• Net interest income for the third quarter of 2009 was $43.6 million, compared to $47.0 million for the corresponding period in 2008. The decrease of $3.4 million in net interest income for 2009, compared to 2008, resulted from a reduction in interest income of $19.4 million, partially offset by a reduction in interest expense of $16.0 million. The reduction in interest income resulted from (i) a 0.67% reduction in yield on assets reflecting the lower market interest rate environment and a higher level of non-performing loans; and (ii) a $290.2 million decrease in average interest-earning assets, particularly the investment securities average balance which decreased by $941.0 million primarily driven by $1.4 billion of securities sold during the second and third quarters of 2009, offset by growth in mortgage backed securities and other interest-earning assets. The decrease in interest expense resulted from a 0.69% decrease in the rate payable on liabilities primarily reflected in lower costs of deposits and certain loans payable combined with slight decline in average interest-bearing liabilities. Average interest-earning assets decreased from $9.6 billion for the third quarter of 2008 to $9.3 billion for the corresponding 2009 period, while the average interest-bearing liabilities decreased from $8.5 billion to $8.3 billion, respectively. The reduction in leverage, combined with a decline in interest expense, resulted in a contraction of net interest margin from 1.96% in the third quarter of 2008 to 1.87% in the corresponding 2009 period.

• Doral Financial's provision for loan and lease losses for the quarter ended September 30, 2009 amounted to $4.9 million, compared to $7.2 million for the corresponding 2008 period. The $2.3

million decrease in the provision was driven by decreases in the provisions for the commercial and construction (including land) portfolios of $2.0 million and $4.7 million, respectively, partially offset by increases in the provisions for the mortgage and consumer loan portfolios of $3.2 million and $1.0 million, respectively. Third quarter results were impacted by the effects of continuing deterioration of Puerto Rico economy on the residential real estate market, causing lower home absorption rates on new construction, increased defaults on existing mortgages and weakening economic situation of existing borrowers.

• Non-interest income for the third quarter of 2009 was $26.9 million, compared to $11.9 million for the corresponding period in 2008. The increase in non-interest income of $15.0 million for the third quarter of 2009, compared to the same period in 2008, resulted from (i) an increase of $11.3 million in servicing income from a positive change in the fair value of the Company's mortgage servicing assets; (ii) a net gain on the sale of investment securities of $1.0 million; (iii) an increase in the gain on securities held for trading primarily driven by a gain of $3.9 million on the IO value; (iv) an increase in other income of $1.5 million related to a gain of $2.0 million from the redemption of shares of VISA, Inc., pursuant to their global restructuring agreement; partially offset (v) by an increase of $6.4 million in other-than-temporary impairment losses realized on investment securities.

• Non-interest expense for the third quarter of 2009 was $59.3 million, compared to $52.4 million for the corresponding period in 2008. Non-interest expense for the third quarter of 2009 were impacted by decreases in operating expenses for compensation and benefits, advertising, occupancy and depreciation and amortization expenses, offset by increases of (i) $1.4 million in professional expenses; (ii) $4.4 million in the FDIC insurance expense; (iii) an increase of $3.6 million in OREO losses and other related expenses driven by appraisals adjustments during the quarter; and (iv) an increase of $3.7 million in other expenses primarily related to an increase of $3.5 million in the provision for recourse driven by continued deterioration of the portfolio.

• An income tax benefit of $6.9 million for the third quarter of 2009 related to the effect on deferred tax assets of certain tax agreements.

• The Company reported other comprehensive income of $36.2 million for the third quarter of 2009 compared to other comprehensive loss of $62.3 million for the corresponding 2008 period. The Company's other comprehensive income for the third quarter of 2009 resulted principally from the increase in value of securities in its available for sale investment portfolio. As of September 30, 2009, the Company's accumulated other comprehensive loss (net of income tax benefit) totaled $103.9 million, compared to $123.2 million as of December 31, 2008.

