UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

or

¨ 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

(Exact name of registrant as specified in its charter)

Puerto Rico	66-0312162
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1451 F.D. Roosevelt Avenue, San Juan, Puerto Rico	00920-2717
(Address of principal executive offices)	(Zip Code)

(787) 474-6700

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (Rule 12b-2 of the Exchange Act). See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock: 6,650,896 shares outstanding as of August 12, 2013.

Introductory Note

On August 12, 2013 Doral Financial Corporation filed a Form 12b-25 stating that it was unable to file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013 because it determined during the final closing adjustments that it had incorrectly recorded past due interest associated with a number of loan modifications in prior periods and could not resolve the error without unreasonable effort and expense. The Company was also evaluating the financial control implications of these matters. The Company has since resolved these matters and as required by Rule 12b-25 of the Securities Exchange Act of 1934 is filing its Quarterly Report on Form 10-Q for the second fiscal quarter within the five (5) calendar day grace period afforded by such rule.

As set forth in more detail in the Company’s consolidated financial statements for the fiscal quarter ended June 30, 2013, the Company determined that it had incorrectly recorded $6.2 million interest income cumulatively from January 1, 2011 through June 30, 2013 (a period of ten fiscal quarters). In correcting the interest income over accrual there was a corresponding, cumulative adjustment to the ALLL associated with the loan modifications. In particular, the Company has reduced the reserves in the ALLL totaling $4.6 million, all of which has been recognized into income as of the three and six months period ended June 30, 2013. This results in a cumulative adjustment of $1.6 million.

The cumulative effect of all of these adjustments is a pre-tax decrease by $1.6 million to the Company’s income in the fiscal quarter ended June 30, 2013. Further, the Company determined that these accounting issues constitute a control deficiency that has been corrected principally by a change in the loan modification process, as well as other changes in the Company’s accounting procedures implemented through the second fiscal quarter of 2013.

DORAL FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

INDEX PAGE

	PAGE
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2013 and December  31, 2012		1
Consolidated Statements of Operations (Unaudited) - For the three months and six months ended June  30, 2013 and June 30, 2012		2
Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - For the three months and six months ended June 30, 2013 and June 30, 2012		3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - For the six months ended June 30, 2013 and June 30, 2012		4
Consolidated Statements of Cash Flows (Unaudited) - For the six months ended June  30, 2013 and June 30, 2012		5
Notes to Consolidated Financial Statements (Unaudited)		6
Item  2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		59
Item 3 — Quantitative and Qualitative Disclosures about Market Risk		106
Item 4 — Controls and Procedures		106
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings		107
Item 1A — Risk Factors		108
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		112
Item 3 — Defaults Upon Senior Securities		112
Item 4 — Mine Safety Disclosures		112
Item 5 — Other Information		112
Item 6 — Exhibits		112
SIGNATURES		115
Ex-12.1
Ex-12.2
Ex-12.3
Ex-12.4
Ex-31.1
Ex-31.2
Ex-32.1
Ex-32.2

Doral Financial Corporation provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the consolidated financial statements and in the notes to consolidated financial statements.

AFICA	Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority
ALLL	Allowance for loan and lease losses
ARM	Adjustable Rate Mortgage
ASC	Accounting Standards Codification
CLO	Collateralized loan obligation
CMO	Collateralized mortgage obligations
CPR	Constant prepayment rate
DTA	Deferred tax asset
DTL	Deferred tax liability
FASB	Financial Accounting Standards Board
FHA/VA/FRM	Federal Housing Administration/Veteran Administration/Farm Credit Administration
FHLB	Federal Home Loan Bank of New York
FHLMC	Federal Home Loan Mortgage Corporation
FNMA	Federal National Mortgage Association
FDIC	Federal Deposit Insurance Corporation
FRBNY	Federal Reserve Bank of New York
GAAP	Generally accepted accounting principles in the United States of America
GNMA	Government National Mortgage Association
GSE	Government sponsored enterprises
HUD	U.S. Department of Housing and Urban Development
IOs	Interest-only securities
LIBOR	London Interbank Offered Rate
LTV	Loan-to-value
MBS	Mortgage-backed securities
MSR	Mortgage servicing right
NOL	Net operating loss
NOW	Negotiable order of withdrawal
NPL	Non-performing loan
OTTI	Other-than-temporary impairment
PR	Puerto Rico
RHS	Rural Housing Service
SEC	Securities and Exchange Commission
SPE	Special purpose entity
TDR	Troubled debt restructuring
US	United States of America
VIE	Variable Interest Entity
FTP	Funds Transfer Pricing
NYSE	New York Stock Exchange
DIF	Deposit Insurance Fund
PLLL	Provision for loan and lease losses
REVE	Real estate valuation estimate
UPB	Unpaid principal balance
IRLC	Interest rate lock commitments
ALCO	Asset/Liability Management Committee
MVE	Market value equity
NII	Net interest income
OTC	Over the counter
TBA	To be announced

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF June 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

