2010, respectively.(3)
    
    Change in fair value of servicing assets, net of reversal of loans purchased, is
recognized as part of non-interest income in the Companys Consolidated Statement of
Operations as servicing income (loss) for the periods presented. Capitalization of servicing
assets is recognized as part of non-interest income as net gain on mortgage loan sales and
fees, which includes $1.4 million and $3.2 million for the quarter and six month period ended
June 30, 2010, respectively.(4)
    
    Amount represents the adjustment of MSR fair value related to the repurchase of
$74.5 million and $84.6 million in principal balance of mortgage loans serviced for others for
the quarter and six month period ended June 30, 2010, respectively. 47




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##### Table of Contents



Quarter Ended
    
    
    Six Month Period EndedJune 30, 2009
    
    
    June 30, 2009Securities
    
    
    Securities
    
    
    
    
    
    
    Securities
    
    
    SecuritiesHeld for
    
    
    Available
    
    
    Servicing
    
    
    Held for
    
    
    Available
    
    
    Servicing(In thousands)
    
    Trading(1)
    
    
    for Sale(2)
    
    
    Assets(3)
    
    
    Trading(1)
    
    
    for Sale(2)
    
    
    Assets(3)Balance at beginning of period
    
    $
    50,542
    
    
    $
    345,976
    
    
    $
    104,426
    
    
    $
    52,910
    
    
    $
    390,634
    
    
    $
    114,396Change in fair value
    
    
    474
    
    
    
    (1,370
    )
    
    
    6,827
    
    
    
    (21
    )
    
    
    (37,167
    )
    
    
    (4,268
    )Purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other-than-temporary impairment
    
    
    
    
    
    
    (6,795
    )
    
    
    
    
    
    
    
    
    
    
    (6,795
    )
    
    
    Principal repayment/amortization
of premium and discount
    
    
    (2,447
    )
    
    
    (13,547
    )
    
    
    
    
    
    
    (4,320
    )
    
    
    (22,408
    )Capitalization/sales, net
    
    
    
    
    
    
    
    
    
    
    1,888
    
    
    
    
    
    
    
    
    
    
    
    3,271Reversal of loans purchased (4)
    
    
    
    
    
    
    
    
    
    
    (272
    )
    
    
    
    
    
    
    
    
    
    
    (530
    )Balance at end of period
    
    $
    48,569
    
    
    $
    324,264
    
    
    $
    112,869
    
    
    $
    48,569
    
    
    $
    324,264
    
    
    $
    112,869
 
 (1)
    
    Securities held for trading classified as Level 3 include IOs and
residual CMO certificates. Change in fair value is recognized as part of non-interest income
in the Companys Consolidated Statement of Operations as net (loss) gain on trading
activities, which includes $0.6 million and approximately $7,000 of changes in fair value of
IOs and $95,000 and approximately $(28,000) of changes in fair value of residual CMO
certificates for the quarter and six month period ended June 30, 2009, respectively.
Amortization of IO is recognized as part of interest income as Interest-only strips and
includes $2.4 million and $4.3 million for the quarter and six month period ended June 30,
2009, respectively.(2)
    
    Level 3 securities available for sale include non-agency and agency CMOs. OTTI is
recognized as part of non-interest income in the Companys Consolidated Statement of
Operations. Amortization of premium and discount is recognized as part of interest income as
mortgage-backed securities, which includes $1.7 million and $1.1 million for the quarter and
six month period ended June 30, 2009, respectively.(3)
    
    Change in fair value of servicing assets, net of the reversal of loans purchased,
is recognized as part of non-interest income in the Companys Consolidated Statement of
Operations as servicing income (loss) for the periods presented. Capitalization of servicing
assets is recognized as part of non-interest income as net gain on mortgage loan sales and
fees, which includes $2.0 million and $3.4 million for the quarter and six month period ended
June 30, 2009, respectively.(4)
    
    Amount represents the adjustment of MSR fair value related to the repurchase of
$23.3 million and $43.2 million in principal balance of mortgage loans serviced for others for
the quarter and six month period ended June 30, 2009, respectively. 48




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##### Table of Contents



Assets Recorded at Fair Value on a Nonrecurring Basis
  (In thousands)
    
    Carrying Value
    
    
    Level 3June 30, 2010Loans receivable (1)
    
    $
    177,815
    
    
    $
    177,815Real estate held for sale(2)
    
    
    83,058
    
    
    
    83,058Total
    
    $
    260,873
    
    
    $
    260,873December 31, 2009Loans receivable (1)
    
    $
    196,726
    
    
    $
    196,726Real estate held for sale(2)
    
    
    66,042
    
    
    
    66,042Total
    
    $
    262,768
    
    
    $
    262,768
 
 (1)
    
    Represents the carrying value of collateral dependent 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 less
cost to sell adjusted by managements severity assumptions.  Gain (loss) for the
    
    
    Loss for the sixLocation of Loss Recognized in
    
    
    quarters ended June 30,
    
    
    month periods ended June 30,(In thousands)
    
    the Statement of Operations
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Loans receivable(1)
    
    Provision for loan and lease losses
    
    $
    (4,284
    )
    
    $
    351
    
    
    $
    (20,335
    )
    
    $
    (355
    )Real estate held for sale(2)
    
    Other expenses
    
    $
    (27,980
    )
    
    $
    (1,351
    )
    
    $
    (32,429
    )
    
    $
    (2,757
    )
 
 (1)
    
    Represents the carrying value of collateral dependent 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. Disclosures about Fair Value of Financial Instruments
   49




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##### Table of Contents



June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and due from banks
    
    $
    318,949
    
    
    $
    318,949
    
    
    $
    725,277
    
    
    $
    725,277Other interest-earning assets
    
    
    42,791
    
    
    
    42,791
    
    
    
    95,000
    
    
    
    95,000Securities held for trading(1)
    
    
    48,561
    
    
    
    48,561
    
    
    
    47,726
    
    
    
    47,726Securities available for sale
    
    
    2,379,712
    
    
    
    2,379,712
    
    
    
    2,789,177
    
    
    
    2,789,177Loans held for sale(2)
    
    
    382,387
    
    
    
    389,979
    
    
    
    320,930
    
    
    
    326,108Loans receivable
    
    
    5,386,341
    
    
    
    5,208,209
    
    
    
    5,375,034
    
    
    
    5,015,141Servicing assets
    
    
    113,005
    
    
    
    113,005
    
    
    
    118,493
    
    
    
    118,493Financial liabilities:Deposits
    
    $
    4,940,569
    
    
    $
    5,007,853
    
    
    $
    4,643,021
    
    
    $
    4,684,443Securities sold under agreements to repurchase
    
    
    1,460,800
    
    
    
    1,533,401
    
    
    
    2,145,262
    
    
    
    2,213,755Advances from FHLB
    
    
    1,217,920
    
    
    
    1,258,776
    
    
    
    1,606,920
    
    
    
    1,655,258Other short-term borrowings
    
    
    
    
    
    
    
    
    
    
    110,000
    
    
    
    110,024Loans payable
    
    
    318,652
    
    
    
    318,652
    
    
    
    337,036
    
    
    
    337,036Notes payable
    
    
    267,648
    
    
    
    260,256
    
    
    
    270,838
    
    
    
    262,585Derivatives(3)
    
    
    7,694
    
    
    
    7,694
    
    
    
    12,596
    
    
    
    12,596
 
 (1)
    
    Includes derivatives of $3.0 million and $1.1 million for June 30, 2010 and December 31, 2009, respectively.(2)
    
    Includes $122.7 million and $128.6 million for June 30, 2010 and December 31, 2009, respectively, related to GNMA defaulted loans for which the Company has an
unconditional buy-back option.(3)
    
    Includes $0.2 million and $1.9 million of derivatives held for trading purposes and $7.5 million and $10.7 million of derivatives held for purposes other than
trading, for June 30, 2010 and December 31, 2009, respectively, as part of accrued expenses and other liabilities in the Consolidated Statement of Financial Condition. 31. Derivatives
    June 30, 2010
    
    
    December 31, 2009Fair Value
    
    
    
    
    
    
    Fair Value(In thousands)
    
    Notional Amount
    
    
    Asset
    
    
    Liability
    
    
    Notional Amount
    
    
    Asset
    
    
    LiabilityCash Flow Hedges:Interest rate swaps
    
    $
    305,000
    
    
    $
    
    
    
    $
    (7,511
    )
    
    $
    305,000
    
    
    $
    
    
    
    $
    (10,691
    )Other Derivatives (non hedges):Interest rate caps
    
    
    270,000
    
    
    
    53
    
    
    
    
    
    
    
    270,000
    
    
    
    777
    
    
    
    Forward contracts
    
    
    135,000
    
    
    
    2,964
    
    
    
    (183
    )
    
    
    210,000
    
    
    
    333
    
    
    
    (1,905
    )Total
    
    $
    710,000
    
    
    $
    3,017
    
    
    $
    (7,694
    )
    
    $
    785,000
    
    
    $
    1,110
    
    
    $
    (12,596
    )
 50




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##### Table of Contents



Cash Flow Hedges
    Location ofLoss Reclassified
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) Reclassifiedfrom Accumulated
    
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    
    from AccumulatedOther Comprehensive
    
    
    Notional
    
    
    Fair
    
    
    Comprehensive
    
    
    Other Comprehensive(In thousands)
    
    Loss to Income
    
    
    Amount
    
    
    Value
    
    
    Income
    
    
    Loss to IncomeCash flow HedgesJune 30, 2010Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    305,000
    
    
    $
    (7,511
    )
    
    $
    1,594
    
    
    $
    (2,522
    )June 30, 2009Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    345,000
    
    
    $
    (12,951
    )
    
    $
    2,388
    
    
    $
    (2,310
    )
  Location ofLoss Reclassified
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) Reclassifiedfrom Accumulated
    
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    
    from AccumulatedOther Comprehensive
    
    
    Notional
    
    
    Fair
    
    
    Comprehensive
    
    
    Other Comprehensive(In thousands)
    
    Loss to Income
    
    
    Amount
    
    
    Value
    
    
    Income
    
    
    Loss to IncomeCash flow HedgesJune 30, 2010Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    305,000
    
    
    $
    (7,511
    )
    
    $
    3,152
    
    
    $
    (3,673
    )June 30, 2009Interest rate swaps
    
    Interest expense Advances from FHLB
    
    $
    345,000
    
    
    $
    (12,951
    )
    
    $
    3,593
    
    
    $
    (3,704
    )
 Trading and Non-Hedging Activities
  51




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##### Table of Contents



Location ofGain (Loss)Recognized in theConsolidated
    
    
    June 30, 2010Statement of
    
    
    Notional
    
    
    Fair
    
    
    Net (Loss) Gain for the
    
    
    Net (Loss) Gain for the(In thousands)
    
    Operations
    
    
    Amount
    
    
    Value
    
    
    Quarter
    
    
    Six Month PeriodDerivatives not designated as cash flow hedges:Interest rate caps
    
    Net gain (loss) onsecurities held for trading
    
    $
    270,000
    
    
    $
    53
    
    
    $
    (162
    )
    
    
    (723
    )Forward contracts
    
    Net gain (loss) onsecurities held for trading
    
    
    135,000
    
    
    
    2,781
    
    
    
    3,407
    
    
    
    4,298$
    405,000
    
    
    $
    2,834
    
    
    $
    3,245
    
    
    $
    3,575
 Location ofGain (Loss)Recognized in theConsolidated
    
    
    June 30, 2009Statement of
    
    
    Notional
    
    
    Fair
    
    
    Net Gain (Loss) for the
    
    
    Net Gain (Loss) for the(In thousands)
    
    Operations
    
    
    Amount
    
    
    Value
    
    
    Quarter
    
    
    Six Month PeriodDerivatives not designated as cash flow hedges:Interest rate caps
    
    Net gain (loss) onsecurities held for trading
    
    $
    270,000
    
    
    $
    484
    
    
    $
    311
    
    
    $
    198Forward contracts
    
    Net gain (loss) onsecurities held for trading
    
    
    200,000
    
    
    
    (264
    )
    
    
    (236
    )
    
    
    (1,267
    )$
    470,000
    
    
    $
    220
    
    
    $
    75
    
    
    $
    (1,069
    )
     52




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##### Table of Contents



32. Variable Interest Entities
  
    
    The equity investment at risk is not sufficient for the entity to finance its
activities without additional subordinated financial support.
    
    As a group, the holders of equity investment at risk do not possess: i) the power,
through voting rights or similar rights, to direct the activities that most
significantly impact the entitys economic performance; or ii) the obligation to absorb
expected losses or the right to receive the expected residual returns of the entity; or
iii) symmetry between voting rights and economic interests and where substantially all
of the entitys activities either involve or are conducted on behalf of an investor
with disproportionately fewer voting rights (e.g., structures with nonsubstantive
voting rights).
 of ASC 810-10-05,
Consolidation-Variable Interest Entities
  Servicing Assets
  Investment Securities
  53




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##### Table of Contents



Loans
   June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Carrying AmountServicing Assets
    
    $
    14,949
    
    
    $
    15,878Available for Sale Securities:Non-Agency CMO
    
    
    11,687
    
    
    
    11,568Loan Receivable:Construction Loans
    
    
    226,846
    
    
    
    452,386Maximum Exposure to loss(1)Servicing Assets
    
    $
    14,949
    
    
    $
    15,878Available for Sale Securities:Non-Agency CMO(2)
    
    
    11,687
    
    
    
    11,568Loan Receivable:Construction Loans
    
    
    226,846
    
    
    
    452,386
 
 (1)
    
    Maximum exposure to loss is a required disclosure under GAAP and
represents estimated loss that would be incurred under severe,
hypothetical circumstances, for which the possibility of occurrence is
remote, such as where the value of our interests and any associated
collateral declines to zero, without any consideration of recovery or
offset from any economic hedges. Accordingly, this required disclosure is
not an indication of expected loss.(2)
    
    Refers to book value of residual interest from two private placements
(Refer to Investment Securities disclosure above). These transactions are
structured without recourse, so as servicers our exposure is limited to
standard representations and warranties as seller of the loans and
responsibilities as servicer of the SPEs assets. 54




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##### Table of Contents



33. Segment Information
      (In thousands)
    
    Mortgage
    
    
    
    
    
    
    Insurance
    
    
    IntersegmentQuarter Ended June 30, 2010
    
    Banking
    
    
    Banking
    
    
    Agency
    
    
    Eliminations(1)
    
    
    TotalsNet interest income
    
    $
    2,068
    
    
    $
    36,507
    
    
    $
    
    
    
    $
    1,490
    
    
    $
    40,065Provision for loan and lease losses
    
    
    4,170
    
    
    
    40,447
    
    
    
    
    
    
    
    
    
    
    
    44,617Non-interest income (loss)
    
    
    9,402
    
    
    
    (128,172
    )
    
    
    2,482
    
    
    
    (3,902
    )
    
    
    (120,190
    )(Loss) income before income taxes
    
    
    (20,660
    )
    
    
    (209,488
    )
    
    
    1,723
    
    
    
    (399
    )
    
    
    (228,824
    )Net (loss) income
    
    
    (20,963
    )
    
    
    (212,966
    )
    
    
    1,017
    
    
    
    (399
    )
    
    
    (233,311
    )Identifiable assets
    
    
    1,753,139
    
    
    
    8,679,522
    
    
    
    19,837
    
    
    
    (1,055,606
    )
    
    
    9,396,892
 55




---



##### Table of Contents



(In thousands)
    
    Mortgage
    
    
    
    
    
    
    Institutional
    
    
    Insurance
    
    
    IntersegmentQuarter Ended June 30, 2009
    
    Banking
    
    
    Banking
    
    
    Securities
    
    
    Agency
    
    
    Eliminations(1)
    
    
    TotalsNet interest income
    
    $
    3,942
    
    
    $
    37,176
    
    
    $
    
    
    
    $
    
    
    
    $
    972
    
    
    $
    42,090Provision for loan and lease losses
    
    
    5,380
    
    
    
