• Net interest income for the first quarter of 2009 was $36.1 million, compared to $39.0 million for the comparable period in 2008. The decrease of $2.9 million in net interest income for 2009, compared to 2008, was mainly related to a reduction in interest income of $11.6 million, partially offset by a decrease in interest expense of $8.6 million. The reduction in interest income was principally related to (i) a reduction of $6.2 million in income on other interest-earning assets; (ii) a reduction of $3.8 million in interest income on loans; (iii) a reduction of $9.9 million in interest income on investment securities; (iv) partially offset by an increase of $8.3 million in interest income on mortgage-backed securities. Interest income was directly affected by the lower average market interest rates on the floating rate investment securities held by the Company. The reduction in interest expense resulted from the lower average market interest rates and repositioning of the Company's funding by replacing certain callable brokered deposits with lower cost funding.

• The provision for loan and lease losses was $23.6 million, compared to $4.8 million for the same period in 2008. The increase in the provision for loan and lease losses resulted from the effects of continuing deterioration of the Puerto Rico economy on the residential real estate market, causing lower home absorption rates on new construction, increased defaults on existing mortgages, weakening economic situation of existing borrowers, and the need to increase loan loss reserves.

• Non-interest income for the first quarter of 2009 was $1.6 million, compared to $17.4 million for the corresponding period in 2008. The decrease in non-interest income of $15.8 million for the first quarter of 2009, compared to the same period in 2008, resulted from a decrease in the U.S. Treasury securities portfolio value of $7.3 million in the first quarter of 2009 compared to an increase in portfolio value of $7.4 million in the first quarter of 2008, and a $1.2 million increase in loss on the value of the interest-only strip. The Company uses U.S. Treasury securities in its hedging programs and classifies the portfolio as trading, thereby requiring mark-to-market accounting for the securities.

• Non-interest expense for the first quarter of 2009 was $60.4 million, compared to $54.6 million for the corresponding period in 2008, an increase of $5.8 million. Severance expenses associated with a reduction in work force executed during the first quarter of 2009 resulted in an increase in compensation expense of $3.8 million compared to first quarter 2008. The reduction in force recognized the reduced level of business activity in Puerto Rico and positions the bank for more efficient operations in future periods. In addition, increases in professional expenses related to legacy issues, FDIC insurance expense and EDP expenses were partially offset by decreases in advertising and depreciation and amortization expenses.

• The Company reported other comprehensive losses of approximately $12.7 million for the first quarter of 2009 compared to $57.2 million for the corresponding 2008 period. The Company's other comprehensive loss for the first quarter of 2009 resulted principally from the reduction in value of its available for sale securities portfolio. As of March 31, 2009, the Company's accumulated other comprehensive loss (net of income tax benefit) totaled $135.9 million, compared to $123.2 million as of December 31, 2008.

• Doral Financial's loan production for the first quarter of 2009 was $242.3 million, compared to $372.1 million for the comparable period in 2008, a decrease of approximately 35%. The decrease in Doral Financial's loan production for the first quarter of 2009 reflects the reduction in Puerto Rico real estate purchase and mortgage lending activity caused by the end of the Puerto Rico government tax incentive program for the purchase of new homes, and changes in laws and regulations, such as the recent amendment to the Puerto Rico Notary Law that led to an increase in the closing costs and fees payable by persons involved in real estate purchase and mortgage loan transactions in Puerto Rico, as well as tighter loan underwriting standards.

• Total assets as of March 31, 2009 and December 31, 2008, remained relatively stable at $10.1 billion. A decrease of $103.4 million in the Company's investment securities portfolio was partially offset by increases in cash and due from banks of $28.3 million, money market investments of $57.2 million and loans of $4.3 million. Total liabilities were $9.3 billion at March 31, 2009, compared to $9.2 billion at December 31, 2008. Total liabilities were affected by a decrease of $351.5 million in deposits that was offset by an increase of $379.4 million in short-term borrowings.

The following table sets forth certain selected financial data as of the dates indicated and for the periods indicated. This information should be read in conjunction with the Company's financial statements and the related notes thereto.

TABLE A
SELECTED FINANCIAL DATA

                                                                              March 31,
                                                                       2009                2008
Selected Income Statement Data:
Interest income                                                    $    116,494        $    128,108
Interest expense                                                         80,424              89,064

Net interest income                                                      36,070              39,044
Provision for loan and lease losses                                      23,625               4,786

Net interest income after provision for loan and lease losses            12,445              34,258
Total non-interest income                                                 1,583              17,379
Non-interest expenses                                                    60,426              54,563

Loss before income taxes                                                (46,398 )            (2,926 )
Income tax benefit (1)                                                     (108 )              (628 )

Net loss                                                           $    (46,290 )      $     (2,298 )

Net loss attributable to common shareholders                       $    (54,615 )      $    (10,623 )


Net loss per common share(2)                                       $      (1.01 )      $      (0.20 )