(Dollars in thousands, except for share data)	June 30, 2013			December 31, 2012
Assets
Cash and due from banks	$	592,950		$	634,432
Restricted cash		121,779			95,461
Securities held for trading, at fair value		38,385			42,303
Securities available for sale, at fair value (includes $148,138 and $206,494 pledged as collateral at June 30, 2013 and December 31, 2012, respectively, that may be repledged)		255,536			287,676
Federal Home Loan Bank of New York stock, at cost		52,579			63,853
Total investment securities		346,500			393,832
Loans:
Loans held for sale, at fair value		39,882			—
Loans held for sale, at lower of cost or market (includes $86,390 and $94,417 pledged as collateral at June 30, 2013 and December 31, 2012, respectively, that may be repledged)		476,861			438,055
Loans receivable (includes $172,498 and $171,957 pledged as collateral at June 30, 2013 and December 31, 2012, respectively, that may be repledged)		6,188,645			6,174,810
Less: Allowance for loan and lease losses		(112,467	)		(135,343	)
Total net loans receivable		6,076,178			6,039,467
Total loans, net		6,592,921			6,477,522
Accounts receivable		32,159			41,626
Mortgage-servicing advances		77,326			72,743
Accrued interest receivable		29,117			30,140
Servicing assets, net		98,137			99,962
Premises and equipment, net		91,246			93,975
Real estate held for sale, net		129,487			111,923
Deferred tax asset, net		49,150			48,716
Prepaid income tax		316,979			318,407
Other assets		43,418			60,363
Total assets	$	8,521,169		$	8,479,102
Liabilities
Deposits:
Non-interest-bearing deposits	$	367,713		$	353,472
Other interest-bearing deposits		2,819,405			2,279,157
Brokered deposits		1,784,439			1,996,235
Total deposits		4,971,557			4,628,864
Securities sold under agreements to repurchase		159,500			189,500
Advances from Federal Home Loan Bank		938,973			1,180,413
Loans payable		274,040			270,175
Notes payable		1,037,082			1,043,887
Accrued expenses and other liabilities		333,965			330,590
Total liabilities		7,715,117			7,643,429
Contingencies (Refer to note 24)
Stockholders’ Equity
Preferred stock, $1 par value; 40,000,000 shares authorized; 5,811,391 shares issued and outstanding, at aggregate liquidation preference value at June 30, 2013 and December 31, 2012
Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)		148,700			148,700
Perpetual cumulative convertible preferred stock		203,382			203,382
Common stock, $0.01 par value; 15,000,000 shares authorized; 6,650,896 and 6,423,021 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively(1)		67			64
Additional paid-in capital(1)		1,231,534			1,229,445
Accumulated deficit		775,471			(747,914	)
Accumulated other comprehensive (loss) income, net of income tax benefit of $381 at June 30, 2013 and income tax expense of $425 at December 31, 2012		(2,160	)		1,996
Total stockholders’ equity		806,052			835,673
Total liabilities and stockholders’ equity	$	8,521,169		$	8,479,102

(1) Adjusted to reflect the 1-for-20 reverse stock split, which was effective June 28, 2013. See note 25.

The accompanying notes are an integral part of these financial statements.

1

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended June 30,						Six months ended June 30,
(In thousands, except for per share data)	2013			2012			2013			2012
Interest income:
Loans	$	80,961		$	86,061		$	171,776		$	171,347
Mortgage-backed and investment securities		1,421			3,832			3,011			7,427
Interest-only strips		1,322			1,444			2,695			2,917
Other interest-earning assets		728			952			1,694			2,086
Total interest income		84,432			92,289			179,176			183,777
Interest expense:
Deposits		14,006			15,986			27,893			33,340
Securities sold under agreements to repurchase		1,120			2,849			2,354			5,699
Advances from the Federal Home Loan Bank (includes $0 and $556 for the three months ended June 30, 2013 and 2012, respectively and $0 and $1,080 for the six months ended June 30, 2013 and 2012, respectively, of AOCI reclassifications for net loss on cash flow hedges)		8,563			9,585			17,199			19,966
Loans payable		1,276			1,516			2,620			3,109
Notes payable		8,936			7,582			17,839			14,152
Total interest expense		33,901			37,518			67,905			76,266
Net interest income		50,531			54,771			111,271			107,511
Provision for loan and lease losses		5,536			5,209			24,259			120,390
Net interest income (loss) after provision for loan and lease losses		44,995			49,562			87,012			(12,879	)
Non-interest income:
Net gain on loans securitized and sold and capitalization of mortgage servicing		9,025			9,818			18,491			16,022
Retail banking fees		6,067			6,407			12,191			12,668
Mortgage loan servicing income (net of mark-to-market adjustments)		214			356			3,393			5,125
Insurance agency commissions		2,359			2,559			4,790			4,746
Net (loss) gain on trading assets and derivatives		(1,303	)		250			(12	)		535
Mark-to-market adjustment of loans held for sale, at fair value		(1,296	)		—			(297	)		—
Net gain on investment securities available for sale (includes $(195) and $687 for the three months ended June 30, 2013 and 2012, respectively and $(195) and $(939) for the six months ended June 30, 2013 and 2012, respectively of AOCI reclassifications for realized (losses) gains on investment securities)		329			328			329			2,086
Net gain on early repayment of debt		661			—			207			—
Net credit other-than-temporary impairment losses		—			—			—			(6,396	)
Other income		695			413			2,117			737
Total non-interest income		16,751			20,131			41,209			35,523
Non-interest expenses:
Compensation and benefits		24,920			18,943			49,443			36,837
Professional services		10,939			14,287			21,555			25,297
Occupancy expenses		5,531			5,108			10,471			9,389
Communication expenses		2,747			3,482			5,844			7,136
FDIC insurance expense		5,022			4,105			10,112			7,365
Depreciation and amortization		2,982			3,640			6,022			6,891
Taxes, other than payroll and income taxes		4,362			2,616			6,719			5,231
Electronic data processing expenses		4,166			3,889			9,131			7,422
Corporate insurance		1,883			1,569			3,722			3,177
Other		6,577			6,160			13,186			11,991
		69,129			63,799			136,205			120,736
Other provisions and other real estate owned expenses:
Foreclosure and other credit related expenses		1,115			1,654			4,516			3,872
Other real estate owned expenses		3,626			5,067			8,069			8,883
		4,741			6,721			12,585			12,755
Total non-interest expenses		73,870			70,520			148,790			133,491
Loss before income taxes		(12,124	)		(827	)		(20,569	)		(110,847	)
Income tax (benefit) expense		(1,774	)		785			2,158			(111,839	)
Net (Loss) Income	$	(10,350	)	$	(1,612	)	$	(22,727	)	$	992
Net loss attributable to common shareholders	$	(12,765	)	$	(4,027	)	$	27,557		$	(3,838	)
Net loss per common share(1)(2)	$	(1.95	)	$	(0.63	)	$	(4.22	)	$	(0.60	)

⁽¹⁾  Net loss per common share represents the basic and diluted loss per common share. Refer to note 25 for additional information regarding net loss attributable to common shareholders.