    4,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,133Non-interest income
    
    
    19,150
    
    
    
    14,929
    
    
    
    
    
    
    
    2,463
    
    
    
    (17,411
    )
    
    
    19,131Income (loss) before income taxes
    
    
    3,899
    
    
    
    4,217
    
    
    
    
    
    
    
    2,059
    
    
    
    (14,613
    )
    
    
    (4,438
    )Net income
    
    
    15,531
    
    
    
    6,327
    
    
    
    
    
    
    
    1,216
    
    
    
    (14,858
    )
    
    
    8,216Identifiable assets
    
    
    1,667,966
    
    
    
    8,866,956
    
    
    
    1,659
    
    
    
    17,047
    
    
    
    (799,190
    )
    
    
    9,754,438
 
 (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)
    
    Mortgage
    
    
    
    
    
    
    Insurance
    
    
    IntersegmentSix Month Period Ended June 30, 2010
    
    Banking
    
    
    Banking
    
    
    Agency
    
    
    Eliminations(1)
    
    
    TotalsNet interest income
    
    $
    5,454
    
    
    $
    75,110
    
    
    $
    
    
    
    $
    3,262
    
    
    $
    83,826Provision for loan and lease losses
    
    
    6,287
    
    
    
    52,251
    
    
    
    
    
    
    
    
    
    
    
    58,538Non-interest income (loss)
    
    
    15,563
    
    
    
    (96,548
    )
    
    
    4,862
    
    
    
    (7,483
    )
    
    
    (83,606
    )(Loss) income before income taxes
    
    
    (28,016
    )
    
    
    (205,142
    )
    
    
    3,610
    
    
    
    (250
    )
    
    
    (229,798
    )Net (loss) income
    
    
    (28,373
    )
    
    
    (210,323
    )
    
    
    2,132
    
    
    
    (250
    )
    
    
    (236,814
    )Identifiable assets
    
    
    1,753,139
    
    
    
    8,679,522
    
    
    
    19,837
    
    
    
    (1,055,606
    )
    
    
    9,396,892
 (In thousands)
    
    Mortgage
    
    
    
    
    
    
    Institutional
    
    
    Insurance
    
    
    IntersegmentSix Month Period Ended June 30, 2009
    
    Banking
    
    
    Banking
    
    
    Securities
    
    
    Agency
    
    
    Eliminations(1)
    
    
    TotalsNet interest income
    
    $
    8,191
    
    
    $
    68,063
    
    
    $
    
    
    
    $
    
    
    
    $
    1,906
    
    
    $
    78,160(Recovery) provision for loan and lease losses
    
    
    (2,396
    )
    
    
    36,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,758Non-interest income
    
    
    24,184
    
    
    
    12,887
    
    
    
    
    
    
    
    4,988
    
    
    
    (21,345
    )
    
    
    20,714Income (loss) before income taxes
    
    
    3,910
    
    
    
    (42,741
    )
    
    
    
    
    
    
    3,895
    
    
    
    (15,900
    )
    
    
    (50,836
    )Net income (loss)
    
    
    17,105
    
    
    
    (41,638
    )
    
    
    
    
    
    
    2,604
    
    
    
    (16,145
    )
    
    
    (38,074
    )Identifiable assets
    
    
    1,667,966
    
    
    
    8,866,956
    
    
    
    1,659
    
    
    
    17,047
    
    
    
    (799,190
    )
    
    
    9,754,438
 
 (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. 56




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(In thousands)Quarter Ended June 30, 2010
    
    Puerto Rico
    
    
    Mainland U.S.
    
    
    Eliminations
    
    
    TotalsNet interest income
    
    $
    36,217
    
    
    $
    3,669
    
    
    $
    179
    
    
    $
    40,065Provision for loan and lease losses
    
    
    44,084
    
    
    
    533
    
    
    
    
    
    
    
    44,617Non-interest (loss) income
    
    
    (121,330
    )
    
    
    1,343
    
    
    
    (203
    )
    
    
    (120,190
    )(Loss) income before income taxes
    
    
    (230,198
    )
    
    
    1,374
    
    
    
    
    
    
    
    (228,824
    )Net (loss) income
    
    
    (234,087
    )
    
    
    776
    
    
    
    
    
    
    
    (233,311
    )Identifiable assets
    
    
    9,288,371
    
    
    
    720,147
    
    
    
    (611,626
    )
    
    
    9,396,892
 Quarter Ended June 30, 2009
    
    Puerto Rico
    
    
    Mainland U.S.
    
    
    Eliminations
    
    
    TotalsNet interest income
    
    $
    38,892
    
    
    $
    3,080
    
    
    $
    118
    
    
    $
    42,090Provision for loan and lease losses
    
    
    9,977
    
    
    
    156
    
    
    
    
    
    
    
    10,133Non-interest income
    
    
    18,821
    
    
    
    483
    
    
    
    (173
    )
    
    
    19,131(Loss) income before income taxes
    
    
    (6,329
    )
    
    
    1,892
    
    
    
    (1
    )
    
    
    (4,438
    )Net income
    
    
    6,806
    
    
    
    1,656
    
    
    
    (246
    )
    
    
    8,216Identifiable assets
    
    
    9,635,427
    
    
    
    337,201
    
    
    
    (218,190
    )
    
    
    9,754,438
 (In thousands)Six Month Period Ended June 30, 2010
    
    Puerto Rico
    
    
    Mainland U.S.
    
    
    Eliminations
    
    
    TotalsNet interest income
    
    $
    76,631
    
    
    $
    6,876
    
    
    $
    319
    
    
    $
    83,826Provision for loan and lease losses
    
    
    58,023
    
    
    
    515
    
    
    
    
    
    
    
    58,538Non-interest (loss) income
    
    
    (85,181
    )
    
    
    1,947
    
    
    
    (372
    )
    
    
    (83,606
    )(Loss) income before income taxes
    
    
    (231,809
    )
    
    
    2,011
    
    
    
    
    
    
    
    (229,798
    )Net (loss) income
    
    
    (237,700
    )
    
    
    886
    
    
    
    
    
    
    
    (236,814
    )Identifiable assets
    
    
    9,288,371
    
    
    
    720,147
    
    
    
    (611,626
    )
    
    
    9,396,892
 Six Month Period Ended June 30, 2009
    
    Puerto Rico
    
    
    Mainland U.S.
    
    
    Eliminations
    
    
    TotalsNet interest income
    
    $
    72,157
    
    
    $
    5,798
    
    
    $
    205
    
    
    $
    78,160Provision for loan and lease losses
    
    
    33,556
    
    
    
    202
    
    
    
    
    
    
    
    33,758Non-interest income
    
    
    20,091
    
    
    
    883
    
    
    
    (260
    )
    
    
    20,714(Loss) income before income taxes
    
    
    (54,189
    )
    
    
    3,354
    
    
    
    (1
    )
    
    
    (50,836
    )Net (loss) income
    
    
    (40,282
    )
    
    
    2,454
    
    
    
    (246
    )
    
    
    (38,074
    )Identifiable assets
    
    
    9,635,427
    
    
    
    337,201
    
    
    
    (218,190
    )
    
    
    9,754,438
 34. Subsequent Events
 Construction loan sale.
  57




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Conversion
of mandatorily convertible preferred stock.
  Collateralized
loan obligation.
 58




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FORWARD LOOKING STATEMENTS
     
    
    the continued recessionary conditions of the Puerto Rico economy and the continued
weakness in the performance of the United States economy and 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 (OTTI) 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 different
sectors of the Puerto Rico economy;
    
    uncertainty about the effectiveness of the various actions undertaken to stimulate the
United States economy and stabilize the United States financial markets, and the impact of
such actions on our business, financial condition and results of operations;
    
    changes in interest rates, which may result from changes in the fiscal and monetary
policy of the federal government, and the potential impact of such changes in interest
rates on our net interest income and the value of our loans and investments;
    
    the commercial soundness of our various counterparties of financing and other
securities transactions, which could lead to possible losses when the collateral held by us
to secure the obligations of the
 59




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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 public companies and financial
services companies in the United States (including Puerto Rico) as a result of, among other
things, the adoption in July 2010 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act and the regulations to be adopted thereunder by various federal and state
securities and banking regulatory agencies;
    
    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;
    
    the strategies adopted by the FDIC and the three acquiring banks in connection with the
resolution of the residential, construction and commercial real estate loans acquired in
connection with the three Puerto Rico banks that failed in April 2010 may adversely affect
real estate values in Puerto Rico;
    
    to the extent we make any acquisitions, including FDIC-assisted acquisitions of assets
and liabilities of failed banks, risks and difficulties relating to combining the acquired
operations with our existing operations;
    
    potential adverse outcome in the legal or regulatory actions or proceedings described
in Part I, Item 3 Legal Proceedingsin the Companys 2009 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 the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as updated in
Part II, Item 1A Risk Factorsin this Quarterly Report on Form 10-Q and as updated from
time to time in the Companys future reports filed with the SEC.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   OVERVIEW OF RESULTS OF OPERATIONS
   
    
    In April 2010, Doral sold $378.0 million of non-agency collateralized mortgage
obligations (CMO) at a loss of $136.7 million. $129.7 million of the loss had
previously been reflected as a reduction of common equity in other comprehensive income
(loss), resulting in an incremental charge to common equity from the CMO sale of $7.0
million.
    
    In June 2010, Doral reclassified construction loans with unpaid principal balances
of $133.0 million from loans held for investment to loans held for sale, resulting in a
charge to income of $12.6 million. Doral entered into an agreement to sell the
construction loans and similar real estate owned property to a third party on July 29,
2010 in exchange for cash and a loan receivable from the purchaser. There was no gain
or loss incurred as a result of the July 2010 sale agreement as the loans were marked
to lower of cost or market when transferred to held for sale in June 2010.
    
    The Company reduced its estimate of proceeds to be received from the real estate
acquired through foreclosure by $17.0 million to facilitate future sales of other real
estate owned (OREO). This change in OREO estimated proceeds caused an $8.0 million
increase in the residential mortgage provision for loan and lease losses.
    
    Doral decreased the recorded amounts of its claim for losses against Lehman
Brothers, Inc. by $10.8 million to 25.0% of the total claim.
  
    
    Net loss attributable to common shareholders for the second quarter of 2010
totaled $235.7 million, and resulted in a basic loss per share of $3.50, compared to
net income attributable to common shareholders for the corresponding 2009 period of
$14.5 million, or basic earnings per share of $0.27. For further information please
refer to Note 29 of the accompanying financial statements.
    
    Net interest income for the second quarter of 2010 was $40.1 million,
compared to $42.1 million for the corresponding period in 2009. The decrease of $2.0
million in net interest income for 2010, compared to 2009, was due to a decrease in
interest income of $13.5 million, or 11.8%, partially offset by a decrease in interest
expense of $11.5 million, or 15.8%. The decrease in interest income was driven by lower
average interest-earning assets, primarily mortgage-backed securities and investment
securities due to the sale of non-agency CMOs during the second quarter of 2010 as well
as sales of mortgage-backed securities and investment
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securities late in 2009. In
addition, asset yields are being adversely affected by the higher level of
non-performing loans and yield concessions on loan restructurings. The decrease in
interest expense was driven by lower average borrowings as the year end 2009 excess
liquidity was used to pay down expiring borrowings and partly due to the reduction in
wholesale borrowing costs.
    
    The provision for loan and lease losses for the quarter ended June 30, 2010
totaled $44.6 million, an increase of $34.5 million over the $10.1 million provision
for the corresponding 2009 period. The provision included a charge of $12.6 million to
reduce certain construction loans to lower of cost or market when transferred to loans
held for sale and an $8.0 million charge due to increased severities on other real
estate owned (OREO) properties resulting from managements strategic decision to
accelerate OREO dispositions. In addition, the provision was impacted by charges
related to foreclosed loans as well as deterioration in the construction and commercial
real estate loan portfolios.
    
    Non-interest loss for the second quarter of 2010 was $120.2 million, a
decrease in total non-interest income of $139.3 million compared to non-interest
income of $19.1 million for the corresponding period in 2009. The decrease in
non-interest income for the second quarter of 2010, compared to the same period in
2009, was driven by a loss on the sale of non-agency securities of $136.7 million as
the Company sold $378.0 million of non-agency CMOs, and a loss on early repayment of
debt of $2.5 million, partially offset by a lower OTTI loss of $6.8 million.
    
    Non-interest expense for the first quarter of 2010 was $104.1 million,
compared to $55.5 million for the corresponding period in 2009. The $48.6 million
increase in non-interest expenses for the second quarter of 2010 was due to (i) an
increase of $22.2 million in OREO losses and other related expenses due to primarily to
an additional provision for OREO losses of $17.0 million to accelerate future OREO
sales, (ii) recognition of an additional reserve on the Lehman Brothers, Inc. (LBI)
claim receivable of $10.8 million, (iii) higher professional services of $8.0 million
due to expenses incurred in the Companys capital raise, preferred stock exchange,
participation in bids for FDIC assisted transactions, sale of non-performing assets and
the defense of the Companys former officers, (iv) payment of $3.3 million pursuant to
the Companys Retention Program, and (v) higher advertising expenses of $2.6 million as
a result of campaigns to increase the Companys deposit and mortgage loan market share
after the bank consolidations on the Island.
    
    An income tax expense of $4.5 million for the second quarter of 2010,
compared to an income tax benefit of $12.7 million for the corresponding period in
2009. The current tax expense resulted from taxes on U.S. source income and the
amortization of existing deferred tax assets whereas the 2009 tax benefit was related
to a release of unrecognized tax benefits due to the expiration of the statute of
limitations on certain tax positions net of the recognition of an accrual for
unrecognized tax benefits.
    
    The Company reported cumulative other comprehensive income of $28.5 million
as of June 30, 2010, compared to other comprehensive loss of $140.2 million for the
corresponding 2009 period. The Companys other comprehensive income as of June 30, 2010
resulted from the sale of the Companys non-agency CMOs that realized a loss of
approximately $129.7 million at the time of sale.
    
    Doral Financials loan production for the second quarter of 2010 was $380.2
million, compared to $291.9 million for the comparable 2009 period, an increase of
approximately 30.2%. The increase in loan production for the second quarter of 2010 was
due to an increase in the U.S. commercial loan portfolio as a result of loan production
generated by the Companys U.S. based middle market syndicated lending unit which is
engaged in purchasing participation interests in senior credit facilities in the
syndicated loan market.
    
    Total assets as of June 30, 2010 totaled $9.4 billion compared to $10.2
billion as of December 31, 2009, a decrease of $835.1 million or 8.2%. The decrease in
assets was due to a decrease of $435.4 million in the Companys investment securities
portfolio that resulted from a combination of a sale of $378.0 million of non-agency
CMOs and purchases primarily of shorter duration mortgage-backed securities as part of interest rate risk management strategies. There was also a
decrease of
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$458.5 million in cash and interest-earning assets, partially offset by an
increase in net loans of $72.8 million.
    
    Total deposits of $4.9 billion increased $297.5 million, or 6.4%, over
deposits of $4.6 billion as of December 31, 2009. The year-to-date deposit increase
resulted from a $199.3 million, or 10.0%, increase in retail deposits and a $98.2
million or 3.7% increase in brokered deposits. For the quarter, retail deposits
increased $300.9 million, or 15.9%, and brokered deposits increased $53.5 million, or
2.0%.
    