• Doral Financial's loan production for the third quarter of 2009 was $248.5 million, compared to $318.3 million for the comparable 2008 period, a decrease of approximately 22%. The decrease in Doral Financial's loan production for the third quarter of 2009 resulted from significant decreases in residential mortgage and construction lending activity levels in Puerto Rico. The decrease in Doral Financial's originated loans is due to a number of factors including deteriorating economic conditions, competition from other financial institutions, changes in laws and regulations and the general economic conditions in Puerto Rico.

• Total assets as of September 30, 2009 amounted to $10.0 billion compared to $10.1 billion as of December 31, 2008. A decrease of $248.2 million in the Company's investment securities portfolio was partially offset by increases in loans of $69.7 million and cash and due from banks of $33.2 million. Total liabilities were $9.1 billion at September 30, 2009, compared to $9.2 billion at December 31, 2008. Total liabilities declined due to decreases of $272.1 million in brokered deposits and $86.6 million in other short-term borrowings, partially offset by an increase of $192.8 million in securities sold under agreements to repurchase.

• Non-performing assets as of September 30, 2009 were $909.9 million, an increase of $130.7 million since December 31, 2008. Non-performing loans (which are included in non-performing assets) as of September 30, 2009 were $816.7 million, an increase of $99.0 million since December 31, 2008. The increment in non-performing assets resulted from increases in the construction and residential mortgage portfolio as a direct consequence of the depressed housing market and overall

macroeconomic trends in Puerto Rico. The increase in non-performing assets occurred principally during the first quarter of 2009. Non-performing assets as of September 30, 2009 increased only by $20.1 million when compared to June 30, 2009.

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

                                                                                                                  NINE MONTH
                                                                     QUARTER ENDED                              PERIODS ENDED
                                                                     SEPTEMBER 30,                              SEPTEMBER 30,
(Dollars in thousands, except per share data)                  2009                 2008                  2009                  2008
Selected Income Statement Data:
Interest income                                            $    113,403         $    132,816          $    344,475          $    396,570
Interest expense                                                 69,794               85,776               222,706               261,631

Net interest income                                              43,609               47,040               121,769               134,939
Provision for loan and lease losses                               4,879                7,209                38,637                22,678

Net interest income after provision for loan and
lease losses                                                     38,730               39,831                83,132               112,261
Total non-interest income                                        26,888               11,921                47,602                54,195
Non-interest expenses                                            59,264               52,448               175,216               162,637

Income (loss) before income taxes                                 6,354                 (696 )             (44,482 )               3,819
Income tax (benefit) expense (1)                                 (6,855 )              1,060               (19,617 )               6,231

Net income (loss)                                          $     13,209         $     (1,756 )        $    (24,865 )        $     (2,412 )

Net income (loss) attributable to common
shareholders                                               $     10,000         $    (10,080 )        $    (30,091 )        $    (27,386 )


Net income (loss) per common share(2)                      $       0.17         $      (0.19 )        $      (0.54 )        $      (0.51 )


Cash Dividends Accrued, Preferred Stock                    $      3,209         $      8,324          $     14,595          $     24,974
Book Value Per Common Share                                $       7.14         $      10.85          $       7.14          $      10.85
Weighted - Average Common Shares Outstanding                 57,764,002           53,810,110            55,432,220            53,810,110
Common shares outstanding at end of period                   57,764,002           53,810,110            57,764,002            53,810,110