⁽²⁾  Adjusted to reflect the 1-for-20 reverse stock split, which was effective June 28, 2013. See note 25.

The accompanying notes are an integral part of these financial statements.

2

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2013			2012			2013			2012
Net (loss) income	$	(10,350	)	$	(1,612	)	$	(22,727	)	$	992
Other comprehensive (loss) income, before tax:
Unrealized (losses) gains on securities arising during the period		(4,688	)		4,136			(5,086	)		(3,625	)
Non-credit portion of OTTI losses		—			—			—			6,396
Reclassification of net realized losses (gains) included in net loss		195			(687	)		195			939
Other comprehensive (loss) income on investment securities, before tax		(4,493	)		3,449			(4,891	)		3,710
Income tax benefit (expense) related to investment securities		675			(517	)		735			(555	)
Other comprehensive (loss) income on investment securities, net of tax		(3,818	)		2,932			(4,156	)		3,155
Other comprehensive income on cash flow hedges		—			538			—			1,002
Other comprehensive (loss) income		(3,818	)		3,470			(4,156	)		4,157
Comprehensive (loss) income	$	(14,168	)	$	1,858		$	(26,883	)	$	5,149

The accompanying notes are an integral part of these financial statements.

3

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Six months ended June 30,
(In thousands)	2013			2012
Preferred Stock	$	352,082		$	352,082
Common Stock:
Balance at beginning of period(1)		64			64
Restricted stock issued		3			—
Balance at end of period		67			64
Additional Paid-In Capital:
Balance at beginning of period (1)		1,229,445			1,224,202
Restricted stock issued		(3	)		—
Stock-based compensation recognized		2,092			2,667
Balance at end of period		1,231,534			1,226,869
Accumulated Deficit:
Balance at beginning of period		(747,914	)		(734,954	)
Net (loss) income		(22,727	)		992
Dividend accrued on preferred stock		(4,830	)		(4,830	)
Balance at end of period		(775,471	)		(738,792	)
Accumulated Other Comprehensive (Loss) Income, Net of Tax:
Balance at beginning of period		1,996			(1,240	)
Other comprehensive (loss) income, net of deferred tax		(4,156	)		4,157
Balance at end of period		(2,160	)		2,917
Total stockholders’ equity	$	806,052		$	843,140

(1) Adjusted to reflect the 1-for-20 reverse stock split, which was effective June 28, 2013. See note 25.

The accompanying notes are an integral part of these financial statements.

4

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended June 30,
(In thousands)	2013			2012
Cash flows from operating activities:
Net (loss) income	$	(22,727	)	$	992
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock-based compensation		2,092			2,667
Depreciation and amortization		6,022			6,891
Capitalization of mortgage servicing rights		(8,202	)		(5,060	)
Mark-to-market adjustment of servicing assets		8,244			8,698
Gain on sale of servicing asset		(23	)		—
Deferred tax expense (benefit)		559			(115,810	)
Provision for uncertain tax position		—			1,860
Provision for loan and lease losses		24,259			120,390
Provision for OREO losses		3,501			6,470
Provision for credit related losses		1,735			1,187
Loss on sale of real estate held for sale		2,258			674
Net premium amortization on loans, investment securities and debt		4,624			10,780
Origination and purchases of loans held for sale		(442,823	)		(318,926	)
Principal repayments and sales of loans held for sale		89,569			99,303
Mark-to-market adjustment of loans held for sale at fair value		297			—
Lower-of-cost or fair value adjustment on loans receivable transferred to the loans held for sale		212			—
Loss on sale of loans held for sale		773			432
Mark-to-market derivative		261			—
Gain on sale of securities		(25,023	)		(17,248	)
Net OTTI losses		—			6,396
Net gain on early repayment of debt		(207	)		—
Purchases of securities held for trading		(5,380	)		—
Unrealized losses on trading securities		60			99
Principal repayment and sales of securities held for trading		509,572			304,670
Amortization and net loss in the fair value of IOs		5,400			1,036
Unrealized loss on derivative instruments		(1,574	)		309
Increase in derivative instruments		(110	)		—
(Increase) decrease in restricted cash		(66,749	)		157,906
Decrease in accounts receivable		9,467			1,406
(Increase) decrease in mortgage servicing advances		(4,583	)		215
Decrease in accrued interest receivable		1,023			1,183
Decrease in other assets		18,848			11,615
Decrease in accrued expenses and other liabilities		(44,415	)		(12,204	)
Total adjustments		89,687			274,939
Net cash provided by operating activities		66,960			275,931
Cash flows from investing activities:
Purchases of securities available for sale		(90,081	)		(481,701	)
Principal repayment and sales of securities available for sale		115,826			324,166
Proceeds from sale of FHLB stock		11,274			7,067
Originations, purchases and repurchases of loans receivable		(822,147	)		(718,686	)
Principal repayment of loans receivable		612,267			349,627
Proceeds from sale of servicing assets		1,806			—
Purchases of premises and equipment		(3,293	)		(2,531	)
Proceeds from sales of real estate held for sale		17,026			13,506
Net cash used in investing activities		(157,322	)		(508,552	)
Cash flows from financing activities:
Increase in deposits		342,512			143,586
Decrease in securities sold under agreements to repurchase		(30,180	)		—
Proceeds from advances from FHLB		130,000			200,000
Repayment of advances from FHLB		(379,808	)		(305,000	)
Repayment of secured borrowings		(7,281	)		(11,726	)
Proceeds from notes payable		—			325,951
Repayment of notes payable		(6,363	)		(34,009	)
Net cash provided by financing activities		48,880			318,802
Net (decrease) increase in cash and cash equivalents		(41,482	)		86,181
Cash and cash equivalents at beginning of period		634,432			309,240
Cash and cash equivalents at the end of period	$	592,950		$	395,421
Supplemental schedule of non-cash activities:
Loan securitizations	$	479,498		$	289,508
Loans transferred to other real estate owned	$	40,348		$	23,323
Reclassification of loans held for investment portfolio to the held for sale portfolio(1)	$	112,090		$	20,372
Reclassification of loans held for sale portfolio to the held for investment portfolio	$	3,431		$	—
Reclassification of deferred tax asset to prepaid income tax	$	—		$	226,896
Supplemental information for cash flows:
Cash used to pay interest	$	66,790		$	73,827
Cash used to pay income taxes	$	131		$	438

(1) See note 10.