    Non-performing assets (NPA) as of June 30, 2010 were $1.1 billion, an
increase of $107.5 million compared to December 31, 2009. Non-performing loans (NPL)
(which are included in NPAs) as of June 30, 2010 were
$831.7 million, decrease of
$6.3 million compared to December 31, 2009.  FHA
guaranteed loans, which are guaranteed by an agency of the United States government and
present little credit risk to Doral, were $112.5 million, an increase of $102.3 million
from December 31, 2009.
 63




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Table A 

Selected Financial Data
 Quarters Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Selected Income Statement Data:Interest income
    
    $
    101,077
    
    
    $
    114,578
    
    
    $
    210,305
    
    
    $
    231,072Interest expense
    
    
    61,012
    
    
    
    72,488
    
    
    
    126,479
    
    
    
    152,912Net interest income
    
    
    40,065
    
    
    
    42,090
    
    
    
    83,826
    
    
    
    78,160Provision for loan and lease losses
    
    
    44,617
    
    
    
    10,133
    
    
    
    58,538
    
    
    
    33,758Net interest (loss) income after provision for loan and lease losses
    
    
    (4,552
    )
    
    
    31,957
    
    
    
    25,288
    
    
    
    44,402Non-interest (loss) income
    
    
    (120,190
    )
    
    
    19,131
    
    
    
    (83,606
    )
    
    
    20,714Non-interest expenses
    
    
    104,082
    
    
    
    55,526
    
    
    
    171,480
    
    
    
    115,952(Loss) income before income taxes
    
    
    (228,824
    )
    
    
    (4,438
    )
    
    
    (229,798
    )
    
    
    (50,836
    )Income tax expense (benefit)(1)
    
    
    4,487
    
    
    
    (12,654
    )
    
    
    7,016
    
    
    
    (12,762
    )Net (loss) income
    
    $
    (233,311
    )
    
    $
    8,216
    
    
    $
    (236,814
    )
    
    $
    (38,074
    )Net (loss) income attributable to common shareholders
    
    $
    (235,726
    )
    
    $
    14,524
    
    
    $
    (214,508
    )
    
    $
    (40,091
    )Net (loss) income per common share(2)
    
    $
    (3.50
    )
    
    $
    0.27
    
    
    $
    (3.30
    )
    
    $
    (0.74
    )Accrued dividends, preferred stock
    
    $
    2,415
    
    
    $
    3,061
    
    
    $
    4,279
    
    
    $
    11,386Preferred stock exchange premium, net
    
    $
    
    
    
    $
    (9,369
    )
    
    $
    (26,585
    )
    
    $
    (9,369
    )Book value per common share
    
    $
    6.27
    
    
    $
    6.34
    
    
    $
    6.27
    
    
    $
    6.34Preferred shares outstanding at end of period
    
    
    6,096,393
    
    
    
    7,709,704
    
    
    
    6,096,393
    
    
    
    7,709,704Weighted average common shares outstanding
    
    
    67,285,568
    
    
    
    54,679,097
    
    
    
    64,920,036
    
    
    
    54,247,004Common shares outstanding at end of period
    
    
    67,293,370
    
    
    
    57,764,002
    
    
    
    67,293,370
    
    
    
    57,764,002Selected Balance Sheet Data at Period End:Total investment securities
    
    $
    2,527,802
    
    
    $
    3,229,443
    
    
    $
    2,527,802
    
    
    $
    3,229,443Total loans, net(3)
    
    
    5,768,728
    
    
    
    5,548,370
    
    
    
    5,768,728
    
    
    
    5,548,370Allowance for loan and lease losses
    
    
    134,913
    
    
    
    146,769
    
    
    
    134,913
    
    
    
    146,769Servicing assets, net
    
    
    113,005
    
    
    
    112,869
    
    
    
    113,005
    
    
    
    112,869Total assets
    
    
    9,396,892
    
    
    
    9,754,438
    
    
    
    9,396,892
    
    
    
    9,754,438Deposits
    
    
    4,940,569
    
    
    
    4,064,257
    
    
    
    4,940,569
    
    
    
    4,064,257Total borrowings
    
    
    3,265,020
    
    
    
    4,540,328
    
    
    
    3,265,020
    
    
    
    4,540,328Total liabilities
    
    
    8,451,920
    
    
    
    8,920,535
    
    
    
    8,451,920
    
    
    
    8,920,535Preferred equity
    
    
    523,082
    
    
    
    467,641
    
    
    
    523,082
    
    
    
    467,641Common equity
    
    
    421,890
    
    
    
    366,262
    
    
    
    421.890
    
    
    
    366,262Stockholders equity
    
    
    944,972
    
    
    
    833,903
    
    
    
    944,972
    
    
    
    833,903Selected Average Balance Sheet Data for Period End(4):Total investment securities
    
    $
    2,284,672
    
    
    $
    3,382,582
    
    
    $
    2,603,284
    
    
    $
    3,540,250Total loans(3)
    
    
    5,876,723
    
    
    
    5,667,466
    
    
    
    5,858,009
    
    
    
    5,631,025Total interest-earning assets
    
    
    8,747,284
    
    
    
    9,495,336
    
    
    
    9,123,226
    
    
    
    9,524,608Total assets
    
    
    9,427,981
    
    
    
    10,103,085
    
    
    
    9,808,502
    
    
    
    10,083,725Deposits
    
    
    4,644,841
    
    
    
    4,093,605
    
    
    
    4,648,579
    
    
    
    4,124,041Total borrowings
    
    
    3,449,652
    
    
    
    4,658,017
    
    
    
    3,876,960
    
    
    
    4,665,261Total interest-bearing liabilities
    
    
    7,863,038
    
    
    
    8,500,380
    
    
    
    8,287,745
    
    
    
    8,542,163Preferred equity
    
    
    486,191
    
    
    
    550,039
    
    
    
    448,205
    
    
    
    561,581Common equity
    
    
    468,198
    
    
    
    282,552
    
    
    
    468,161
    
    
    
    301,409Total stockholders equity
    
    
    954,389
    
    
    
    832,591
    
    
    
    916,366
    
    
    
    862,990Operating Data:Loan production
    
    $
    380,170
    
    
    $
    291,940
    
    
    $
    669,225
    
    
    $
    534,278Loan servicing portfolio(5)
    
    
    8,335,364
    
    
    
    9,065,032
    
    
    
    8,335,364
    
    
    
    9,065,032Selected Financial RatiosPerformance:Net interest margin
    
    
    1.84
    %
    
    
    1.78
    %
    
    
    1.85
    %
    
    
    1.65
    %Return on average assets(4)
    
    
    (9.93
    )%
    
    
    0.33
    %
    
    
    (4.87
    )%
    
    
    (0.76
    )%Return on average common equity(4)(6)
    
    
    (201.94
    )%
    
    
    7.32
    %
    
    
    (103.85
    )%
    
    
    (33.09
    )%
 64




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Table A 

Selected Financial Data
 Quarters Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Capital:Leverage ratio
    
    
    8.52
    %
    
    
    8.16
    %
    
    
    8.52
    %
    
    
    8.16
    %Tier 1 risk-based capital ratio
    
    
    13.99
    %
    
    
    13.32
    %
    
    
    13.99
    %
    
    
    13.32
    %Total risk-based capital ratio
    
    
    15.26
    %
    
    
    15.19
    %
    
    
    15.26
    %
    
    
    15.19
    %Asset quality:Total NPAs as percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
    
    
    18.26
    %
    
    
    16.36
    %
    
    
    18.26
    %
    
    
    16.36
    %Total NPAs as a percentage of consolidated total assets
    
    
    11.18
    %
    
    
    9.12
    %
    
    
    11.18
    %
    
    
    9.12
    %Allowance for loan losses as a percentage of loans receivable
outstanding, at the end of period
    
    
    2.44
    %
    
    
    2.77
    %
    
    
    2.44
    %
    
    
    2.77
    %Provision for loan and lease losses to net charge-offs
    
    
    78.02
    %
    
    
    139.50
    %
    
    
    90.90
    %
    
    
    177.59
    %Net charge-offs to average loan receivable outstanding
    
    
    1.03
    %
    
    
    0.14
    %
    
    
    1.16
    %
    
    
    0.36
    %Allowance for loan and leases losses to net charge-offs on an
annualized basis
    
    
    58.82
    %
    
    
    503.73
    %
    
    
    103.89
    %
    
    
    382.87
    %Other ratios:Average common equity to average assets(4)
    
    
    4.97
    %
    
    
    2.80
    %
    
    
    4.77
    %
    
    
    2.99
    %Tier 1 common equity to risk-weighted assets
    
    
    4.79
    %
    
    
    6.36
    %
    
    
    4.79
    %
    
    
    6.36
    %Pro-forma average common equity to average assets(4)(7)
    
    
    6.42
    %
    
    na
    
    
    
    5.48
    %
    
    naPro-forma Tier 1 common equity to risk-weighted assets(7)
    
    
    7.80
    %
    
    na
    
    
    
    7.80
    %
    
    naPro-forma book value for common share(7)
    
    $
    4.66
    
    
    na
    
    
    $
    4.66
    
    
    na
 
 (1)
    
    See Note 23 of the consolidated financial statements for an explanation of the computation of income tax benefit.(2)
    
    For the quarters and six month periods ended June 30, 2010 and 2009, net (loss) income per common share represents the basic and diluted loss per common share, respectively, for each of the
periods presented.(3)
    
    Includes loans held for sale.(4)
    
    Average balances are computed on a daily basis.(5)
    
    Represents the total portfolio of loans serviced for third parties. Excludes $4.5 billion and $4.3 billion of mortgage loans owned by Doral Financial at June 10, 2010 and 2009,
respectively.(6)
    
    Excludes the effect of the preferred stock exchange premium.(7)
    
    Reflects the pro-forma effect of the conversion of the mandatorily convertible preferred stock on the respective ratios, consisting of 60 million common shares and $171 million. CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
  RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
 NET INTEREST INCOME
  65




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Second Quarter 2010 vs. Second Quarter 2009
    Six Months Period Ended June 30,
2010 vs. Six Months Period Ended June 30, 2009
 66




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67




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Table B

Average Balance Sheet and Summary of Net Interest Income
 Quarter Ended June 30,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,876,723
    
    
    $
    78,916
    
    
    
    5.39
    %
    
    $
    5,667,466
    
    
    $
    81,245
    
    
    
    5.75
    %Mortgage-backed securities
    
    
    2,197,216
    
    
    
    18,542
    
    
    
    3.38
    %
    
    
    2,975,342
    
    
    
    27,256
    
    
    
    3.67
    %Interest-only strips (IOs)
    
    
    43,946
    
    
    
    1,491
    
    
    
    13.61
    %
    
    
    48,356
    
    
    
    1,575
    
    
    
    13.07
    %Investment securities
    
    
    43,510
    
    
    
    583
    
    
    
    5.37
    %
    
    
    358,884
    
    
    
    2,765
    
    
    
    3.09
    %Other interest-earning assets
    
    
    585,889
    
    
    
    1,545
    
    
    
    1.06
    %
    
    
    445,288
    
    
    
    1,737
    
    
    
    1.56
    %Total interest-earning assets/interest income
    
    
    8,747,284
    
    
    $
    101,077
    
    
    
    4.63
    %
    
    
    9,495,336
    
    
    $
    114,578
    
    
    
    4.84
    %Total non-interest-earning assets
    
    
    680,697
    
    
    
    
    
    
    
    
    
    
    
    607,749Total assets
    
    $
    9,427,981
    
    
    
    
    
    
    
    
    
    
    $
    10,103,085LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,413,386
    
    
    $
    27,587
    
    
    
    2.51
    %
    
    $
    3,842,363
    
    
    $
    30,872
    
    
    
    3.22
    %Repurchase agreements
    
    
    1,597,173
    
    
    
    13,738
    
    
    
    3.45
    %
    
    
    1,785,233
    
    
    
    17,481
    
    
    
    3.93
    %Advances from FHLB
    
    
    1,254,513
    
    
    
    12,921
    
    
    
    4.13
    %
    
    
    1,591,938
    
    
    
    15,988
    
    
    
    4.03
    %Other short-term borrowings
    
    
    3,791
    
    
    
    4
    
    
    
    0.49
    %
    
    
    647,912
    
    
    
    406
    
    
    
    0.25
    %Loans payable
    
    
    325,378
    
    
    
    1,676
    
    
    
    2.07
    %
    
    
    357,956
    
    
    
    2,538
    
    
    
    2.84
    %Notes payable
    
    
    268,797
    
    
    
    5,086
    
    
    
    7.57
    %
    
    
    274,978
    
    
    
    5,203
    
    
    
    7.59
    %Total interest-bearing liabilities/interest expense
    
    
    7,863,038
    
    
    $
    61,012
    
    
    
    3.11
    %
    
    
    8,500,380
    
    
    $
    72,488
    
    
    
    3.42
    %Total non-interest-bearing liabilities
    
    
    610,554
    
    
    
    
    
    
    
    
    
    
    
    770,114Total liabilities
    
    
    8,473,592
    
    
    
    
    
    
    
    
    
    
    
    9,270,494Stockholders equity
    
    
    954,389
    
    
    
    
    
    
    
    
    
    
    
    832,591Total liabilities and stockholders equity
    
    $
    9,427,981
    
    
    
    
    
    
    
    
    
    
    $
    10,103,085Net interest-earning assets
    
    $
    884,246
    
    
    
    
    
    
    
    
    
    
    $
    994,956Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    40,065
    
    
    
    
    
    
    
    
    
    
    $
    42,090Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.52
    %
    
    
    
    
    
    
    
    
    
    
    1.42
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.84
    %
    
    
    
    
    
    
    
    
    
    
    1.78
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    111.25
    %
    
    
    
    
    
    
    
    
    
    
    111.70
    %
 
 (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 $0.2 million and $0.4 million for the second quarters of 2010 and 2009, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between the 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. 68




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Table C

Average Balance Sheet and Summary of Net Interest Income
 Six Month Period Ended June 30,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,858,009
    
    
    $
    160,349
    
    
    
    5.52
    %
    
    $
    5,631,025
    
    
    $
    162,833
    
    
    
    5.83
    %Mortgage-backed securities
    
    
    2,495,194
    
    
    
    41,789
    
    
    
    3.38
    %
    
    
    3,051,767
    
    
    
    54,637
    
    
    
    3.61
    %Interest-only strips (IOs)
    
    
    44,820
    
    
    
    3,034
    
    
    
    13.65
    %
    
    
    49,376
    
    
    
    3,203
    
    
    
    13.08
    %Investment securities
    
    
    63,270
    
    
    
    1,448
    
    
    
    4.62
    %
    
    
    439,107
    
    
    
    7,672
    
    
    
    3.52
    %Other interest-earning assets
    
    
    661,933
    
    
    
    3,685
    
    
    
    1.12
    %
    
    
    353,333
    
    
    
    2,727
    
    
    
    1.56
    %Total interest-earning assets/interest income
    
    
    9,123,226
    
    
    $
    210,305
    
    
    
    4.65
    %
    
    
    9,524,608
    
    
    $
    231,072
    
    
    
    4.89
    %Total non-interest-earning assets
    
    
    685,276
    
    
    
    
    
    
    
    
    
    
    
    559,117Total assets
    
    $
    9,808,502
    
    
    
    
    
    
    
    
    
    
    $
    10,083,725LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,410,785
    
    
    $
    54,287
    
    
    
    2.48
    %
    
    $
    3,876,902
    
    
    $
    69,079
    
    
    
    3.59
    %Repurchase agreements
    
    
    1,898,535
    
    
    
    31,762
    
    
    
    3.37
    %
    
    
    1,795,324
    
    
    
    34,713
    
    
    
    3.90
    %Advances from FHLB
    
    
    1,368,914
    
    
    
    26,894
    
    
    
    3.96
    %
    
    
    1,603,533
    
    
    
    32,002
    
    
    
    4.02
    %Other short-term borrowings
    
    
    10,138
    
    
    
    15
    
    
    
    0.30
    %
    
    
    629,590
    
    
    
    842
    
    
    
    0.27
    %Loans payable
    
    
    329,823
    
    
    
    3,325
    
    
    
    2.03
    %
    
    
    361,138
    
    
    
    5,847
    
    
    
    3.27
    %Notes payable
    
    
    269,550
    
    
    
    10,196
    
    
    
    7.57
    %
    
    
    275,676
    
    
    
    10,429
    
    
    
    7.63
    %Total interest-bearing liabilities/interest expense
    
    
    8,287,745
    
    
    $
    126,479
    
    
    
    3.08
    %
    
    
    8,542,163
    
    
    $
    152,912
    
    
    