Selected Balance Sheet Data at Period End:
Total investment securities                                $  3,550,760         $  3,211,712          $  3,550,760          $  3,211,712
Total loans, net(3)                                           5,565,902            5,511,253             5,565,902             5,511,253
Servicing assets, net                                           116,958              139,507               116,958               139,507
Total assets                                                 10,023,676            9,989,908            10,023,676             9,989,908
Deposit accounts                                              4,215,314            4,301,797             4,215,314             4,301,797
Total borrowings                                              4,590,265            4,251,164             4,590,265             4,251,164
Total liabilities                                             9,143,556            8,832,806             9,143,556             8,832,806
Preferred stock                                                 467,641              573,250               467,641               573,250
Common stock                                                        578                  538                   578                   538
Stockholders' equity                                            880,120            1,157,102               880,120             1,157,102
Selected Average Balance Sheet Data for Period End:
Total interest-earning assets                                 9,266,490            9,556,734             9,447,210             9,339,746
Total assets                                                  9,773,663           10,292,749             9,958,474            10,107,742
Total interest-bearing liabilities                            8,325,996            8,494,528             8,469,155             8,243,007
Preferred equity                                                467,641              573,250               529,923               573,250
Total stockholders' equity                                      801,845            1,163,132               821,607             1,218,612
Operating Data:
Loan production                                            $    248,529         $    318,251          $    782,807          $  1,073,634
Loan servicing portfolio(4)                                   8,917,697            9,567,985             8,917,697             9,567,985
Selected Financial Ratios(5)
Performance:
Net interest margin                                                1.87 %               1.96 %                1.72 %                1.93 %
Return on average assets                                           0.54 %              (0.07 )%              (0.33 )%              (0.03 )%
Return on average common equity(5) (6)                            11.87 %              (6.80 )%             (13.79 )%              (5.67 )%
Capital:
Leverage ratio                                                     8.46 %               9.92 %                8.46 %                9.92 %
Tier 1 risk-based capital ratio                                   13.53 %              16.52 %               13.53 %               16.52 %
Total risk-based capital ratio                                    15.34 %              17.93 %               15.34 %               17.93 %
Asset quality:
Total NPAs as a percentage of the loan portfolio,
net, and OREO (excluding GNMA defaulted loans)                    16.72 %              13.50 %               16.72 %               13.50 %
Total NPAs of Doral Financial as a percentage of
consolidated total assets                                          9.08 %               7.34 %                9.08 %                7.34 %
Allowance for loan losses as a percentage of loans
receivable outstanding, at the end of period                       2.68 %               2.34 %                2.68 %                2.34 %
Provision for loan losses to net charge-offs                      51.04 %             116.93 %              135.25 %               93.45 %
Net charge-offs on an annualized basis to average
loans receivable outstanding                                       0.72 %               0.47 %                0.73 %                0.94 %
Allowance for loan and lease losses to net
charge-offs on an annualized basis                               374.68 %             496.63 %              372.01 %              252.33 %
Other ratios:
Average common equity to average assets                            3.42 %               5.73 %                2.93 %                6.38 %
Tier 1 common equity to risk-weighted assets                       6.45 %               7.07 %                6.45 %                7.07 %

(1) See Note 21 of the consolidated financial statements for an explanation of the computation of income tax benefit.

(2) For the quarters and nine month periods ended September 30, 2009 and 2008, net income
(loss) per common share represents the basic and diluted earnings
(loss) per common share, respectively, for each of the periods presented.

(3) Includes loans held for sale.

(4) Represents the total portfolio of loans serviced for third parties. Excludes
$4.4 billion
and
$3.9 billion
of mortgage
loans owned
by Doral
Financial at
September 30,
2009 and
2008,
respectively.

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

(6) Includes $9.4 million of effect of conversion of preferred stock.

SUBSEQUENT EVENTS
For a description of subsequent events, please refer to Note 30 of the accompanying Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP 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 September 30, 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
For a description of recent accounting pronouncements, please refer to Note 2 of the accompanying Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
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 September 30, 2009 totaled $43.6 million, compared to $47.0 million for the corresponding 2008 period, a decrease of $3.4 million, or 7%. The decrease in net interest income for third quarter of 2009, compared to the corresponding period in 2008, resulted from a reduction in interest income of $19.4 million, partially offset by a reduction in interest expense of $16.0 million. The reduction in interest income was principally related to (i) a reduction of $8.4 million in interest income of loans primarily related to the lower interest rate environment and an increase in delinquencies in the Company's loan portfolio; and (ii) a decrease of $11.1 million in interest income on investment securities associated with a $290.2 million reduction in the average balance of interest-earning assets, principally the result of a $941.0 million decline in the average balance of