The accompanying notes are an integral part of these financial statements.

5

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Nature of Operations and Basis of Presentation	7
Note 2 – Summary of Significant Accounting Policies	7
Note 3 – Recent Accounting Pronouncements	9
Note 4 – Cash and Due from Banks	12
Note 5 – Restricted Cash and Other Interest-Earning Assets	12
Note 6 – Securities Held for Trading	12
Note 7 – Securities Available for Sale	13
Note 8 – Investments in an Unrealized Loss Position	14
Note 9 – Pledged Assets	15
Note 10 – Loans Held for Sale	16
Note 11 – Loans Receivable and the Allowance for Loan and Lease Losses	17
Note 12 – Accounts Receivable	26
Note 13 – Servicing Activities	27
Note 14 – Sale and Securitization of Mortgage Loans	29
Note 15 – Real Estate Held for Sale, net	29
Note 16 – Deposits	30
Note 17 – Securities Sold Under Agreements to Repurchase	30
Note 18 – Advances from Federal Home Loan Bank	31
Note 19 – Loans Payable	31
Note 20 – Notes Payable	32
Note 21 – Income Taxes	32
Note 22 – Guarantees	36
Note 23 – Financial Instruments with Off-Balance Sheet Risk	37
Note 24 – Contingencies	38
Note 25 – Earnings (Losses) per Share Data	38
Note 26 – Fair Value of Assets and Liabilities	40
Note 27 – Derivatives	48
Note 28 – Variable Interest Entities	52
Note 29 – Segment Information	55
Note 30 – Subsequent Events	58

6

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Basis of Presentation

Doral Financial Corporation (“Doral,” “Doral Financial” or the “Company”) is a bank holding company engaged in banking, mortgage banking insurance agency and commercial lending activities through its wholly-owned subsidiaries Doral Bank (“Doral Bank”), Doral Recovery, Inc. (“Doral Recovery”), Doral Insurance Agency, LLC (“Doral Insurance Agency”), and Doral Properties, Inc. (“Doral Properties”). Doral Bank controls three wholly-owned subsidiaries, Doral Mortgage, LLC (“Doral Mortgage”), which is principally engaged in mortgage lending in Puerto Rico, Doral Money, Inc. (“Doral Money”), which is engaged in commercial lending in the United States, and Doral Recovery, LLC (“Doral Recovery II”, previously Casa Bella, LLC), an entity originally formed to dispose of a real estate project of which Doral Bank took possession during 2005, which now holds small commercial real estate loans and certain delinquent residential mortgage loans previously held by Doral Bank. Doral Money consolidates three variable interest entities created for the purpose of entering into collateralized loan arrangements with third parties.

The accompanying consolidated financial statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s annual audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 13, 2013. Certain information and note disclosures normally included in the audited consolidated financial statements prepared in accordance with GAAP have been condensed or omitted from these financial statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2012 included in the Company’s 2012 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

During the quarter ended June 30, 2013, the Company recorded several out-of-period adjustments that affected the consolidated results of operations for the three and six months ended June 30, 2013. The out-of-period adjustments relate primarily to the incorrect recording of past due interest associated with a number of loan modifications and the resulting effect of this adjustment on the calculation of the allowance for loan losses, segmentation of certain modified loans within the ALLL model, and recourse liability. The impact on loss before taxes for the three-month and six-month periods ended June 30, 2013 resulted in an increase in the losses recognized of $4.4 million and $3.1 million, respectively. The impact of correcting these errors in the prior periods would have increased (decreased) loss before income taxes by approximately $1.3 million, $3.5 million, and $(0.2) million for the three-month period ended March 31, 2013, year ended December 31, 2012, and six-month period ended June 30, 2012, respectively. The Company assessed the impact of the adjustments needed to correct these errors in the appropriate periods and concluded that recording the adjustments in the quarter ended June 30, 2013, rather than restating the prior periods impacted, was quantitatively and qualitatively not material to the results of operations, financial position, and cash flows corresponding to the prior periods impacted.

Certain amounts reflected in the Company’s annual audited consolidated financial statements for the year ended December 31, 2012 and interim financial results of 2012 have been reclassified to conform to the presentation for the Company’s interim financial results for 2013.

The results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.

2. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

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 as well as the disclosure of contingent assets and liabilities. Certain of these estimates are critical to the presentation of the Company’s financial condition and results of operations since they are particularly sensitive to the Company’s judgment and are highly complex in nature. Of particular significance are judgments and estimates made to estimate the amount of the allowance and provision for loan and lease losses, the determination to place loans on non-accrual status and return loans to accrual status, the determination of whether a loan restructure is a TDR and whether loan performance meets the criteria not to be reported as a TDR, the valuation of mortgage servicing rights, interest only strips, repossessed assets, investment securities (including identification of those that are other than temporarily impaired), the collectability of receivables, adequacy of recourse obligations, fair value measurement of assets and liabilities, as well as income taxes and the accompanying deferred tax assets and reserves. Doral Financial believes that the judgments, estimates and assumptions used in the preparation of its consolidated financial statements are appropriate given the factual circumstances as of June 30, 2013. 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. The Company’s accounting policies are included in note 2 “Significant Accounting Policies” in the audited consolidated financial statements included in the Company’s 2012 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2013.