    3.61
    %Total non-interest-bearing liabilities
    
    
    604,391
    
    
    
    
    
    
    
    
    
    
    
    678,572Total liabilities
    
    
    8,892,136
    
    
    
    
    
    
    
    
    
    
    
    9,220,735Stockholders equity
    
    
    916,366
    
    
    
    
    
    
    
    
    
    
    
    862,990Total liabilities and stockholders equity
    
    $
    9,808,502
    
    
    
    
    
    
    
    
    
    
    $
    10,083,725Net interest-earning assets
    
    $
    835,481
    
    
    
    
    
    
    
    
    
    
    $
    982,445Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    83,826
    
    
    
    
    
    
    
    
    
    
    $
    78,160Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.57
    %
    
    
    
    
    
    
    
    
    
    
    1.28
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.85
    %
    
    
    
    
    
    
    
    
    
    
    1.65
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    110.08
    %
    
    
    
    
    
    
    
    
    
    
    111.50
    %
 
 (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 $0.4 million and $0.6 million for the first half of 2010 and 2009, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between the 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.  69




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Table D  Net Interest Income Variance Analysis
 Quarter Ended June 30,2010 Compared To 2009Increase (Decrease) Due To:(In thousands)
    
    Volume
    
    
    Rate
    
    
    TotalInterest Income VarianceTotal loans
    
    $
    14,273
    
    
    $
    (16,602
    )
    
    $
    (2,329
    )Mortgage-backed securities
    
    
    (6,692
    )
    
    
    (2,022
    )
    
    
    (8,714
    )Interest-only strips
    
    
    (421
    )
    
    
    337
    
    
    
    (84
    )Investment securities
    
    
    (10,082
    )
    
    
    7,900
    
    
    
    (2,182
    )Other interest-earning assets
    
    
    2,115
    
    
    
    (2,307
    )
    
    
    (192
    )Total Interest Income Variance
    
    $
    (807
    )
    
    $
    (12,694
    )
    
    $
    (13,501
    )Interest Expense VarianceDeposits
    
    $
    20,645
    
    
    $
    (23,930
    )
    
    $
    (3,285
    )Repurchase agreements
    
    
    (1,733
    )
    
    
    (2,010
    )
    
    
    (3,743
    )Advances from FHLB
    
    
    (5,596
    )
    
    
    2,529
    
    
    
    (3,067
    )Other short-term borrowings
    
    
    (1,787
    )
    
    
    1,385
    
    
    
    (402
    )Loans payable
    
    
    (217
    )
    
    
    (645
    )
    
    
    (862
    )Notes payable
    
    
    (117
    )
    
    
    
    
    
    
    (117
    )Total Interest Expense Variance
    
    $
    11,195
    
    
    $
    (22,671
    )
    
    $
    (11,476
    )Net Interest Income Variance
    
    $
    (12,002
    )
    
    $
    9,977
    
    
    $
    (2,025
    )
 70




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Table E  Net Interest Income Variance Analysis
 Six Month Period Ended June 30,2010 Compared To 2009Increase (Decrease) Due To:(In thousands)
    
    Volume
    
    
    Rate
    
    
    TotalInterest Income VarianceTotal loans
    
    $
    13,983
    
    
    $
    (16,467
    )
    
    $
    (2,484
    )Mortgage-backed securities
    
    
    (9,522
    )
    
    
    (3,326
    )
    
    
    (12,848
    )Interest-only strips
    
    
    (497
    )
    
    
    328
    
    
    
    (169
    )Investment securities
    
    
    (11,636
    )
    
    
    5,412
    
    
    
    (6,224
    )Other interest-earning assets
    
    
    3,074
    
    
    
    (2,116
    )
    
    
    958Total Interest Income Variance
    
    $
    (4,598
    )
    
    $
    (16,169
    )
    
    $
    (20,767
    )Interest Expense VarianceDeposits
    
    $
    21,963
    
    
    $
    (36,755
    )
    
    $
    (14,792
    )Repurchase agreements
    
    
    4,780
    
    
    
    (7,731
    )
    
    
    (2,951
    )Advances from FHLB
    
    
    (4,635
    )
    
    
    (473
    )
    
    
    (5,108
    )Other short-term borrowings
    
    
    (1,083
    )
    
    
    256
    
    
    
    (827
    )Loans payable
    
    
    (471
    )
    
    
    (2,051
    )
    
    
    (2,522
    )Notes payable
    
    
    (233
    )
    
    
    
    
    
    
    (233
    )Total Interest Expense Variance
    
    $
    20,321
    
    
    $
    (46,754
    )
    
    $
    (26,433
    )Net Interest Income Variance
    
    $
    (24,919
    )
    
    $
    30,585
    
    
    $
    5,666
 PROVISION FOR LOAN AND LEASE LOSSES
   
    
    An increase in the construction and land loan loss provision of $15.7 million primarily
due to a $12.6 million provision related to the transfer of loans to held for sale, adverse
developments in a large loan which drove an increase in the individual impairment
measurements and increases in stale appraisal reserves.
    
    An increase in the residential mortgage loan provision of $11.2 million was mainly
driven by the effect of charge-offs related to loans that were foreclosed during the
quarter; loss mitigation volume, which drove approximately $2.7 million in additional
provisions; a $1.1 million adjustment driven by changes in portfolio behavior; and an $8.0
million provision due to increased severities resulting from managements
 71




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##### Table of Contents




    
    Increases in commercial real estate loan provisions of $7.9 million, were driven by
increases in delinquencies of small commercial loans and stale appraisal reserves.
      72




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NON-INTEREST INCOME
 
 Table F
 Quarter Ended
    
    
    
    
    
    

    Six Month Periods EndedJune 30,
    

    

    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    $ Variance
    
    
    2010
    
    
    2009
    
    
    $ VarianceNet other-than-temporary impairment losses
    
    $
    
    
    
    $
    (6,795
    )
    
    $
    6,795
    
    
    $
    (13,259
    )
    
    $
    (6,795
    )
    
    $
    (6,464
    )Net gain on mortgage loan sales and fees
    
    
    1,811
    
    
    
    3,298
    
    
    
    (1,487
    )
    
    
    4,377
    
    
    
    5,017
    
    
    
    (640
    )Net gain on securities held for trading
    
    
    1,794
    
    
    
    104
    
    
    
    1,690
    
    
    
    2,579
    
    
    
    1,783
    
    
    
    796Gain on IO valuation
    
    
    3,857
    
    
    
    569
    
    
    
    3,288
    
    
    
    4,516
    
    
    
    7
    
    
    
    4,509Gain (loss) on MSR economic hedge
    
    
    4,656
    
    
    
    (6,895
    )
    
    
    11,551
    
    
    
    6,484
    
    
    
    (14,196
    )
    
    
    20,680Loss (gain) on derivatives
    
    
    (1,411
    )
    
    
    426
    
    
    
    (1,837
    )
    
    
    (2,909
    )
    
    
    (718
    )
    
    
    (2,191
    )Net gain (loss) on trading activities
    
    
    8,896
    
    
    
    (5,796
    )
    
    
    14,692
    
    
    
    10,670
    
    
    
    (13,124
    )
    
    
    23,794Net (loss) gain on investment securities
    
    
    (137,204
    )
    
    
    4,810
    
    
    
    (142,014
    )
    
    
    (110,790
    )
    
    
    4,797
    
    
    
    (115,587
    )Loss on early repayment of debt
    
    
    (2,545
    )
    
    
    
    
    
    
    (2,545
    )
    
    
    (3,021
    )
    
    
    
    
    
    
    (3,021
    )Servicing (loss) incomeServicing fees
    
    
    7,515
    
    
    
    7,134
    
    
    
    381
    
    
    
    14,625
    
    
    
    14,975
    
    
    
    (350
    )Late charges
    
    
    2,287
    
    
    
    2,059
    
    
    
    228
    
    
    
    4,382
    
    
    
    4,335
    
    
    
    47Prepayment penalties
    
    
    4
    
    
    
    136
    
    
    
    (132
    )
    
    
    (5
    )
    
    
    262
    
    
    
    (267
    )Other servicing fees
    
    
    238
    
    
    
    141
    
    
    
    97
    
    
    
    472
    
    
    
    274
    
    
    
    198Interest loss on serial notes and others
    
    
    (4,924
    )
    
    
    (2,065
    )
    
    
    (2,859
    )
    
    
    (5,606
    )
    
    
    (3,863
    )
    
    
    (1,743
    )Mark-to-market adjustment of servicing
assets
    
    
    (6,474
    )
    
    
    6,555
    
    
    
    (13,029
    )
    
    
    (8,478
    )
    
    
    (4,798
    )
    
    
    (3,680
    )Total servicing (loss) income
    
    
    (1,354
    )
    
    
    13,960
    
    
    
    (15,314
    )
    
    
    5,390
    
    
    
    11,185
    
    
    
    (5,795
    )Commissions, fees and other income:Retail banking fees
    
    
    7,199
    
    
    
    7,127
    
    
    
    72
    
    
    
    14,342
    
    
    
    14,209
    
    
    
    133Insurance agency commissions
    
    
    2,436
    
    
    
    2,463
    
    
    
    (27
    )
    
    
    4,778
    
    
    
    4,887
    
    
    
    (109
    )Other income
    
    
    571
    
    
    
    64
    
    
    
    507
    
    
    
    3,907
    
    
    
    538
    
    
    
    3,369Total commissions, fees and other income
    
    
    10,206
    
    
    
    9,654
    
    
    
    552
    
    
    
    23,027
    
    
    
    19,634
    
    
    
    3,393Total non-interest (loss) income
    
    $
    (120,190
    )
    
    $
    19,131
    
    
    $
    (139,321
    )
    
    $
    (83,606
    )
    
    $
    20,714
    
    
    $
    (104,320
    )
 Second Quarter 2010 vs. Second Quarter 2009 -
 
    
    No OTTI was recognized during the second quarter of 2010 resulting in positive variance of
$6.8 million.
    
    A net gain on securities held for trading of $8.9 million compared a loss of $5.8 million
for the second quarter of 2009 was driven by:
 
    
    A gain on the IO valuation of $3.9 million compared to $0.6 million for the
second quarter of 2009, was driven by decreases in the LIBOR-Swap forward curve.
    
    A gain on the MSR economic hedge of $4.7 million compared to a loss of $6.9
million for the second quarter of 2009. There was a change in hedging strategy in the
second quarter of 2009 from the use of U.S. Treasuries to forward contracts, which
impacted subsequent reporting periods.
 
    
    A servicing loss of $1.4 million compared to servicing income of $14.0 million for the
second quarter of 2009. The servicing loss was due to:
 
    
    A $4.2 million decrease in servicing income due to interest lost on servicing
advances during the period, related to the repurchase of certain GNMA defaulted loans
during the second quarter of 2010.
    
    A reduction in the value of the mortgage servicing asset
(MSR) due to higher
prepayment speeds and a reduction in loan balances. For the second quarter of 2009
there was a gain of $6.6 million in the value of the MSR due primarily to a decrease in
prepayment speeds caused by higher interest rates.
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##### Table of Contents



Six Months Period Ended June 30, 2010 vs. Six Months Period Ended June 30, 2009
 
    
    Higher OTTI loss of $6.5 million due to the deterioration in estimated future cash flows of
non-agency CMOs during the first quarter of 2010. These securities were sold during the second
quarter of 2010 and the unrealized loss in OCI was realized, resulting in no further OTTI
during the second quarter.
    
    A net loss on investment securities of $110.8 million was driven by a loss of $136.7
million during the second quarter of 2010, from the sale of certain non-agency CMOs with an
amortized cost basis of $378.0 million net of OTTI recognized in previous periods totaling
$39.6 million, offset in part by the sale of certain agency securities in the first quarter of
2010 that generated net gains of $26.4 million.
    
    The improvement in the net gain on trading activities was driven principally by an
improvement in the MSR economic hedge of $20.7 million when compared to 2009, primarily due to
a change in the hedging strategy. There was also a gain of $4.5 million on the IO valuation
driven by decreases in the LIBOR-Swap forward curve.
    
    The $5.8 million reduction in servicing income compared to $11.2 million servicing income
for the six month period ended June 30, 2009 was due to:
 
    
    A $4.2 million decrease in servicing income due to interest lost on servicing
advances during the period, related to the repurchase of certain GNMA defaulted loans
during the second quarter of 2010.
    
    A reduction in the value of the mortgage servicing asset due to higher
prepayment speeds and a reduction in loan balances.
 
    
    An increase in other income of $3.4 million was driven by a gain on redemption of shares of
VISA, Inc. during the first quarter of 2010 of $2.9 million.
 NON-INTEREST EXPENSE
 Table G
 Quarter Ended
    
    
    
    
    
    
    Six Month Periods EndedJune 30,
    
    

    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    $ Variance
    
    
    2010
    
    
    2009
    
    
    $ VarianceCompensation and benefits
    
    $
    20,315
    
    
    $
    15,823
    
    
    $
    4,492
    
    
    $
    36,750
    
    
    $
    38,651
    
    
    $
    (1,901
    )Professional services
    
    
    15,420
    
    
    
    7,391
    
    
    
    8,029
    
    
    
    29,212
    
    
    
    13,518
    
    
    
    15,694FDIC insurance expense
    
    
    5,574
    
    
    
    6,144
    
    
    
    (570
    )
    
    
    10,765
    
    
    
    8,081
    
    
    
    2,684Occupancy expenses
    
    
    4,322
    
    
    
    2,914
    
    
    
    1,408
    
    
    
    8,303
    
    
    
    6,915
    
    
    
    1,388Advertising
    
    
    4,073
    
    
    
    1,424
    
    
    
    2,649
    
    
    
    5,571
    
    
    
    2,872
    
    
    
    2,699Communication expenses
    
    
    4,056
    
    
    
    4,005
    
    
    
    51
    
    
    
    8,000
    
    
    
    8,413
    
    
    
    (413
    )Depreciation and amortization
    
    
    3,110
    
    
    
    3,217
    
    
    
    (107
    )
    
    
    6,257
    
    
    
    6,670
    
    
    
    (413
    )EDP expenses
    
    
    2,878
    
    
    
    3,167
    
    
    
    (289
    )
    
    
    6,657
    
    
    
    6,783
    
    
    
    (126
    )Taxes, other than payroll and
income taxes
    
    
    2,591
    
    
    
    2,423
    
    
    
    168
    
    
    
    5,155
    
    
    
    4,911
    
    
    
    244Corporate insurance
    
    
    1,264
    
    
    
    1,131
    
    
    
    133
    
    
    
    2,526
    
    
    
    2,193
    
    
    
    333Office expenses
    
    
    1,112
    
    
    
    1,203
    
    
    
    (91
    )
    
    
    2,397
    
    
    
    2,669
    
    
    
    (272
    )Other
    
    
    5,134
    
    
    
    5,422
    
    
    
    (288
    )
    
    
    11,057
    
    
    
    11,826
    
    
    
    (769
    )69,849
    
    
    
    54,264
    
    
    
    15,585
    
    
    
    132,650
    
    
    
    113,502
    
    
    
    19,148Other reserves and OREO:Reserve on claim receivable from LBI
    
    
    10,819
    
    
    
    
    
    
    
    10,819
    
    
    
    10,819
    
    
    
    
    
    
    
    10,819Lower of cost or market adjustment
for OREO
    
    
    22,457
    
    
    
    1,078
    
    
    
    21,379
    
    
    
    26,272
    
    
    
    1,920
    
    
    
    24,352(Gain) loss on sales of OREO
    
    
    (21
    )
    
    
    (288
    )
    
    
    267
    
    
    
    61
    
    
    
    (479
    )
    
    
    540OREO other related expenses
    
    
    978
    
    
    
    472
    
    
    
    506
    
    
    
    1,678
    
    
    
    1,009
    
    
    
    66934,233
    
    
    
    1,262
    
    
    
    32,971
    
    
    
    38,830
    
    
    
    2,450
    
    
    
    36,380Total non-interest expense
    
    $
    104,082
    
    
    $
    55,526
    
    
    $
    48,556
    
    
    $
    171,480
    
    
    $
    115,952
    
    
    $
    55,528
 Second Quarter 2010 vs. Second Quarter 2009 
 
    
    An increase of $4.5 million in compensation and benefits was primarily due to a $3.3
million retention award granted to certain officers of the Company pursuant to its Retention
Program.
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##### Table of Contents




    
    Increase in advertising expense of $2.6 million related to campaigns to gain market share in deposits and mortgage originations
subsequent to the local market bank failures and asset acquisitions in April 2010.
    