investment securities as a result of a reduction of $0.5 billion associated to the termination of repurchase financing arrangements and the sale of collateral associated with such financing arrangements with LBI and $1.4 billion security sales in the second and third quarters of 2009, offset in part by security purchases and limited residential mortgage loan growth.
The decrease in interest income was partially offset by a decrease in interest expense. Interest expense for the quarter ended September 30, 2009 decreased by $16.0 million, or 19%, compared to the corresponding 2008 period. The decrease in interest expense was driven by (i) a reduction of $7.6 million in interest expense of deposits driven by a decline in brokered deposits and the general decline in interest rates; and (ii) reductions of $4.3 million in the interest expense on securities sold under agreement to repurchase, $2.2 million in interest expense on advances from FHLB and $2.0 million in interest expense on loans payable associated to a 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").
Average interest-earning assets decreased from $9.6 billion for the third quarter of 2008 to $9.3 billion for the corresponding 2009 period, while the average interest-bearing liabilities decreased from $8.5 billion to $8.3 billion, respectively. The reduction in leverage, combined with a decline in net interest income, resulted in a contraction of the net interest margin from 1.96% in the third quarter of 2008 to 1.87% in the corresponding 2009 period.
Net interest income for the nine month period ended September 30, 2009 totaled $121.8 million, compared to $134.9 million for the corresponding 2008 period, a decrease of $13.2 million, or 10%. The decrease in net interest income for the nine month period ended September 30, 2009, compared to the corresponding 2008 period, resulted from a reduction in interest income of $52.1 million, partially offset by a reduction in interest expense of $38.9 million. The reduction in interest income was principally related to (i) a reduction of $16.9 million in interest income on loans primarily related to the increase in delinquencies in the Company's loan portfolio between periods of $99.0 million; (ii) a decrease of $32.1 million in interest income on investment securities associated with a reduction of $806.3 million in the average balance of investment securities as a result of a reduction of $0.5 billion from the termination of repurchase financing arrangements and the sale of collateral associated with such financing arrangements with LBI, partially offset by an increase of $7.3 million in interest income on mortgage backed securities as a result of an increase in the average balance of these securities of $1.0 billion; and (iii) a decrease of $9.5 million in the interest income on other interest-earning assets resulting from a decrease of $209.2 million in the average balance of other interest-earning assets resulting from the sale of these instruments to finance the purchase of securities associated with the Company's plan to replace certain earning assets ("Asset Replacement Program").
The decrease in interest income was partially offset by a decrease in interest expense. Interest expense for the nine month period ended September 30, 2009 decreased by $38.9 million, or 15%, compared to the corresponding 2008 period. The decrease in interest expense was driven by (i) a reduction of $18.4 million in interest expense on deposits related to the strategic repositioning of the Company's deposits products, resulting in the decline in brokered deposits, and the general decline in interest rates; and (ii) reductions of $10.0 million in the interest expense on securities sold under agreement to repurchase, $5.0 million in interest expense on advances from FHLB and $6.3 million in interest expense on loans payable 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 TAF.
Average interest-earning assets increased from $9.3 billion for the nine month period ended September 30, 2008 to $9.4 billion for the corresponding 2009 period, while the average interest-bearing liabilities increased from $8.2 billion to $8.5 billion, respectively. The decrease in leverage, combined with a decrease in net interest income, resulted in a contraction of the net interest margin from 1.93% for the nine month period ended September 30, 2008 to 1.72% for the corresponding 2009 period.
The following tables present, 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. These tables do 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

                                                                       QUARTER ENDED SEPTEMBER 30,
                                                      2009                                                    2008
                                  AVERAGE                             AVERAGE             AVERAGE                              AVERAGE
(Dollars in thousands)            BALANCE          INTEREST          YIELD/RATE           BALANCE           INTEREST          YIELD/RATE
ASSETS:
Interest-earning assets:
Total loans(1)(2)               $ 5,671,294        $  78,653                5.50 %      $  5,633,559        $  87,055                6.15 %
Mortgage-backed securities        2,972,288           30,026                4.01 %         2,432,288           28,336                4.63 %
Interest-only strips
("IOs")                              44,608            1,347               11.98 %            48,203            1,975               16.30 %
Investment securities               199,893            1,580                3.14 %         1,140,883           12,723                4.44 %
Other interest-earning
assets                              378,407            1,797                1.88 %           301,801            2,727                3.59 %


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