7

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Loans Held for Sale

The Company’s loans classified as held-for-sale primarily include residential mortgage loans, commercial & industrial loans, commercial real estate loans, and GNMA loans. Effective March 18, 2013, the Company elected to account for its newly originated Puerto Rico residential mortgage loans classified as held-for-sale under the fair value option, with changes in fair value reported within the mark-to-market adjustment on loans held for sale at fair value caption in the consolidated statements of operations. Upfront fees and costs related to loans held for sale at fair value are recognized in earnings as incurred and not deferred. All other loans held-for-sale, not subject to the fair value option, are carried at the lower of cost or fair value on an aggregate portfolio basis. The amount by which cost exceeds fair value, if any, is accounted for as a loss through a valuation allowance. Changes in the valuation allowance of loans held for sale at lower of cost or market are included in the determination of income in the period in which those changes occur and are reported under net gain on loans securitized and sold and capitalization of mortgage servicing in the consolidated statements of operations. Loan origination fees, direct loan origination costs, premiums and discounts related to loans held for sale at lower of cost or market are deferred as an adjustment to the carrying basis of such loans until these are sold or securitized.

Fair Value Measurements

The Company uses fair value measurements to determine the fair value of certain assets and liabilities and to support fair value disclosures. Certain loans held for sale, securities held for trading, securities available for sale, derivatives and servicing assets are recorded at fair value on a recurring basis. Additionally, from time to time, Doral may be required to record other financial assets at fair value on a nonrecurring basis, such as certain loans held for sale, loans receivable and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

The Company discloses the fair value of all financial instruments for which it is practicable to estimate that value, whether or not recognized in the statement of financial condition.

Fair Value Hierarchy

The Company categorizes its financial instruments based on the priority of inputs to the valuation technique into a three level hierarchy described below.

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

The Company bases fair values on the price that would be received upon sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. It is the Company’s intent to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.

Loans held for sale

Loans held for sale includes residential mortgage loans, commercial loans to financial institutions, commercial real estate loans, and GNMA loans. Effective March 18, 2013, the Company elected to account for its newly originated Puerto Rico residential mortgage loans classified as held-for-sale using the fair value option, with changes in fair value reported within the mark-to-market adjustment on loans held for sale at fair value caption in the consolidated statements of operations.

All other loans held for sale, not subject to the fair value option, are carried at the lower of cost or fair value on an aggregate portfolio basis. The amount, by which cost exceeds fair value, if any, is accounted for as a loss through a valuation allowance.

8

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The fair value of mortgage loans held-for-sale is generally based on quoted market prices for secondary market MBS, which is Doral’s principal market, adjusted to reflect particular characteristics of the loan such as guarantee fees, servicing fees, actual delinquency and credit risk. The Company’s loans held-for-sale are generally classified as Level 2. Loans are classified as Level 3 to the extent that management makes certain adjustments to the fair value model based on unobservable inputs that are significant.

Gains and losses on loans held for sale which are recorded at lower of cost or market are recorded within non-interest income in the consolidated statements of operations. Direct loan origination costs and fees for newly originated Puerto Rico mortgage loans classified as held-for-sale under the fair value option are recognized at origination within net gain on loans securitized and sold and capitalization of mortgage servicing rights. Interest income on loans held-for-sale for which the fair value option is elected is calculated based on the note rate of the loan and is recorded within interest income in the consolidated statement of operations. For loans held-for-sale recorded at lower of cost or market, direct loan origination costs and fees are deferred and recognized when the loans are sold within net gain on loans securitized and sold and capitalization of mortgage servicing.

3. Recent Accounting Pronouncements

The FASB has issued the following accounting pronouncements and guidance relevant to the Company’s operations:

Accounting Standards Update No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”)

This Update states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. Management does not expect the implementation of this update to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-10, Derivatives and Hedging (Topic 815), Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU No. 2013-10”)

This Update permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. Prior to the amendments in this ASU, only U.S. Treasury and the LIBOR swap rates were considered benchmark interest rates. Including the Fed Funds Effective Swap Rate (OIS) as an acceptable U.S. benchmark interest rate in addition to U.S. Treasury and LIBOR rates provides a more comprehensive spectrum of interest rates to be utilized as the designated benchmark interest rate risk component under the hedge accounting guidance. The amendments in ASU 2013-10 are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Management does not expect the implementation of this update to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”)

This Update affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. This Update changes the approach to the investment company assessment in Topic 946, clarifies the characteristics of an investment company, and provides comprehensive guidance for assessing whether an entity is an investment company. This Update requires an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than using the equity method of accounting. It also requires the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946; (b) information about changes, if any, in an entity’s status as an investment company; and (c) information

9

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in ASU 2013-08 are effective for interim and annual reporting periods beginning after December 15, 2013, with earlier application prohibited. Management does not expect the implementation of this update to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-07 - Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting (“ASU 2013-07”)

In April 2013, the FASB issued ASU 2013-07, requiring financial statements to be prepared using the liquidation basis of accounting when liquidation is “imminent.” Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces (e.g., involuntary bankruptcy). In cases where a plan for liquidation was specified in the organization’s governing documents at inception (e.g., limited-life entities), the organization should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified in the organization’s governing documents. The ASU requires financial statements prepared using the liquidation basis to present relevant information about a company’s resources and obligations in liquidation, including: (a) The organization’s assets measured at the amount of the expected cash proceeds from liquidation, including any items it had not previously recognized under U.S. GAAP, that it expects to either sell in liquidation or use in settling liabilities (e.g., trademarks); (b) The organization’s liabilities as recognized and measured in accordance with existing guidance that applies to those liabilities; (c) Accrual of the costs it expects to incur and the income it expects to earn during liquidation, including any anticipated disposal costs. The amendments in ASU 2013-07 are effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. Management does not expect the implementation of this update to have an effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-04 - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”)

In February 2013, the FASB issued ASU 2013-04 to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within the scope of this update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. U.S. GAAP does not include specific guidance on accounting for such obligations with joint and several-liability, which has resulted in diversity in practice. Some entities record the entire amount under the joint and several-liability arrangement on the basis of the concept of a liability and the guidance that must be met to extinguish a liability. Other entities record less than the total amount of the obligation, such as an amount allocated, an amount corresponding to the proceeds received, or the portion of the amount the entity agreed to pay among its co-obligors, on the basis of the guidance for contingent liabilities. The guidance in this update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this update also requires an entity to disclose the nature and amount of the obligations as well as other information about those obligations. The amendments in ASU 2013-04 are effective for interim and annual reporting periods beginning after December 15, 2013. Management does not expect the implementation of this update to have a material effect on the Company’s consolidated financial statements.