    Professional services of $15.4 million reflected an increase of $8.0 million primarily related to:
 
    
    An increase of $2.4 million in defense litigation costs of former company officers.
    
    Advisory services of $0.5 million related to the dissolution of Doral Holdings
and Doral Holdings L.P., our parent company, pursuant to the Cooperation Agreement dated
April 19, 2010, between Doral Financial and Doral Holdings, Doral Holdings L.P. and
Doral GP Ltd.
    
    Services related to the possible sale of certain construction loans during the
third quarter of 2010 of $2.7 million.
    
    Increase in advisory services related to the construction loan portfolio of
$1.5 million compared to June 30, 2009.
 
    
    An additional $10.8 million reserve for the Companys claim on Lehman Brothers Inc. was
established during the second quarter of 2010.
    
    An increase of $22.2 million in OREO losses and other related expenses as a result of an
additional provision for OREO losses of $17.0 million established during the second quarter of
2010 to recognize the effect of managements strategic decision to reduce pricing in order to
accelerate OREO sales, adjustments driven by lower values of certain of Dorals OREO
properties, higher levels of repossessed units and higher expenses to maintain the properties
in saleable condition.
 Six Months Period Ended June 30, 2010 vs. Six Months Period Ended June 30, 2009
 
    
    A decrease of $1.9 million in compensation and employee benefits was driven by a one-time severance expense
related to a reduction in workforce during 2009 and partially offset by a retention bonus of $3.3 million
incurred in 2010.
    
    Increase in advertising expense of $2.7 million related to campaigns to gain market share in deposits and
mortgage origination subsequent to the local market bank failures and asset acquisitions in April 2010.
    
    Professional services of $29.2 million reflected an increase of $15.7 million compared to June 30, 2009,
primarily due to:
 
    
    An increase of $3.9 million in defense litigation costs of former company officers.
    
    Advisory services of $0.5 million related to the dissolution of Doral Holdings
and Doral Holdings L.P., our parent company, pursuant to the Cooperation Agreement dated
April 19, 2010, between Doral Financial and Doral Holdings, Doral Holdings L.P. and
Doral GP Ltd.
    
    Services related to the possible sale of certain construction loans during the
third quarter of 2010 of $2.7 million.
    
    Increase in advisory services related to the construction loan portfolio of
$2.6 million compared to June 30, 2009.
    
    $5.3 million in advisory services related to the Companys preparation to
participate in bidding for FDIC assisted transactions.
    
    $1.9 million increase in legal expenses to support corporate litigation and collections efforts.
 
    
    An additional $10.8 million reserve for the Companys claim on Lehman Brothers Inc. was established during the second
quarter of 2010.
    
    An increase of $2.7 million in FDIC insurance expense related to increases in rates and assessment bases during the
second half of 2009.
    
    An increase of $25.6 million in OREO losses and other related expenses as a result of an additional provision for OREO
losses of $17.0 million established during the second quarter of 2010 to recognize the effect of managements strategic
decision to reduce pricing in order to accelerate OREO sales, adjustments driven by lower values of certain of Dorals
OREO properties, higher levels of repossessed units and higher expenses to maintain the properties in saleable
condition.
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##### Table of Contents



INCOME TAXES
  Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Current income tax expense (benefit):Puerto Rico
    
    $
    
    
    
    $
    (15,275
    )
    
    $
    
    
    
    $
    (14,932
    )United States
    
    
    3,615
    
    
    
    853
    
    
    
    3,890
    
    
    
    1,565Total current income tax expense (benefit)
    
    
    3,615
    
    
    
    (14,422
    )
    
    
    3,890
    
    
    
    (13,367
    )Deferred income tax expense:Puerto Rico
    
    
    1,008
    
    
    
    2,384
    
    
    
    2,795
    
    
    
    1,269United States
    
    
    (136
    )
    
    
    (616
    )
    
    
    331
    
    
    
    (664
    )Total deferred income tax expense
    
    
    872
    
    
    
    1,768
    
    
    
    3,126
    
    
    
    605Total income tax expense (benefit)
    
    $
    4,487
    
    
    $
    (12,654
    )
    
    $
    7,016
    
    
    $
    (12,762
    )
    BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  76




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##### Table of Contents



Table H  Loan Production
 Quarter Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(Dollars in thousands, except for average initial loan balance)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009FHA/VA mortgage loansNumber of loans
    
    
    422
    
    
    
    761
    
    
    
    804
    
    
    
    1,265Volume of loans
    
    $
    58,136
    
    
    $
    108,534
    
    
    $
    109,623
    
    
    $
    180,929Percent of total volume
    
    
    15
    %
    
    
    37
    %
    
    
    16
    %
    
    
    34
    %Average initial loan balance
    
    $
    137,763
    
    
    $
    142,620
    
    
    $
    136,347
    
    
    $
    143,027Conventional conforming mortgage loansNumber of loans
    
    
    217
    
    
    
    216
    
    
    
    415
    
    
    
    484Volume of loans
    
    $
    28,984
    
    
    $
    26,696
    
    
    $
    51,359
    
    
    $
    60,750Percent of total volume
    
    
    8
    %
    
    
    9
    %
    
    
    8
    %
    
    
    11
    %Average initial loan balance
    
    $
    133,567
    
    
    $
    123,593
    
    
    $
    123,756
    
    
    $
    125,516Conventional non-conforming mortgage loans(1)Number of loans
    
    
    493
    
    
    
    654
    
    
    
    1,044
    
    
    
    1,311Volume of loans
    
    $
    72,269
    
    
    $
    99,650
    
    
    $
    166,115
    
    
    $
    201,622Percent of total volume
    
    
    19
    %
    
    
    34
    %
    
    
    25
    %
    
    
    38
    %Average initial loan balance
    
    $
    146,590
    
    
    $
    152,370
    
    
    $
    159,114
    
    
    $
    153,792Construction Development loansNumber of loans
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Volume of loans
    
    $
    2,861
    
    
    $
    
    
    
    $
    2,861
    
    
    $
    Percent of total volume
    
    
    1
    %
    
    
    
    %
    
    
    1
    %
    
    
    
    %Average initial loan balance
    
    $
    476,833
    
    
    $
    
    
    
    $
    476,879
    
    
    $
    Disbursement under existing construction development loansVolume of loans
    
    $
    3,798
    
    
    $
    22,196
    
    
    $
    6,689
    
    
    $
    29,989Percent of total volume
    
    
    1
    %
    
    
    8
    %
    
    
    1
    %
    
    
    5
    %Commercial loans(2)Number of loans
    
    
    94
    
    
    
    9
    
    
    
    174
    
    
    
    24Volume of loans
    
    $
    184,424
    
    
    $
    24,507
    
    
    $
    291,769
    
    
    $
    47,914Percent of total volume
    
    
    49
    %
    
    
    8
    %
    
    
    44
    %
    
    
    9
    %Average initial loan balance
    
    $
    1,961,957
    
    
    $
    2,723,000
    
    
    $
    1,676,832
    
    
    $
    1,996,417Consumer loans(2) (3)Number of loans
    
    
    338
    
    
    
    172
    
    
    
    435
    
    
    
    484Volume of loans
    
    $
    1,613
    
    
    $
    1,157
    
    
    $
    2,274
    
    
    $
    3,874Percent of total volume
    
    
    
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %Average initial loan balance
    
    $
    4,772
    
    
    $
    6,727
    
    
    $
    5,227
    
    
    $
    8,004Other(4)Number of loans
    
    
    24
    
    
    
    1
    
    
    
    28
    
    
    
    1Volume of loans
    
    $
    28,085
    
    
    $
    9,200
    
    
    $
    38,535
    
    
    $
    9,200Percent of total volume
    
    
    7
    %
    
    
    3
    %
    
    
    6
    %
    
    
    2
    %Total loansNumber of loans
    
    
    1,594
    
    
    
    1,813
    
    
    
    2,906
    
    
    
    3,569Volume of loans
    
    $
    380,170
    
    
    $
    291,940
    
    
    $
    669,225
    
    
    $
    534,278
 
 (1)
    
    Includes $87,000 and $0.6 million in second mortgages for the quarters ended June 30, 2010 and 2009, respectively, and $0.4 million and $1.5 million in second mortgages for the six month periods
ended June 30, 2010 and June 30, 2009.(2)
    
    Commercial and consumer lines of credit are included in the loan production according to the credit limit approved.(3)
    
    Includes commercial real estate and commercial and industrial loans.(4)
    
    Consists of multifamily loans.  77




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Table I  Loan Origination Sources
 Six Month Periods Ended June 30,2010
    
    
    2009Puerto Rico
    
    
    US
    
    
    Total
    
    
    Puerto Rico
    
    
    US
    
    
    TotalConsumer
    
    
    43
    %
    
    
    
    
    
    
    43
    %
    
    
    71
    %
    
    
    
    
    
    
    71
    %Wholesale(1)
    
    
    6
    %
    
    
    3
    %
    
    
    9
    %
    
    
    12
    %
    
    
    
    
    
    
    12
    %Housing Developments(2)
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    
    
    2
    %
    
    
    4
    %
    
    
    6
    %Commercial and Industrial
    
    
    
    
    
    
    39
    %
    
    
    39
    %
    
    
    
    
    
    
    2
    %
    
    
    2
    %Other(3)
    
    
    1
    %
    
    
    7
    %
    
    
    8
    %
    
    
    1
    %
    
    
    8
    %
    
    
    9
    %Total
    
    
    51
    %
    
    
    49
    %
    
    
    100
    %
    
    
    86
    %
    
    
    14
    %
    
    
    100
    %
 
 (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 real estate, consumer and multifamily loans originated through the banking subsidiaries. MORTGAGE LOAN SERVICING
  78




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Table J  Loans Serviced For Third Parties
 As of June 30,(Dollars in Thousands, Except for Average Size of Loans Serviced)
    
    2010
    
    
    2009Composition of Portfolio Serviced for Third Parties at Period End:GNMA
    
    $
    2,272,527
    
    
    $
    2,334,067FHLMC/FNMA
    
    
    2,943,897
    
    
    
    3,248,679Other conventional mortgage loans(1)(2)
    
    
    3,118,940
    
    
    
    3,482,286Total portfolio serviced for third parties
    
    $
    8,335,364
    
    
    $
    9,065,032Activity of Portfolio Serviced for Third Parties:Beginning servicing portfolio
    
    $
    8,655,613
    
    
    $
    9,460,350Additions to servicing portfolio
    
    
    167,244
    
    
    
    239,384Servicing released due to repurchases
    
    
    (84,647
    )
    
    
    (43,162
    )MSRs sales
    
    
    (24,045
    )
    
    
    (7,111
    )Run-off(3)
    
    
    (378,801
    )
    
    
    (584,429
    )Ending servicing portfolio
    
    $
    8,335,364
    
    
    $
    9,065,032Selected Data Regarding Mortgage Loans Serviced for Third Parties:Number of loans
    
    
    99,760
    
    
    
    107,608Weighted- average interest rate
    
    
    6.26
    %
    
    
    6.36
    %Weighted- average remaining maturity (months)
    
    
    239
    
    
    
    244Weighted- average gross servicing fee rate
    
    
    0.41
    %
    
    
    0.39
    %Average servicing portfolio(4)
    
    $
    8,512,746
    
    
    $
    9,264,298Principal prepayments
    
    $
    222,161
    
    
    $
    388,922Constant prepayment rate
    
    
    4.96
    %
    
    
    7.75
    %Average size of loans
    
    $
    83,554
    
    
    $
    84,241Servicing assets, net
    
    $
    113,005
    
    
    $
    112,869Mortgage-servicing advances(5)
    
    $
    41,609
    
    
    $
    26,012Delinquent Mortgage Loans and Pending Foreclosures at Period End:60-89 days past due
    
    
    2.60
    %
    
    
    2.21
    %90 days or more past due
    
    
    5.10
    %
    
    
    4.07
    %Total delinquencies excluding foreclosures
    
    
    7.70
    %
    
    
    6.28
    %Foreclosures pending
    
    
    2.99
    %
    
    
    3.02
    %
 
 (1)
    
    Excludes $4.5 billion and $4.3 billion of loans owned by Doral Financial at June 30, 2010 and 2009, respectively.(2)
    
    Includes portfolios of $0.1 million and $0.2 million at June 30, 2010 and 2009, respectively, of delinquent FHA/VA and conventional mortgage loans sold to third
parties.(3)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures.(4)
    
    Excludes the average balance of mortgage loans owned by Doral Financial of $4.4 billion and $4.2 billion at June 30, 2010 and 2009, respectively.(5)
    
    Includes reserves for possible losses on P&I advances of $5.5 million and $8.5 million at June 30, 2010 and 2009, respectively.    79




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LIQUIDITY AND CAPITAL RESOURCES
  Liquidity of the Holding Company
      
    
    changes in short-term borrowings and deposits in the normal course of business;
    
    repayment of certain long-term callable certificate of deposits;
    
    early repayment of debt;
 80




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
    
    adoption of an initiative to lengthen the brokered certificates term to structurally
reduce interest rate sensitivity;
    
    the impact on the Companys assets and liabilities as a result of the Companys exposure
to Lehman Brothers Inc. in connection with repurchase agreements and forward TBA
agreements;
    
    capital contributions to Doral Bank;
    
    suspension of payment of dividends on outstanding preferred stock;
    
    prepayment of FDIC insurance assessments for the years 2010-2012;
    
    repurchase of GNMA defaulted loans in 2009 and 2010;
    
    inducement on preferred stock conversions;
    
    capital raise of $171.0 million in the second quarter of 2010;
    
    efforts to increase retail deposits in the wake of failed Puerto Rico banks; and
    
    On July 8, 2010, the Company entered into a collateralized loan arrangement in which,
when fully operational, $450.0 million of U.S. based commercial loans are funded $250.0
million by a third party and $200.0 million by Doral. The entity holding the loans will be
consolidated by Doral and the third party financing reported as a loan.
  Liquidity of the Banking Subsidiaries
  Cash Sources and Uses
  81




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82




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Primary Sources of Cash
  Table K
Sources Of Borrowings
 As of June 30, 2010
    
    
    As of December 31, 2009Amount
    
    
    Average
    
    
    Amount
    
    
    Average(Dollars in thousands)
    
    Outstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateDeposits
    
    $
    4,940,569
    
    
    
    2.18
    %
    
    $
    4,643,021
    
    
    
    2.24
    %Repurchase Agreements
    
    
    1,460,800
    
    
    
    3.01
    %
    
    
    2,145,262
    
    
    
    3.32
    %Advances from FHLB
    
    
    1,217,920
    
    
    
    3.28
    %
    
    
    1,606,920
    
    
    
    3.05
    %Other Short-Term Borrowings
    
    
    
    
    
    
    0.00
    %
    
    
    110,000
    
    
    
    0.25
    %Loans Payable
    
    
    318,652
    
    
    
    6.98
    %
    
    
    337,036
    
    
    
    7.27
    %Notes Payable
    
    
    267,648
    
    
    
    7.30
    %
    
    
    270,838
    
    
    
    7.30
    %
   Table L
Average Deposit Balance
 Six Month Period Ended
    
    
    Year EndedJune 30, 2010
    
    
    December 31, 2009Average
    
    
    Average
    
    
    Average
    
    
    Average(Dollars in thousands)
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateCertificates of deposit
    
    $
    546,253
    
    
    
    2.66
    %
    
    $
    484,917
    
    
    
    3.34
    %Brokered certificates of deposits
    
    
    2,732,539
    
    
    