Cash Dividends Declared, Preferred Stock                           $      8,325        $      8,325
Book Value Per Common Share                                        $       4.92        $      13.11
Weighted - Average Common Shares Outstanding                         53,810,110          53,810,110

TABLE A
SELECTED FINANCIAL DATA

                                                                March 31,
                                                          2009              2008
 Common shares outstanding at end of period             53,810,110        53,810,110

 Selected Balance Sheet Data at Period End:
 Total investment securities                          $  3,695,582      $  3,587,300
 Total loans(3)                                          5,510,650         5,405,219
 Servicing assets, net                                     104,426           139,570
 Total assets                                           10,114,667        10,471,437
 Deposit accounts                                        4,051,242         4,128,535
 Total borrowings                                        4,914,981         4,671,386
 Total liabilities                                       9,276,768         9,192,532
 Preferred stock                                           573,250           573,250
 Common stock                                                  538               538
 Stockholders' equity                                      837,899         1,278,905
 Selected Average Balance Sheet Data at Period End:
 Total interest-earning assets                           9,421,720         8,738,164
 Total assets                                           10,027,573         9,559,465
 Total interest-bearing liabilities                      8,584,069         7,590,977
 Total stockholders' equity                                852,822         1,261,229
 Operating Data:
 Loan production                                      $    242,338      $    372,074
 Loan servicing portfolio(4)                             9,267,513         9,874,498
 Selected Financial Ratios(5)
 Performance:
 Net interest margin                                          1.55 %            1.80 %
 Return on average assets                                    (1.87 )%          (0.10 )%
 Return on average common equity                            (79.23 )%          (6.21 )%
 Average common equity to average assets                      2.79 %            7.20 %
 Capital:
 Leverage ratio                                               7.18 %           10.15 %
 Tier 1 risk-based capital ratio                             11.82 %           15.17 %
 Total risk-based capital ratio                              16.16 %           16.49 %

(1) See Note 22 of the consolidated financial statements for an explanation of the computation of income tax benefit.

(2) For the quarters ended March 31, 2009 and 2008, net loss per common shares represents the basic and diluted loss per common shares, respectively, for each of the periods presented.

(3) Includes loans held for sale.

(4) Represents the total portfolio of loans serviced for third parties. Excludes
$4.2 billion
and
$3.7 billion
of mortgage
loans owned
by Doral
Financial at
March 31,
2009 and
2008,
respectively.

(5) Average balances are computed on a daily basis.

SUBSEQUENT EVENTS
Preferred Stock Conversion
The Company's Board of Directors approved in May 2009 an offering to exchange a stated amount of its newly issued common stock and cash in exchange a limited number of preferred stock shares. Each of the four series of Doral Financial Corporation preferred stock is eligible for exchange, but priority of acceptance is given to the perpetual cumulative convertible preferred stock. The offer to exchange commenced on May 7, 2009 and expires on June 8, 2009.
The Company is making this offer to reduce future dividend obligations and to improve its capital structure. If the preferred securities are acquired at the amount offered, the Company will increase its tangible common shareholders equity (common shareholders equity less intangible assets) on an aggregate and per share basis. The exchange would also increase regulatory Tier 1 capital. The Company believes the expected increase in tangible common equity capitalization and preservation of liquidity as a result of this offer will improve our ability to operate in the current economic environment and enhance our long-term financial stability.

CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Company's Consolidated Financial Statements and accompanying notes. Various elements of Doral Financial's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. The Company believes that the judgments, estimates and assumptions used in the preparation of its Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are appropriate given the factual circumstances as of March 31, 2009. However, given the sensitivity of Doral Financial's Consolidated Financial Statements to these estimates, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. In April 2009, the Financial Accounting Standard Board ("FASB") issued FASB Staff Position ("FSP") FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions Than Are Not Orderly" ("FSP FAS 157-4"). This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, "Fair Value Measurements", when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate when a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. If a reporting entity elects to adopt early either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," the reporting entity also is required to adopt early this FSP. Additionally, if the reporting entity elects to adopt early this FSP, FSP FAS 115-2 and FAS 124-2 also must be adopted early. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. Management will adopt the accounting and disclosure requirements for the second quarter of 2009, and is currently evaluating the effect of adopting the guidance.

Recognition and Presentation of Other-Than-Temporary Impairments. In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP FAS 115-2"). This FSP amends the other-than-temporary impairment guidance for debt securities (FAS 115 and EITF 99-20) to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. If an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments", the entity is also required to early adopt this FSP. Additionally, if an entity elects to early adopt this FSP, it is required to adopt early FSP FAS 157-4. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The Company will adopt the standard for the second quarter of 2009. Interim Disclosures about Fair Value of Financial Instruments. In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". This FSP amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments", to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting", to require the disclosures in summarized financial information at interim reporting periods. Under this FSP, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, an entity shall disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by Statement 107. This FSP shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. Management is evaluating the enhanced disclosure requirements for the second quarter of 2009.

RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008 The components of Doral Financial's revenues are: (1) net interest income;
(2) net gain on mortgage loan sales and fees; (3) trading activities;
(4) investment activities; (5) servicing loss; and (6) commissions, fees and other income.
NET INTEREST INCOME
Net interest income is the excess of interest earned by Doral Financial on its interest-earning assets over the interest incurred on its interest-bearing liabilities. Doral Financial's net interest income is subject to interest rate risk due to the repricing and maturity mismatch in the Company's assets and liabilities. Generally, Doral Financial's assets have a longer maturity and a later repricing date than its liabilities, which results in lower net interest income in periods of rising short-term interest rates and higher net interest income in periods of declining short-term interest rates. Please refer to "Risk Management" below for additional information on the Company's exposure to interest rate risk.
Net interest income for the quarter ended March 31, 2009 totaled to $36.1 million, compared to $39.0 million for the corresponding 2008 period, a decrease of $2.9 million, or 7.6%. This decrease in net interest income was driven by a reduction in interest income of $11.6 million, primarily related to
(i) a reduction of $6.2 million in interest income on other interest-earning assets associated with the reduction in the average balance of money markets as a result of the use of these instruments to finance the purchase of securities associated with the Company's plan to replace its earning assets ("Asset Replacement Program"); (ii) a reduction of $3.8 million in interest income on loans primarily related to the increase in delinquencies in the Company's loan portfolio between periods of $147.9 million; (iii) a reduction of $9.9 million in interest income on investment securities partially related to the reduction of $0.5 billion associated to the termination of repurchase financing arrangements and the sale of collateral associated with such financing arrangements with Lehman Brothers, Inc. ("LBI"); (iv) partially offset by an increase of $8.3 million in interest income on mortgage-backed securities associated with the purchase of securities through the Asset Replacement Program. The decrease in interest income was partially offset by a decrease in interest expense. Interest expense decreased by $8.6 million, or 9.7% for the quarter ended March 31, 2009, compared to the corresponding 2008 period. The decrease in interest expense was driven by (i) a decrease of $4.4 million in interest expense on deposits as a result of repositioning of the Company's deposits products, driven by the run off of brokered deposits and the general decline in interest rates; and (ii) a reduction of $4.2 million in borrowing costs also associated with the general decline in interest rates and lower borrowing costs under lines of credit with the Federal Home Loan Bank and an auction of term funds to depository institutions granted by the Federal Reserve under the Term Auction Facility ("TAF"). There was an increase in the average balance of interest-earning assets of $0.7 billion, when comparing the first quarter of 2009 to the corresponding 2008 period, mainly due to an increase of approximately $1.9 billion in the average balance of mortgage-backed securities partially offset by a reduction of $0.7 billion in investment securities and a reduction of $0.7 billion in the average balance of other interest-earning assets associated with the decrease in money market investments. For the quarter ended March 31, 2009, the average balance of interest-bearing liabilities increased by $1.0 billion, compared to the corresponding 2008 period. This increase in the average balance of interest-bearing liabilities was primarily related to average balance of other short-term borrowings, which represents the balance of a line of credit with the Federal Home Loan Bank and term funds under TAF, as well as an increase in average repurchase agreements. The increase in the average balance of interest-earning assets coupled with the increase in the average balance of the interest-bearing liabilities resulted in an increase in leverage and a decrease in interest rate margin from 1.80% for the quarter ended March 31, 2008 to 1.55% for the quarter ended March 31, 2009. The following table presents, for the periods indicated, Doral Financial's average balance sheet, the total dollar amount of interest income from its average interest-earning assets and the related yields, as well as the interest expense on its average interest-bearing liabilities, expressed in both dollars and rates, and the net interest margin and spread. This table does not reflect any effect of income taxes. Average balances are based on average daily balances.

TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(Dollars in thousands)

                                                                                            QUARTER ENDED MARCH 31,
                                                                        2009                                                        2008
                                                   AVERAGE                                AVERAGE              AVERAGE                               AVERAGE
                                                   BALANCE            INTEREST           YIELD/RATE            BALANCE           INTEREST           YIELD/RATE
ASSETS:
Interest-earning assets:
Total loans(1)(2)                                $  5,594,175         $  81,588                 5.91 %       $ 5,450,698         $  85,382                 6.30 %
Mortgage-backed securities                          3,129,230            27,381                 3.55 %         1,265,345            19,102                 6.07 %
Interest-only strips                                   51,662             1,628                12.78 %            46,658             1,674                14.43 %
Investment securities                                 515,523             4,907                 3.86 %         1,174,303            14,766                 5.06 %
Other interest-earning assets                         131,130               990                 3.06 %           801,160             7,184                 3.61 %


Total interest-earning assets/interest
income                                              9,421,720         $ 116,494                 5.01 %         8,738,164         $ 128,108                 5.90 %


Total non-interest-earning assets                     605,853                                                    821,301

Total assets                                     $ 10,027,573                                                $ 9,559,465