Changes in Accounting Standards Adopted in the Financial Statements

Accounting Standards Update No. 2013-02 - Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”)

In February 2013, the FASB issued ASU 2013-02, to supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011). The amendments require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net

10

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Public companies are required to comply with these amendments for all reporting periods presented, including interim periods. The amendments in ASU 2013-02 were effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this update resulted in additional disclosures within the consolidated statements of operations, but did not impact the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-01 - Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”)

In January 2013, the FASB issued ASU 2013-01, to clarify that the scope of ASU 2011-11 (issued in December 2011) would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45, or are subject to a master netting arrangement or similar agreement. The FASB concluded that the clarified scope will reduce significantly the operability concerns expressed by preparers while still providing decision-useful information about certain transactions involving master netting arrangements. The amendments in ASU 2013-01 were effective retrospectively for reporting periods beginning on or after January 1, 2013. The adoption of this update resulted in additional disclosures within note 27 - Derivatives, but did not impact the Company’s consolidated financial statements.

Accounting Standards Update No. 2012-04 - Technical Corrections and Improvements (“ASU 2012-04”)

In October 2012, the FASB issued ASU 2012-04, to clarify the Codification, correct unintended application of guidance, and/or make minor improvements which the FASB did not expect to have a significant effect on current accounting practice. Specifically, this ASU includes technical corrections and improvements as well as conforming amendments related to fair value measurements. The technical corrections and improvements as well as conforming amendments related to fair value measurements are comprised of: (1) source literature amendments; (2) guidance clarification and reference corrections; and (3) relocated guidance. The conforming amendments related to fair value measurements do not introduce any new fair value measurements, but rather conform terminology to eliminate inconsistencies and clarify certain guidance in various topics of the codification to fully reflect the fair value measurement and disclosure requirements of ASC 820. Certain amendments and corrections in ASU 2012-04 do not have transition guidance and are effective upon issuance. The remaining amendments in ASU 2012-04 were effective for fiscal periods beginning after December 15, 2012. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2012-2 (Topic 350) - Intangibles - Goodwill and Other (“ASU 2012-02”)

In July 2012, the FASB issued ASU 2012-02, to amend Topic 350, dubbed Step Zero, which permits an entity to quantitatively assess whether the fair value of a reporting unit is less than its carrying amount. Under the qualitative assessment in ASU 2011-08, if an entity concludes that its fair value is not less than its carrying value, using a more likely than not criteria (>50%), an entity would not be required to perform the two-step impairment test. Based on a qualitative assessment, if the entity determines that it is more likely than not that the fair value of the reporting unit is less than the carrying value, then the entity must perform step one of the goodwill impairment test. Alternatively, the entity has the option to forgo the qualitative assessment and simply perform step one of the quantitative test. The amendments in ASU 2012-02 were effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update No. 2011-11 - Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”)

In December 2011, the FASB issued ASU 2011-11, enhancing disclosures about offsetting assets and liabilities by requiring improved information about financial instruments and derivative instruments that are either: (1) offset in accordance with certain rights to setoff conditions prescribed by current accounting guidance; or (2) subject to an enforceable master netting agreement or similar agreement, irrespective of whether they are offset in accordance to current accounting guidance. The amendments in ASU No. 2011-11 were effective for the first interim period beginning after January 1, 2013. This information enabled users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The adoption of this update resulted in additional disclosures but did not impact the Company’s consolidated financial statements.

11

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

4. Cash and Due from Banks

At June 30, 2013 and December 31, 2012, the Company’s cash and due from banks totaled $593.0 million and $634.4 million, respectively and included $67.4 million and $36.7 million of non-interest bearing deposits with other banks, $493.2 million and $560.5 million of interest bearing deposits with the Federal Reserve Bank, and $7.2 million and $3.6 million of interest bearing deposits with the Federal Home Loan Bank of New York, respectively.

The Company’s bank subsidiary is required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank. Those required average reserve balances were $144.3 million and $152.2 million as of June 30, 2013 and December 31, 2012, respectively.

5. Restricted Cash and Other Interest-Earning Assets

The Company reported restricted cash and other interest-earning assets of $121.8 million and $95.5 million as of June 30, 2013 and December 31, 2012, respectively.

The following table includes the composition of the restricted cash and other interest earning assets for the periods presented:

(In thousands)	June 30, 2013		December 31, 2012
Minimum required deposit balances with other financial institutions	$	68,435	$	433
Cash held in escrow accounts		8,598		9,851
Restricted assets related to CLO special-purpose entities (see note 28):
Cash and due from banks		6,499		1,627
Other interest-earning assets		38,247		83,550
	$	121,779	$	95,461

6. Securities Held for Trading

The following table summarizes the fair value of the Company’s securities held for trading as of June 30, 2013 and December 31, 2012.

(In thousands)	June 30, 2013		December 31, 2012
MBS	$	560	$	619
Variable Rate IOs		36,185		41,547
Fixed Rate IOs		84		122
Derivatives (1)		1,556		15
Total	$	38,385	$	42,303

⁽¹⁾  Refer to note 27 for additional information regarding the notional amount of derivatives.

As of June 30, 2013 and December 31, 2012, the weighted-average yield of investment securities held for trading, including IOs, was 12.70% and 13.47%, respectively. The weighted-average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value.

12

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

7. Securities Available for Sale

The following tables summarize the amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield, and contractual maturities of securities available for sale as of June 30, 2013 and December 31, 2012.