    2.79
    %
    
    
    2,374,207
    
    
    
    3.70
    %Regular passbook savings
    
    
    367,075
    
    
    
    1.50
    %
    
    
    361,217
    
    
    
    1.69
    %NOW accounts and other transaction accounts
    
    
    358,451
    
    
    
    1.22
    %
    
    
    350,300
    
    
    
    1.26
    %Money market accounts
    
    
    406,467
    
    
    
    2.15
    %
    
    
    390,962
    
    
    
    2.71
    %Total interest-bearing
    
    
    4,410,785
    
    
    
    2.48
    %
    
    
    3,961,603
    
    
    
    3.16
    %Non-interest bearing
    
    
    237,795
    
    
    
    
    
    
    
    244,606
    
    
    
    Total deposits
    
    $
    4,648,580
    
    
    
    2.36
    %
    
    $
    4,206,209
    
    
    
    2.97
    %
  Table M
Certificates of Deposits Maturities
 (In thousands)
    
    AmountCertificates of deposit maturing:Three months or less
    
    $
    516,909Over three through six months
    
    
    407,007Over six through twelve months
    
    
    540,577Over twelve months
    
    
    1,699,886Total
    
    $
    3,164,379
 83




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Other Uses of Cash
  84




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Regulatory Capital Ratios
   85




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Table N
Regulatory Capital Ratios
 As of June 30, 2010Doral
    
    Doral
    
    DoralFinancial
    
    Bank PR
    
    Bank NYTotal Capital Ratio (Total capital to risk- weighted assets)
    
    
    15.3
    %
    
    
    16.4
    %
    
    
    15.9
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    14.0
    %
    
    
    15.2
    %
    
    
    15.5
    %Leverage Ratio(1)
    
    
    8.5
    %
    
    
    7.9
    %
    
    
    12.4
    %
 
 (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. As of December 31, 2009Doral
    
    Doral
    
    DoralFinancial
    
    Bank PR
    
    Bank NYTotal Capital Ratio (Total capital to risk- weighted assets)
    
    
    15.1
    %
    
    
    15.3
    %
    
    
    16.6
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    13.8
    %
    
    
    14.0
    %
    
    
    16.2
    %Leverage Ratio(1)
    
    
    8.4
    %
    
    
    7.4
    %
    
    
    13.0
    %
 
 (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.   Legal Proceedings
  ASSETS AND LIABILITIES
  86




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CAPITAL
     Earnings per
Share
  87




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88




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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.
    89




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OFF-BALANCE SHEET ACTIVITIES
      90




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Quarter Ended
    
    
    Six Month Period Ended(In thousands)
    
    June 30, 2010
    
    
    June 30, 2010Balance at beginning of period
    
    $
    9,337
    
    
    $
    9,440Net charge-offs / termination
    
    
    (1,002
    )
    
    
    (1,472
    )Provision for recourse liability
    
    
    890
    
    
    
    1,257Balance at end of period
    
    $
    9,225
    
    
    $
    9,225
       91




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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
    
    $
    4,940,569
    
    
    $
    3,196,237
    
    
    $
    1,171,604
    
    
    $
    406,560
    
    
    $
    166,168Repurchase agreements(1) (2)
    
    
    1,460,800
    
    
    
    229,000
    
    
    
    752,300
    
    
    
    479,500
    
    
    
    Advances from FHLB(1) (2)
    
    
    1,217,920
    
    
    
    653,500
    
    
    
    564,420
    
    
    
    
    
    
    
    Loans payable(3)
    
    
    318,652
    
    
    
    39,742
    
    
    
    72,997
    
    
    
    57,355
    
    
    
    148,558Notes payable
    
    
    267,648
    
    
    
    4,478
    
    
    
    7,933
    
    
    
    7,303
    
    
    
    247,934Other liabilities(4)
    
    
    122,031
    
    
    
    122,031
    
    
    
    
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    41,886
    
    
    
    5,526
    
    
    
    10,091
    
    
    
    7,638
    
    
    
    18,631Total Contractual Cash Obligations
    
    $
    8,369,506
    
    
    $
    4,250,514
    
    
    $
    2,579,345
    
    
    $
    958,356
    
    
    $
    581,291
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $100.0 million of a repurchase agreement with a fixed
rate of 2.98% and $80.0 million in advances from FHLB with a fixed rate of
5.04%,which the lenders have the right to call before their contractual
maturities. The repurchase agreements and advances from FHLB are included in
the less-than-one year category in the above table but have actual contractual
maturities ranging from October 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)
    
    Consist of secured borrowings with local financial
institutions, collateralized by residential mortgage loans at variable interest
rates tied to 3-month LIBOR. These loans are not subject to scheduled payments,
but are required to be repaid according to the regular amortization and
prepayments of the underlying mortgage loans. For purposes of the table above,
the Company used a CPR of 11.1% to estimate the repayments.(4)
    
    Includes the liability for uncertain tax positions of $4.0
million, excluding associated interest and penalties of $0.8 million, that the
Company expects to settle within less than one year. 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
    
    $
    80,647
    
    
    $
    64,741
    
    
    $
    7,613
    
    
    $
    6
    
    
    $
    8,287Commitments to sell loans
    
    
    128,155
    
    
    
    128,155
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    25
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    728,869
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728,869Total
    
    $
    937,696
    
    
    $
    192,921
    
    
    $
    7,613
    
    
    $
    6
    
    
    $
    737,156
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for
additional information regarding other commercial commitments of the Company. 92




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RISK MANAGEMENT
  Interest Rate and Market Risk Management
     
    
    developing the Companys asset/liability management and liquidity strategy;
    
    establishing and monitoring 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
   93




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
    
    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: (i) the Company maintains a static balance sheet; (ii)
full reinvestment of funds in similar product/instruments with similar maturity and
repricing characteristics; (iii) spread assumed constant; (iv) prepayment rates on
mortgages and mortgage related securities are modeled using multi-factor prepayment model;
(v) non-maturity deposit decay and price elasticity assumptions are incorporated, and (vi)
evaluation of embedded options is also taken into consideration. To complement and broaden
the analysis of earnings at risk the Company also performs earning simulations for longer
time horizons.
    
    Market Value of Equity Sensitivity.Used to capture and measure the risks associated
with longer-term maturity and re-pricing mismatches. Doral Financial uses value simulation
techniques for all financial components of the Statement of Financial Condition. Valuation
techniques include static cash flows analyses, stochastic models to qualify value of
embedded options and prepayment modeling. To complement and broaden the risk analysis, the
Company uses duration and convexity analysis to measure the sensitivity of the market value
of equity to changes in interest rates. Duration measures the linear change in market value
of equity caused by changes in interest rates, while, convexity measures the asymmetric
changes in market value of equity caused by changes in interest rates due to the presence
of options. The analysis of duration and convexity combined provide a better understanding
of the sensitivity of the market value of equity to changes in interest rates.
    
    Effective Duration of Equity.The effective duration of equity is a broad measure of
the impact of interest rate changes on Doral Financials economic capital. The measure
summarizes the net sensitivity of assets and liabilities, adjusted for off-balance sheet
positions.
 Interest Rate Risk Management Strategy
  Net Interest Income Risk.
 Market Value of Equity Hedging Strategies
 94




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Duration Risk
 Convexity Risk
 Hedging related to Mortgage Banking Activities
  
    
    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
    95




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Market Value
    
    Net InterestAs of June 30, 2010
    
    Of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (5.0
    )%
    
    
    0.5
    %- 100 BPS
    
    
    3.5
    %
    
    
    (2.8
    )%
 Market Value
    
    Net InterestAs of December 31, 2009
    
    of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (9.4
    )%
    
    
    (3.4
    )%- 100 BPS
    
    
    (2.4
    )%
    
    
    (0.4
    )%
 
 (1)
    
    Based on 12-month forward change in net interest income.   96




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##### Table of Contents



(In thousands)
    
    June 30, 2010
    
    December 31, 2009Change in Fair
    
    Change in FairChange in Interest
    
    Value of Available
    
    Value of AvailableRates (Basis Points)
    
    for Sale Securities
    
    for Sale Securities+200
    
    $
    (59,735
    )
    
    $
    (164,043
    )+100
    
    
    28,516
    
    
    
    (71,675
    )Base
    
    
    
    
    
    
    -100
    
    
    48,324
    
    
    
    51,165-200
    
    
    58,343
    
    
    
    103,334
 Derivatives
  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
    
    
    $
    15,000
    
    
    September, 2011
    
    1-month LIBOR over 5.50%
    
    
    134
    
    
    
    15,000
    
    
    September, 2012
    
    1-month LIBOR over 6.00%
    
    
    143
    
    
    
    235,000
    
    
    October, 2010
    
    1-month LIBOR over 5.00%
    
    
    199
    
    
    
    15,000
    
    
    October, 2011
    
    1-month LIBOR over 5.00%
    
    
    172
    
    
    
    15,000
    
    
    October, 2012
    
    1-month LIBOR over 5.50%
    
    
    182
    
    
    
    650,000
    
    
    November, 2012
    
    1-month LIBOR over 6.50%
    
    
    228
    
    
    
    1050,000
    
    
    November, 2012
    
    1-month LIBOR over 5.50%
    
    
    545
    
    
    
    2150,000
    
    
    November, 2012
    
    1-month LIBOR over 6.00%
    
    
    350
    
    
    
    14$
    270,000
    
    
    
    
    
    
    $
    2,158
    
    
    $
    53
  97




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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%
    
    $
    (1,415
    )8,000
    
    
    September, 2010
    
    
    4.62
    %
    
    1-month LIBOR plus 0.02%
    
    
    (84
    )3,000
    
    
    September, 2011
    
    
    4.69
    %
    
    1-month LIBOR plus 0.02%
    
    
    (153
    )8,000
    
    
    October, 2010
    
    
    4.37
    %
    
    1-month LIBOR plus 0.02%
    
    
    (104
    )6,000
    
    
    October, 2011
    
    
    4.51
    %
    
    1-month LIBOR plus 0.05%
    
    
    (307
    )5,000
    
    
    October, 2012
    
    
    4.62
    %
    
    1-month LIBOR plus 0.05%
    
    
    (423
    )15,000
    
    
    November, 2010
    
    
    4.42
    %
    
    1-month LIBOR
    
    
    (249
    )15,000
    
    
    November, 2011
    
    
    4.55
    %
    
    1-month LIBOR plus 0.02%
    
    
    (825
    )45,000
    
    
    November, 2012
    
    
    4.62
    %
    
    1-month LIBOR plus 0.02%
    
    
    (3,951
    )$
    305,000
    
    
    
    
    
    
    
    
    
    
    $
    (7,511
    )
 Freestanding Derivatives.
 Derivatives  Hedge Accounting.
  Table S
Derivatives Positions
 June 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCash Flow HedgesInterest rate swaps
    
    $
    305,000
    
    
    $
    (7,511
    )
    
    $
    305,000
    
    
    $
    (10,691
    )Other DerivativesInterest rate caps
    
    
    270,000
    
    
    
    53
    
    
    
    270,000
    
    
    
    777Forward contracts
    
    
    135,000
    
    
    
    2,781
    
    
    
    210,000
    
    
    
    (1,572
    )405,000
    
    
    
    2,834
    
    
    
    480,000
    
    
    
    (795
    )$
    710,000
    
    
    $
    (4,677
    )
    
    $
    785,000
    
    
    $
    (11,486
    )
 98




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Table TFair Value Reconciliation
 Six MonthPeriod Ended(In thousands)
    
    June 30, 2010Fair value of contracts outstanding at the beginning of the period
    
    $
    (795
    )Changes in fair values during the period
    
    
    3,629Fair value of contracts outstanding at the end of the period
    
    $
    2,834
 Table USources of Fair Value
 Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturity(In thousands)
    
    less than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of June 30, 2010
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValuePrices actively quoted
    
    $
    2,781
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,781Prices provided by
internal sources
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53$
    2,781
    
    
    $
    53
    
    
    $
    
    
    
    $
    
    
    
    $
    2,834
 The use of derivatives involves market and credit risk. The market risk of derivatives arises
principally from the potential for changes in the value of derivative contracts based on changes in
interest rates.The credit risk of OTC derivatives arises from the potential of counterparties to default on their
contractual obligations. To manage this credit risk, Doral Financial deals with counterparties of
good credit standing, enters into master netting agreements whenever possible and monitors market
on pledged collateral to minimize credit exposure. Master netting agreements incorporate rights of
set-off that provide for the net settlement of contracts with the same counterparty in the event of
default. As a result of the ratings downgrades affecting Doral Financial, counterparties to
derivative contracts used for interest rate risk management purposes could increase the applicable
margin requirements under such contracts, or could require the Company to terminate such
agreements.Table VDerivative Counterparty Credit Exposure
 June 30, 2010Weighted Average(Dollars in thousands)
    
    Number of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    215,000
    
    
    $
    51
    
    
    $
    
    
    
    $
    51
    
    
    
    1.95A+
    
    
    1
    
    
    
    360,000
    
    
    
    2
    
    
    
    (7,511
    )
    
    
    (7,509
    )
    
    
    0.63A
    
    
    2
    
    
    
    135,000
    
    
    
    3,111
    
    
    
    (330
    )
    
    
    2,781
    
    
    
    0.05Total Derivatives
    
    
    4
    
    
    $
    710,000
    
    
    $
    3,164
    
    
    $
    (7,841
    )
    
    $
    (4,677
    )
    
    
    0.92
 
 (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). 99




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##### Table of Contents



December 31, 2009Weighted Average(Dollars in thousands)
    
    Number of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    215,000
    
    
    $
    719
    
    
    $
    
    
    
    $
    719
    
    
    
    2.45A+
    
    
    1
    
    
    
    360,000
    
    
    
    58
    
    
    
    (10,691
    )
    
    
    (10,633
    )
    
    
    1.12A
    
    
    2
    
    
    
    210,000
    
    
    
    553
    
    
    
    (2,125
    )
    
    
    (1,572
    )
    
    
    0.11Subtotal
    
    
    4
    
    
    $
    785,000
    
    
    $
    1,330
    
    
    $
    (12,816
    )
    
    $
    (11,486
    )
    
    
    1.21
 
 (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 RiskDoral Financial is subject to credit risk, particularly with respect to its investment securities
and loans receivable. For a discussion of credit risk on investment securities please refer to Note
7 of the accompanying financial statements.Loans receivable are loans that Doral Financial holds for investment and, therefore, the Company is
at risk for the term of the loans. Because most of Doral Financials loans are made to borrowers
located in Puerto Rico and secured by properties located in Puerto Rico, the Company is subject to
credit risk tied to adverse economic, political or business developments and natural hazards, such
as hurricanes, that may affect Puerto Rico. The Puerto Rico economy has been in a recession since
2006. This has affected borrowers disposable incomes and their ability to make payments when due,
causing an increase in delinquency and foreclosures rates. The Company believes that these
conditions will continue to affect its credit quality. In addition, there is evidence that property
values have declined from their peak. This has reduced borrowers capacity to refinance and
increased the exposure to loss upon default. This decline in prices and increases in expected
defaults are incorporated into the loss rates used for calculating the Companys allowance for loan
and lease losses.With respect to mortgage loans originated for sale as part of its mortgage banking business, Doral
Financial is generally at risk for any mortgage loan default from the time it originates the
mortgage loan until the time it sells the loan or packages it into a mortgage-backed security. For
residential mortgage loans that are retained as a loan investment, Doral retains the credit risk
from the time the loan is originated until the loan is paid. With respect to FHA loans, Doral
Financial is fully insured as to principal by the FHA against foreclosure loss. VA loans are
guaranteed within a range of 25% to 50% of the principal amount of the loan subject to a maximum,
ranging from $22,500 to $50,750, in addition to the mortgage collateral. Prior to 2006, the Company
sold loans on a recourse basis as part of the ordinary course of business. As part of such
transactions, the Company committed to make payments to remedy loan defaults or to repurchase
defaulted loans. Refer to Off-Balance Sheet Activities above for additional information regarding
recourse obligations. In mid 2005, the Company discontinued the practice of selling mortgage loans
with recourse, except for recourse related to early payments defaults.The residential mortgage portfolio includes loans that, at some point were repurchased pursuant to
recourse obligations and, as a result, have a higher credit risk. Repurchases of delinquent loans
from recourse obligations for the quarter and the six month periods ended June 30, 2010 amounted to
$6.7 million and $14.0 million, respectively, and resulted in a loss of $0.9 million and $1.3
million for the corresponding periods. When repurchased from recourse obligations, loans are
recorded at their market value, which includes a discount for poor credit performance.With respect to residential mortgages, the Company has developed collection and loss mitigation
strategies to manage credit risk. The Company engages in the restructuring and/or modifications of
the residential mortgage debt of borrowers, who are delinquent due to economic or legal reasons, if
the Company determines that it is in the best interest for both the Company and the borrower to do
so. In some cases, due to the nature of the borrowers financial condition, the restructure or loan
modification fits the definition of Troubled Debt Restructuring (TDR) as defined by the ASC
310-40, Receivables- Troubled Debt Restructuring by Creditorsand ASC 470-60, Debt-Troubled Debt
 100