The weighted-average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value. Expected maturities of mortgage-backed securities and certain debt securities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As of June 30, 2013

(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Weighted- Average Yield
Agency MBS
Due from one to five years	$	86	$	5	$	—	$	91		4.85	%
Due from five to ten years		1,250		69		—		1,319		4.79	%
Due over ten years		180,552		307		3,517		177,342		1.55	%
CMO Government Sponsored Agencies
Due from one to five years		1,225		—		101		1,124		7.80	%
Due over ten years		3,141		1,010		106		4,045		6.10	%
Obligations U.S. Government Sponsored Agencies
Due within one year		44,981		—		10		44,971		0.09	%
Private Securities and Other
Due within one year		5,000		2		—		5,002		3.50	%
Due over ten years		21,842		51		251		21,642		3.10	%
	$	258,077	$	1,444	$	3,985	$	255,536		1.56	%

As of December 31, 2012

(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Weighted- Average Yield
Agency MBS
Due from one to five years	$	115	$	9	$	—	$	124		4.84	%
Due from five to ten years		1,342		93		—		1,435		4.80	%
Due over ten years		204,431		1,433		318		205,546		1.58	%
CMO Government Sponsored Agencies
Due from one to five years		1,393		—		115		1,278		7.80	%
Due over ten years		4,675		1,104		145		5,634		5.46	%
Obligations U.S. Government Sponsored Agencies
Due within one year		44,976		5		—		44,981		0.13	%
Private Securities and Other
Due from one to five years		5,000		6		—		5,006		3.50	%
Due over ten years		23,397		275		—		23,672		3.17	%
	$	285,329	$	2,925	$	578	$	287,676		1.63	%

13

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

8. Investments in an Unrealized Loss Position

The following tables present the Company’s fair value and gross unrealized losses for available for sale investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2013 and December 31, 2012:

	As of June 30, 2013
	Less than 12 months						12 months or more						Total
(Dollars in thousands)	Number of Positions		Fair Value		Unrealized Losses		Number of Positions		Fair Value		Unrealized Losses		Number of Positions		Fair Value		Unrealized Losses
Agency MBS		14	$	173,562	$	3,517		—	$	—	$	—		14	$	173,562	$	3,517
CMO Government Sponsored Agencies		—		—		—		2		2,763		207		2		2,763		207
Obligations U.S. Government Sponsored Agencies		1		44,971		10		—		—		—		1		44,971		10
Private Securities and Other		4		12,298		251		—		—		—		4		12,298		251
		19	$	230,831	$	3,778		2	$	2,763	$	207		21	$	233,594	$	3,985
	As of December 31, 2012
	Less than 12 months						12 months or more						Total
(Dollars in thousands)	Number of Positions		Fair Value		Unrealized Losses		Number of Positions		Fair Value		Unrealized Losses		Number of Positions		Fair Value		Unrealized Losses
Agency MBS		5	$	62,366	$	318		—	$	—	$	—		5	$	62,366	$	318
CMO Government Sponsored Agencies		1		1,130		16		3		3,308		244		4		4,438		260
		6	$	63,496	$	334		3	$	3,308	$	244		9	$	66,804	$	578

Investment securities currently held by the Company are principally MBS or other securities backed by a U.S. government sponsored entity and therefore, principal and interest on the securities is considered recoverable.

During the first three months of 2012, Puerto Rico Non-Agency CMOs and other privately issued securities reflecting unrealized losses were marked to market with losses recorded in the consolidated statement of operations. The Company intended to sell the securities evaluated for OTTI and, when the intention to sell was reached, the book value of the securities was written down to the estimated market values obtained from broker dealers. During the second quarter of 2012, after consideration of the $6.4 million OTTI recognized in the first three months of 2012, these securities were sold at an additional loss of approximately $87,000.

As of June 30, 2013, the declines in the fair value of the remaining securities in the Company’s portfolio are considered temporary, as the Company neither intends to sell these securities, nor is it more likely than not that it will be required to sell these securities, prior to recovering their entire amortized cost basis. Based on this impairment analysis, the Company did not recognize OTTI during the three months and six months ended June 30, 2013.

14

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the securities for which OTTI was recognized for the three months and six months ended June 30, 2012, based on the Company’s impairment analysis as of June 30, 2012.

	As of June 30, 2012						Three months ended June 30, 2012						Six months ended June 30, 2012
(In thousands)	Amortized Cost (after credit related OTTI)		Gross Unrealized Losses		Fair Value		Amortized Cost (after credit related OTTI)		Gross Unrealized Losses		Fair Value		OTTI Related to Credit Loss		OTTI Related to Non-Credit Loss		Total Impairment Losses
OTTI Investments
P.R. Non-Agency CMOs	$	—	$	—	$	—	$	—	$	—	$	—	$	4,881	$	—	$	4,881
Other		—		—		—		—		—		—		1,515		—		1,515
	$	—	$	—	$	—	$	—	$	—	$	—	$	6,396	$	—	$	6,396

The following table presents activity related to the credit losses recognized in earnings during the three months and six months ended June 30, 2012 for debt securities held by the Company, for which a portion of OTTI remains in accumulated other comprehensive income:

	Three months ended June 30,					Six months ended June 30,
(In thousands)	2013		2012			2013		2012
Balance at beginning of period	$	—	$	13,502		$	—	$	7,106
Additions:
Credit losses for which OTTI was not previously recognized		—		—			—		1,515
Additional OTTI credit losses for which an OTTI was previously recognized		—		—			—		4,881
Less:
OTTI on investment securities sold		—		(13,502	)		—		(13,502	)
Balance at end of period	$	—	$	—		$	—	$	—

The Company will continue to monitor and analyze the performance of its securities to assess the collectability of principal and interest as of each balance sheet date.

9. Pledged Assets

At June 30, 2013 and December 31, 2012, certain securities and loans, as well as cash and other interest earning assets, were pledged to secure public deposits, assets sold under agreements to repurchase, certain borrowings and available credit facilities, as described below:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Securities available for sale	$	218,018	$	252,739
Loans held for sale, at lower of cost or market		86,390		94,417
Loans receivable		3,132,561		3,185,943
Total pledged assets	$	3,436,969	$	3,533,099

Pledged securities and loans that the creditor has the right to re-pledge are disclosed on the consolidated statements of financial condition. Pledged loans held for sale do not include loans held for sale, at fair value, but only those that continue to be carried at lower of cost or market.