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Restructuring by Debtors.Such restructures are identified as TDRs and accounted for based on the
provisions ASC 310-10-35, Receivables-Measurement of Loan Impairment.The Company has developed several different restructuring plans with the purpose of aiding
borrowers with delinquent mortgage loans in returning to financial stability. Under the plans,
certain economic concessions have been granted to borrowers experiencing financial difficulties.
These concessions typically result from the Companys loss mitigation activities and could include
reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other
actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be
returned to performing status after considering the borrowers sustained repayment performance
under revised payment terms for a reasonable period.Doral Financial provided land acquisition, development, and construction financing to developers of
residential housing projects and, as consequence, has credit risk exposure to this sector.
Construction loans extended to developers are typically adjustable rate loans, indexed to the prime
interest rate with terms ranging generally from 12 to 36 months. Doral Financial principally
targeted developers of residential construction for single-family primary-home occupancy. As a
result of the negative outlook for the Puerto Rico economy and its adverse effect on the
construction industry, in the fourth quarter of 2007, the Company ceased financing new housing
projects in Puerto Rico. The recorded balance for the residential housing construction sector has
decreased from $276.2 million as of December 31, 2009, to $218.7 million as of June 30, 2010.
Management expects that the amount of construction loans will continue to decrease in future years.The first half of 2010 reflected lower delinquency in the construction and land portfolio compared
to December 2009 due to charge offs of certain loans that were reclassified to held for sale in
June 2010. The overall sentiment of the housing development industry in Puerto Rico continues
unchanged since the last quarter reflecting a negative outlook. The Company expects that absorption
will continue to be at low levels due to the current economic environment.During the second quarter of 2010 the commercial real estate portfolio experienced an increase in
late stage delinquency mainly attributed to adverse performance of the small commercial portfolio
related to the continued recessionary conditions in Puerto Rico. Management has taken certain
actions to mitigate the risk in the portfolio, including advisory services of third party providers
in order to work-out delinquent loans and prevent performing loans from becoming delinquent.Doral Financial mitigates loan defaults on its construction, land, commercial real estate, and
commercial and industrial portfolios through its Loan Workout function. The functions main
responsibility is to minimize losses upon default of relatively large credit relationships. The
group utilizes relationship officers, collection specialists, attorneys and has contracted with
third party service providers to supplement its internal resources. In the case of residential
construction projects, the workout function monitors project specifics, such as project management
and marketing, as deemed necessary.
 101




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Table W
 June 30, 2010
    
    
    December 31, 200990 days and over
    
    
    
    
    
    
    90 days and over(In thousands)
    
    TDRs
    
    
    delinquency
    
    
    TDRs
    
    
    delinquencyConsumerResidential mortgage
    
    $
    509,678
    
    
    $
    126,369
    
    
    $
    428,746
    
    
    $
    89,551FHA/VA guaranteed residential mortgage
    
    
    2,404
    
    
    
    873
    
    
    
    556
    
    
    
    220Personal
    
    
    1,574
    
    
    
    181
    
    
    
    1,301
    
    
    
    Total consumer
    
    
    513,656
    
    
    
    127,423
    
    
    
    430,603
    
    
    
    89,771CommercialCommercial real estate
    
    $
    57,481
    
    
    
    25,106
    
    
    
    51,194
    
    
    
    15,078Commercial and industrial
    
    
    5,471
    
    
    
    
    
    
    
    2,482
    
    
    
    Construction
    
    
    76,875
    
    
    
    66,022
    
    
    
    108,776
    
    
    
    97,737Land secured
    
    
    28,294
    
    
    
    1,311
    
    
    
    1,119
    
    
    
    579Total commercial
    
    
    168,121
    
    
    
    92,439
    
    
    
    163,571
    
    
    
    113,394Total TDRs
    
    $
    681,777
    
    
    $
    219,862
    
    
    $
    594,174
    
    
    $
    203,165
 Non-performing Loans
  102




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##### Table of Contents



Table X
 June 30, 2010
    
    
    December 31, 2009(In thousands)
    
    PR
    
    
    US
    
    
    Total
    
    
    PR
    
    
    US
    
    
    TotalNon-performing consumer, excluding
FHA/VA(1)Residential mortgage
    
    $
    402,560
    
    
    $
    416
    
    
    $
    402,976
    
    
    $
    397,596
    
    
    $
    102
    
    
    $
    397,698Personal
    
    
    553
    
    
    
    
    
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    Revolving lines of credit
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    519
    
    
    
    
    
    
    
    519Lease financing receivables
    
    
    471
    
    
    
    
    
    
    
    471
    
    
    
    1,091
    
    
    
    
    
    
    
    1,091Other consumer
    
    
    23
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing consumer,
excluding FHA/VA
    
    
    403,622
    
    
    
    416
    
    
    
    404,038
    
    
    
    399,206
    
    
    
    102
    
    
    
    399,308Non-performing commercialCommercial real estate
    
    
    169,243
    
    
    
    
    
    
    
    169,243
    
    
    
    130,811
    
    
    
    
    
    
    
    130,811Construction
    
    
    164,061
    
    
    
    3,910
    
    
    
    167,971
    
    
    
    251,971
    
    
    
    21,610
    
    
    
    273,581Land secured
    
    
    87,127
    
    
    
    
    
    
    
    87,127
    
    
    
    33,373
    
    
    
    
    
    
    
    33,373Commercial and industrial
    
    
    3,343
    
    
    
    
    
    
    
    3,343
    
    
    
    933
    
    
    
    
    
    
    
    933Total non-performing commercial
    
    
    423,774
    
    
    
    3,910
    
    
    
    427,684
    
    
    
    417,088
    
    
    
    21,610
    
    
    
    438,698Total non-performing loans, excluding FHA/VA
    
    $
    827,396
    
    
    $
    4,326
    
    
    $
    831,722
    
    
    $
    816,294
    
    
    $
    21,712
    
    
    $
    838,006OREO and repossessed unitsResidential mortgage
    
    $
    71,622
    
    
    $
    
    
    
    $
    71,622
    
    
    $
    76,461
    
    
    $
    
    
    
    $
    76,461Commercial
    
    
    14,336
    
    
    
    
    
    
    
    14,336
    
    
    
    14,283
    
    
    
    
    
    
    
    14,283Land secured
    
    
    10,821
    
    
    
    
    
    
    
    10,821
    
    
    
    1,597
    
    
    
    
    
    
    
    1,597Construction
    
    
    5,748
    
    
    
    650
    
    
    
    6,398
    
    
    
    1,128
    
    
    
    750
    
    
    
    1,878Other
    
    
    66
    
    
    
    
    
    
    
    66
    
    
    
    101
    
    
    
    
    
    
    
    101Total OREO and repossessed units
    
    $
    102,593
    
    
    $
    650
    
    
    $
    103,243
    
    
    $
    93,570
    
    
    $
    750
    
    
    $
    94,320Non-performing FHA/VA guaranteed
residential(1)(2)(3)
    
    $
    112,523
    
    
    $
    
    
    
    $
    112,523
    
    
    $
    10,273
    
    
    $
    
    
    
    $
    10,273Other non-performing assets
    
    
    2,628
    
    
    
    
    
    
    
    2,628
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets(4)
    
    $
    1,045,140
    
    
    $
    4,976
    
    
    $
    1,050,116
    
    
    $
    920,137
    
    
    $
    22,462
    
    
    $
    942,599Total NPAs as a percentage of the loan
portfolio, net, and OREO (excluding GNMA
defaulted loans)
    
    
    
    
    
    
    
    
    
    
    18.26
    %
    
    
    
    
    
    
    
    
    
    
    16.65
    %Total NPAs as a percentage of consolidated
total assets
    
    
    
    
    
    
    
    
    
    
    11.18
    %
    
    
    
    
    
    
    
    
    
    
    9.21
    %Total non-performing loans to total loans
(excluding GNMA defaulted loans and FHA/VA
guaranteed loans)
    
    
    
    
    
    
    
    
    
    
    15.37
    %
    
    
    
    
    
    
    
    
    
    
    15.55
    %Ratio of allowance for loan and lease
losses to total non-performing loans
(excluding loans held for sale) at end of
period(4)
    
    
    
    
    
    
    
    
    
    
    17.56
    %
    
    
    
    
    
    
    
    
    
    
    16.81
    %
 
 (1)
    
    FHA/VA delinquent loans are separated from the non-performing loans that present
substantial credit risk to the Company in order to recognize the different
risk of loss presented by these assets.(2)
    
    Does not include approximately $122.7 million and $128.6 million of GNMA defaulted
loans over 90 days delinquent (for which the Company has the option, but not an obligation, to
buy back from the pools serviced), included as part of the loans held for sale portfolio as of
June 30, 2010 and December 31, 2009, respectively.(3)
    
    In November 2009, the Company evaluated its non-performing assets policy and placed
in accrual status all FHA loans until 300 days delinquent because the principal balance of
these loans is insured or guaranteed under applicable FHA program and interest is, in most
cases, fully recovered in foreclosures proceedings. As a result of the change in policy, total
non-performing FHA guaranteed residential mortgage loans exclude $55.8 million and $105.5
million of FHA loans as of June 30, 2010 and December 31, 2009, respectively, that were 90
days or more past due.(4)
    
    Excludes FHA and VA claims amounting to $16.6 million and $15.6 million as of June
30, 2010 and December 31, 2009, respectively. 103




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Table Y
    
    Quarters Ended
    
    
    Six Month PeriodsJune  30,
    
    
    Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    872,168
    
    
    $
    804,437
    
    
    $
    838,006
    
    
    $
    712,403Additions
    
    
    137,457
    
    
    
    48,666
    
    
    
    197,749
    
    
    
    234,410Repurchases
    
    
    6,672
    
    
    
    5,559
    
    
    
    11,074
    
    
    
    9,920Remediated / cure
    
    
    (122,740
    )
    
    
    (40,348
    )
    
    
    (113,869
    )
    
    
    (121,916
    )Foreclosed
    
    
    (35,071
    )
    
    
    (16,194
    )
    
    
    (48,663
    )
    
    
    (25,340
    )Write-downs
    
    
    (51,794
    )
    
    
    (4,905
    )
    
    
    (52,575
    )
    
    
    (12,232
    )Balance at end of period
    
    $
    831,722
    
    
    $
    797,245
    
    
    $
    831,722
    
    
    $
    797,245
      104




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##### Table of Contents



Table
Z
 Composition of Mortgage
Non-Performing Assets
 June 30, 2010
 Collateral Type
    
    Loan To Value
    
    
    DistributionFHA/VA loans
    
    
    
    
    
    
    21.9
    %Loans with private mortgage insurance
    
    
    
    
    
    
    5.7
    %Loans with no mortgage insurance
    
    
    < 60
    %
    
    
    12.5
    %61-80
    %
    
    
    33.7
    %81-90
    %
    
    
    12.7
    %Over 91
    %
    
    
    13.5
    %Total loans
    
    
    
    
    
    
    100.0
    %
   90 days and over
    
    
    Percentage of amountYear
    
    Amount
    
    
    delinquency at
    
    
    past due restructuredrestructured
    
    restructured
    
    
    June 30, 2010
    
    
    in year2007
    
    $
    5,647
    
    
    $
    1,230
    
    
    
    21.8
    %2008
    
    
    83,147
    
    
    
    32,997
    
    
    
    39.7
    %2009
    
    
    275,267
    
    
    
    70,891
    
    
    
    25.8
    %2010
    
    
    148,021
    
    
    
    22,124
    
    
    
    14.9
    %$
    512,082
    
    
    $
    127,242
    
    
    
    24.8
    %
  105




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##### Table of Contents



Table AA
 June 30, 2010
    
    
    December 31, 2009(In thousands)
    
    PR
    
    
    US
    
    
    Total
    
    
    PR
    
    
    US
    
    
    TotalResidential construction loans(1)
    
    $
    218,279
    
    
    $
    402
    
    
    $
    218,681
    
    
    $
    275,751
    
    
    $
    404
    
    
    $
    276,155Multi-family, condominium and commercial construction loans
    
    
    
    
    
    
    103,813
    
    
    
    103,813
    
    
    
    72,681
    
    
    
    103,550
    
    
    
    176,231Total undisbursed funds under existing commitments(1) (2)
    
    
    17,277
    
    
    
    11,332
    
    
    
    28,609
    
    
    
    17,677
    
    
    
    13,202
    
    
    
    30,879Total non-performing(1)
    
    
    164,061
    
    
    
    3,910
    
    
    
    167,971
    
    
    
    251,971
    
    
    
    21,610
    
    
    
    273,581Net charge offs(1)
    
    
    38,408
    
    
    
    991
    
    
    
    39,399
    
    
    
    17,754
    
    
    
    
    
    
    
    17,754Allowance for loan losses(1)
    
    
    15,808
    
    
    
    1,042
    
    
    
    16,850
    
    
    
    42,986
    
    
    
    1,640
    
    
    
    44,626Non-performing construction to total construction loans
    
    
    75.16
    %
    
    
    3.75
    %
    
    
    52.09
    %
    
    
    72.32
    %
    
    
    20.79
    %
    
    
    60.48
    %Net charge-offs on an annualized basis to total construction loans
    
    
    35.48
    %
    
    
    1.92
    %
    
    
    24.64
    %
    
    
    10.28
    %
    
    
    
    
    
    
    7.91
    %
 
 (1)
    
    Excludes land loans.(2)
    
    Includes undisbursed funds to matured loans and loans in non-accrual status that are still active.   Table BB
 June 30, 2010
    
    
    December 31, 2009(In thousands)
    
    PR
    
    
    US
    
    
    Total
    
    
    PR
    
    
    US
    
    
    TotalConsumer loans past due 90 days and still accruingResidential
mortgage(1)
    
    $
    1,201
    
    
    $
    610
    
    
    $
    1,811
    
    
    $
    
    
    
    $
    
    
    
    $
    Credit
cards(2)
    
    
    1,349
    
    
    
    
    
    
    
    1,349
    
    
    
    1,231
    
    
    
    
    
    
    
    1,231Other
consumer(3)
    
    
    1,306
    
    
    
    
    
    
    
    1,306
    
    
    
    906
    
    
    
    
    
    
    
    906Total consumer loans past due 90 days and still accruing
    
    
    3,856
    
    
    
    610
    
    
    
    4,466
    
    
    
    2,137
    
    
    
    
    
    
    
    2,137Commercial loans past due 90 days and still accruingCommercial and industrial
    
    
    1,234
    
    
    
    
    
    
    
    1,234
    
    
    
    1,245
    
    
    
    
    
    
    
    1,245Total loans past due 90 days and still accruing
    
    $
    5,090
    
    
    $
    610
    
    
    $
    5,700
    
    
    $
    3,382
    
    
    $
    
    
    
    $
    3,382
 106




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##### Table of Contents



(1)
    
    Excludes $55.8 million and $105.5 million, FHA/VA
guaranteed residential mortgages past due 90 days and still
accruing, as of June 30, 2010 and December 31, 2009, respectively.(2)
    
    Credit cards until 180 days delinquent.(3)
    
    Revolving lines of credit until 180 days delinquent.  Table CC
 (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Past-due 30-89 days consumerResidential mortgage(1)
    
    $
    108,428
    
    
    $
    87,900Other consumer
    
    
    2,322
    
    
    
    2,859Total past-due consumer
    
    
    110,750
    
    
    
    90,759Past-due 30-89 days commercialCommercial
real estate
    
    
    21,443
    
    
    
    31,132Land
    
    
    295
    
    
    
    11,745Construction
    
    
    14,415
    
    
    
    636Commercial and industrial
    
    
    1,301
    
    
    
    625Total past-due commercial
    
    
    37,454
    
    
    
    44,138Total past-due loans
    
    $
    148,204
    
    
    $
    134,897
 
 (1)
    
    Excludes $9.3 million and $7.4 million of FHA/VA guaranteed loans.  Other Real Estate Owned
   (In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Residential
    
    $
    71,622
    
    
    $
    76,461Commercial
    
    
    14,336
    
    
    
    14,283Land
    
    
    10,821
    
    
    
    1,597Construction
    
    
    6,398
    
    
    
    1,878Balance at end of period
    
    $
    103,177
    
    
    $
    94,219
 107




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##### Table of Contents



Quarters Ended
    
    
    Six Month PeriodsJune  30,
    
    
    Ended June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Balance at beginning of period
    
    $
    100,345
    
    
    $
    70,208
    
    
    $
    94,219
    
    
    $
    61,340Additions
    
    
    37,368
    
    
    
    28,500
    
    
    
    56,090
    
    
    
    48,662Sales
    
    
    (6,161
    )
    
    
    (13,432
    )
    
    
    (13,139
    )
    
    
    (21,313
    )Retirement
    
    
    (1,735
    )
    
    
    283
    
    
    
    (4,124
    )
    
    
    (2,301
    )Lower of cost or market adjustments
    
    
    (26,640
    )
    
    
    (1,595
    )
    
    
    (29,869
    )
    
    
    (2,424
    )Balance at end of period
    
    $
    103,177
    
    
    $
    83,964
    
    
    $
    103,177
    
    
    $
    83,964
    Allowance for Loan and Lease Losses (ALLL)
  Residential mortgage.
 108




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##### Table of Contents



Construction, commercial real estate, commercial and industrial and land.
    Consumer.
  Quarter ended June 30, 2010
    
    
    Six month period ended June 30, 2010Beginning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending
    
    
    Beginning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending(In thousands)
    
    Balance
    
    
    Provision
    
    
    Charge-offs
    
    
    Recoveries
    
    
    Balance
    
    
    Balance
    
    
    Provision
    
    
    Charge-offs
    
    
    Recoveries
    
    
    BalanceResidential mortgage
    
    $
    53,708
    
    
    $
    18,769
    
    
    $
    (14,497
    )
    
    $
    
    
    
    $
    57,980
    
    
    $
    51,814
    
    
    $
    25,378
    
    
    $
    (19,212
    )
    
    $
    
    
    
    $
    57,980Construction
    
    
    39,854
    
    
    
    16,485
    
    
    
    (39,489
    )
    
    
    
    
    
    
    16,850
    
    
    
    44,626
    
    
    
    11,623
    
    
    
    (39,521
    )
    
    
    122
    
    
    
    16,850Commercial real estate
    
    
    24,745
    
    
    
    4,771
    
    
    
    (430
    )
    
    
    
    
    
    
    29,086
    
    
    
    21,883
    
    
    
    7,839
    
    
    
    (686
    )
    
    
    50
    
    
    
    29,086Land
    
    
    17,379
    
    
    
    1,220
    
    
    
    
    
    
    
    
    
    
    
    18,599
    
    
    
    9,832
    
    
    
    8,767
    
    
    
    
    
    
    
    
    
    
    
    18,599Commercial
and industrial
    
    
    4,032
    
    
    
    1,728
    
    
    
    (978
    )
    
    
    43
    
    
    
    4,825
    
    
    
    4,281
    
    
    
    1,654
    
    
    
    (1,176
    )
    
    
    66
    
    
    
    4,825Other
    
    
    7,763
    
    
    
    1,644
    
    
    
    (2,106
    )
    
    
    272
    
    
    
    7,573
    
    
    
    8,338
    
    
    
    3,277
    
    
    
    (4,555
    )
    
    
    513
    
    
    
    7,573$
    147,481
    
    
    $
    44,617
    
    
    $
    (57,500
    )
    
    $
    315
    
    
    $
    134,913
    
    
    $
    140,774
    
    
    $
    58,538
    
    
    $
    (65,150
    )
    
    $
    751
    
    
    $
    134,913Allowance for loan
and lease losses as a
percentage of loans
receivable outstanding,
at the end of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.44
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.44
    %Provision for loan
losses to net
charge-offs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78.02
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90.90
    %Net charge-offs to
average loans
receivable outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.03
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.16
    %Allowance for loan
and lease losses to net
charge-offs on an
annualized basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58.82
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103.89
    %
 109




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Quarter ended June 30, 2009
    
    
    Six month period ended June 30, 2009Beginning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending
    
    
    Beginning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending(In thousands)
    
    Balance
    
    
    Provision
    
    
    Charge-offs
    
    
    Recoveries
    
    
    Balance
    
    
    Balance
    
    
    Provision
    
    
    Charge-offs
    
    
    Recoveries
    
    
    BalanceResidential mortgage
    
    $
    36,389
    
    
    $
    7,523
    
    
    $
    (1,186
    )
    
    $
    2
    
    
    $
    42,728
    
    
    $
    33,026
    
    
    $
    11,919
    
    
    $
    (2,219
    )
    
    $
    2
    
    
    $
    42,728Construction
    
    
    49,568
    
    
    
    2,697
    
    
    
    (1,608
    )
    
    
    
    
    
    
    50,657
    
    
    
    45,159
    
    
    
    11,052
    
    
    
    (5,554
    )
    
    
    
    
    
    
    50,657Commercial real estate
    
    
    31,148
    
    
    
    (3,156
    )
    
    
    (1
    )
    
    
    9
    
    
    
    28,000
    
    
    
    27,076
    
    
    
    2,933
    
    
    
    (2,035
    )
    
    
    26
    
    
    
    28,000Land
    
    
    13,880
    
    
    
    (690
    )
    
    
    
    
    
    
    
    
    
    
    13,190
    
    
    
    13,193
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    13,190Commercial
and industrial
    
    
    3,745
    
    
    
    1,540
    
    
    
    (2,130
    )
    
    
    6
    
    
    
    3,161
    
    
    
    4,290
    
    
    
    2,825
    
    
    
    (3,967
    )
    
    
    13
    
    
    
    3,161Other
    
    
    9,170
    
    
    
    2,219
    
    
    
    (2,522
    )
    
    
    166
    
    
    
    9,033
    
    
    
    9,276
    
    
    
    5,032
    
    
    
    (5,642
    )
    
    
    367
    
    
    
    9,033$
    143,900
    
    
    $
    10,133
    
    
    $
    (7,447
    )
    
    $
    183
    
    
    $
    146,769
    
    
    $
    132,020
    
    
    $
    33,758
    
    
    $
    (19,417
    )
    
    $
    408
    
    
    $
    146,769Allowance for loan
and lease losses as a
percentage of loans
receivable outstanding,
at the end of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.77
    %Provision for loan
losses to net
charge-offs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139.50
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177.59
    %Net charge-offs to
average loans
receivable outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.14
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.36
    %Allowance for loan
and lease losses to net
charge-offs on an
annualized basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    503.73
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382.87
    %
      110




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##### Table of Contents



(In thousands)
    
    June 30, 2010
    
    
    December 31, 2009Impaired loans with allowance
    
    $
    444,125
    
    
    $
    346,145Impaired loans without allowance
    
    
    165,517
    
    
    
    184,601Total impaired loans
    
    $
    609,642
    
    
    $
    530,746Related allowance
    
    $
    52,862
    
    
    $
    48,223Average impaired loan portfolio
    
    $
    572,580
    
    
    $
    449,741
  111




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##### Table of Contents



Counterparty Risk
   Operational Risk
  Overview of Operational Risk Management
  Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions; Puerto Rico Economy and Fiscal Condition
  112




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##### Table of Contents



Fiscal Condition.
 Fiscal Stabilization Plan.
  113




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##### Table of Contents



Economic Reconstruction Plan.
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  114




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
  Changes in Internal Control Over Financial Reporting
  115




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Risk Factors Risk Factors
 The recently adopted Dodd-Frank Wall Street Reform and Consumer Protection Act will affect our
business
  (i)
    
    establishing a Bureau of Consumer Financial Protection having broad authority
to regulate providers of credit, savings and other consumer financial products and
services, narrows the scope of federal preemption of state consumer laws and expands
the authority of state attorneys general to bring actions to enforce federal consumer
protection legislation;(ii)
    
    creating a structure to regulate systematically important financial companies,
and provide regulators with the power to require such companies to sell or transfer
assets and terminate activities if the regulators determine the size or the scope of
the activities of the company pose a threat to the safety and soundness of the company
or the financial stability of the United States;(iii)
    
    requiring more comprehensive regulation of the over-the-counter derivatives
market, including providing for more strict capital and margin requirements, the
central clearing of standardized over-the-counter derivatives, and heightened
supervision of all over-the-counter derivatives dealers and major market participants;(iv)
    
    limiting the ability of banking entities to engage in certain proprietary
trading activities and restricting their ownership of, investment in or sponsorship of
hedge funds and private equity funds;(v)
    
    restricting the interchange fees payable on debit card transactions;(vi)
    
    abolishing the Office of Thrift Supervision (OTS) and transferring its
functions and responsibilities regarding the supervision of federal savings banks, such
as Doral Bank NY, to the Office of the Comptroller of the Currency (OCC);(vii)
    
    strengthening the regulatory oversight of securities and capital markets
activities by the US Securities and Exchange Commission (SEC) and enhancing the safety
and soundness of the securitization process, including a requirement that securitizers
and originators retain a portion of the credit risk for any asset that they securitize
or originate;
 116




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##### Table of Contents



(viii)
    
    permanently increasing the federal deposit insurance from $100,000 to $250,000,
permitting depository institutions to pay interest on commercial checking accounts and
permitting de novointerstate branching by federal and state depository institutions
alike; and(ix)
    
    strengthening existing laws and regulations applicable to public companies
governing corporate accountability, giving shareholders say on pay and other
corporate governance rights, and imposing limitations on certain executive compensation
practices.
   The Companys business is concentrated in Puerto Rico and continued weakness of Puerto Rico economy
may continue to adversely affect us.
     117




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##### Table of Contents



Increases in FDIC insurance assessments may have a material adverse effect on the Companys
earnings.
     The consolidation of the Puerto Rico banking industry as a result of recent bank failures may
adversely affect us.
   During 2010, the Companys credit quality has 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.
  118




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An additional loss may have to be accrued by the Company with respect to a pending Lehman Brothers
Inc. claim.
   5
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  119




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. REMOVED AND RESERVED
 
 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).3.3
    
    Certificate of Amendment of the Certificate of Incorporation of Doral Financial
dated March 12, 2010 (Incorporated herein by reference to exhibit number 3.1 of
Doral Financials Current Report on Form 8-K filed with the Commission on March
16, 2010).3.4
    
    Certificate of Designations of Mandatorily Convertible Non-Cumulative
Non-Voting Preferred Stock dated April 20, 2010 (Incorporated herein by
reference to exhibit number 3.1 of Doral Financials Current Report on Form 8-K
filed with the Commission on April 26, 2010).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).
 120




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##### Table of Contents



ExhibitNumber
    
    Description4.2
    
    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 March 31, 1999 filed with the Commission on November 15,
1999).4.3
    
    Trust Agreement between AFICA and Citibank, N.A. (Incorporated herein by
reference to exhibit number 4.2 of Doral Financials Quarterly Report on
Form 10-Q for the quarter ended March 31, 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 March 31, 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 March 31, 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 March 31,
2003).4.15
    
    Form of Stock Certificate for Mandatorily Convertible Non-Cumulative Non-Voting
Preferred Stock
 121




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##### Table of Contents



ExhibitNumber
    
    Description(Incorporated herein by reference to exhibit number 4.1 of
Doral Financials Current Report on Form 8-K filed with the Commission on April
26, 2010)(included in Exhibit 3.4 hereto).10.1
    
    Order to Cease and Desist issued by the Board of Governors of the Federal
Reserve System on March 16, 2006. (Incorporated herein by reference to exhibit
number 99.2 of Doral Financials Current Report of Form 8-K filed with the
Commission on March 17, 2006).10.2
    
    Stipulation and Agreement of Partial Settlement, dated as of April 27, 2007.
(Incorporated herein by reference to same exhibit number of Doral Financials
Annual Report on Form 10-K for the year ended December 31, 2006 filed with the
Commission on April 30, 2007).10.3
    
    Order to Cease and Desist issued by the Federal Deposit Insurance Corporation,
dated February 19, 2008. (Incorporated herein by reference to exhibit number
99-2 of Doral Financials Current Report of Form 8-K filed with the Commission
on February 21, 2008).10.4
    
    Purchase Agreement, dated September 23, 2003, between Doral Financial
Corporation and Wachovia Securities LLC, as Representative of the Initial
Purchasers of Doral Financials 4.75% Perpetual Cumulative Convertible
Preferred Stock named therein. (Incorporated herein by reference to
exhibit number 1 to Doral Financials Current Report on Form 8-K filed with the
Commission on March 31, 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 March 31, 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 March 31, 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).
 122




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##### Table of Contents



ExhibitNumber
    
    Description10.12
    
    Doral Financial 2008 Stock Incentive Plan (Incorporated herein by reference to
Annex A to the Definitive Proxy Statement for the Doral Financial 2008 Annual
Stockholders Meeting filed with the Commission on April 11, 2008).10.13
    
    Employment Agreement, dated as of March 24, 2009, between Doral Financial and
Robert E. Wahlman. (Incorporated herein by reference to exhibit number 99.2 to
Doral Financials Current Report on Form 8-K filed with the Commission on March
26, 2009).10.14
    
    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).10.15
    
    Cooperation Agreement dated as of April 19, 2010 between Doral Financial
Corporation, Doral Holdings Delaware, LLC, Doral Holdings, L.P. and Doral GP
Ltd. (Incorporated herein by reference to exhibit number 10.15 to Doral
Financials Quarterly Report on Form 10-Q for the quarter ended March 31, 2010
filed with the Commission on May 10, 2010).10.16
    
    Stock Purchase Agreement dated as of April 19, 2010 between Doral Financial
Corporation with the purchasers named therein. (Incorporated herein by
reference to exhibit number 10.16 to Doral Financials Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010 filed with the Commission on May
10, 2010).10.17
    
    Amendment to Employment Agreement between the Company and Robert Wahlman dated
June 25, 2010. (Incorporated herein by reference to exhibit number 10.3 to
Doral Financials Current Report on Form 8-K filed with the Commission on June
25, 2010).10.18
    
    Form of Restricted Stock Award Granted to Certain Named Executive Officers of
the Company on June 25, 2010. (Incorporated herein by reference to
exhibit number 10.1 to Doral Financials Current Report on Form 8-K filed with
the Commission on June 25, 2010).10.19
    
    Form of Retention Bonus Letter Regarding Retention Bonuses Granted to Certain
Named Executive Officers of the Company on June 25, 2010. (Incorporated herein
by reference to exhibit number 10.2 to Doral Financials Current Report on
Form 8-K filed with the Commission on June 25, 2010).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.
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##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
                         (Registrant)Date: August 9, 2010

/s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: August 9, 2010

/s/ Robert E. WahlmanRobert E. WahlmanExecutive Vice President and
Chief Financial Officer 124