As of June 30, 2013 and December 31, 2012, pledged investment securities available for sale were as follows: $166.1 million and $206.5 million, respectively, pledged as collateral for securities sold under agreements to repurchase; $7.0 million and $1.4 million, respectively, pledged to secure public funds from the government of Puerto Rico; and $44.9 million and $44.9 million, respectively, pledged as collateral for the FNMA recourse obligation.

15

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Loans held for sale, at lower of cost or market, totaling $86.4 million and $94.4 million are pledged as collateral for the Company’s secured borrowings as of June 30, 2013 and December 31, 2012, respectively. See note 19 for additional information regarding the Company’s secured borrowings.

Loans receivable totaling approximately $1.8 billion and $1.9 billion as of March 31, 2013 and December 31, 2012, respectively, are pledged as collateral for FHLB advances, while $172.5 million and $172.0 million are pledged as collateral for secured borrowings as of June 30, 2013 and December 31, 2012, respectively. Loans receivable pledged also include $1.1 billion and $1.1 billion of syndicated commercial loans pledged as collateral as of June 30, 2013 and December 31, 2012, respectively, to secure $832.0 million and $832.0 million in notes payable issued by three VIEs included in the Company’s consolidated financial statements as of June 30, 2013 and December 31, 2012, respectively. See note 28 for additional information regarding the Company’s VIEs.

10. Loans Held for Sale

Effective March 18, 2013, the Company irrevocably elected to measure at fair value each newly originated residential mortgage loan in the Puerto Rico portfolio classified as held for sale. By electing the fair value option, the loans are marked to market and unrealized gains and losses are included in the mark-to-market adjustment on loans held for sale, at fair value, within the non-interest income caption of the consolidated statements of operations. As of June 30, 2013, the aggregate principal balance of loans held for sale at fair value was $39.9 million. The mark-to-market related changes in the fair value of loans held for sale, at fair value, resulted in losses of $1.3 million and $0.3 million for the three months and six months ended June 30, 2013, respectively.

Prior to electing the fair value option for certain loans held for sale, all loans classified as held-for-sale were carried at the lower of cost or market. The lower-of-cost-or-market accounting resulted in a potential mismatch of the earnings impact of changes in the fair value of the loans held for sale and the derivative contracts entered to hedge the interest rate risk associated with the loans. The Company’s fair value election does not apply to certain other loans classified as held-for-sale, such as GNMA loans with right of repurchase, loans pledged to secure borrowings, or any loans in the U.S. portfolio, as the fair value option was only elected for residential mortgage loans to be sold which are originated only by Doral Bank’s Puerto Rico operations.

Loans held for sale consist of the following as of June 30, 2013 and December 31, 2012:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Loans held for sale, at fair value
Conventional single family residential	$	11,793	$	—
FHA/VA		28,089		—
Total loans held for sale, at fair value	$	39,882	$	—
Loans held for sale, lower of cost or market
Conventional single family residential	$	77,273	$	97,185
FHA/VA		234,154		284,001
Commercial real estate		43,301		45,607
Commercial & industrial		122,133		11,262
Total loans held for sale, at lower of cost or market (1)(2)	$	476,861	$	438,055

⁽¹⁾  Includes $9.5 million and $1.1 million of interest-only loans as of June 30, 2013 and December 31, 2012, respectively.

⁽²⁾  Includes $127.7 million and $17.6 million of balloon loans as of June 30, 2013 and December 31, 2012, respectively.

As of June 30, 2013 and December 31, 2012, loans held for sale included $210.6 million and $213.7 million, respectively, of defaulted loans collateralizing GNMA securities for which the Company has an unconditional option (but not an obligation) to repurchase. Payment of principal and a portion of the interest on these loans is guaranteed by the FHA/VA/FRM.

Loan origination fees, discount points, and certain direct origination costs for loans held for sale at lower of cost or market are initially recorded as an adjustment to the cost basis of the loan and reflected in the Company’s earnings as part of the net gain on mortgage loan sales when the loan is sold or securitized into an MBS. In the case of loans held for sale at fair value, up-front fees and costs are recognized in earnings as incurred and not deferred. As of June 30, 2013 and December 31, 2012, the Company had net deferred origination fees on loans held for sale totaling approximately $0.3 million and $0.6 million, respectively.

16

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

As of June 30, 2013 and December 31, 2012, non-performing loans held for sale, excluding GNMA defaulted loans, totaled $36.3 million and $38.6 million, respectively, excluding FHA/VA guaranteed loans and defaulted loans collateralizing GNMA securities.

During the three months ended June 30, 2013, the Company entered into an agreement to sell certain loans at a future date and reclassified $112.1 million of its commercial loans receivable to loans held for sale, at lower-of-cost-or-market. The initial lower-of-cost or market adjustment for these loans reclassified to held-for-sale was recorded in other expenses in the non-interest expenses section of the statement of operations, with a corresponding reduction to their carrying value. Subsequent reductions in value were recorded within Non-interest income.

11. Loans Receivable and Allowance for Loan & Lease Losses

The table below presents the Company’s loan receivable portfolio by product type and geographical location:

	June 30, 2013									December 31, 2012
(Dollars in thousands)	PR			US			Total			PR			US			Total
Consumer
Residential mortgage	$	2,986,603		$	10,817		$	2,997,420		$	3,107,825		$	12,141		$	3,119,966
FHA/VA guaranteed residential mortgage		52,735			—			52,735			59,699			—			59,699
Consumer Loans		21,191			186			21,377			24,674			39			24,713
Total consumer		3,060,529			11,003			3,071,532			3,192,198			12,180			3,204,378
Commercial
Commercial real estate		448,111			690,442			1,138,553			479,495			631,569			1,111,064
Commercial & industrial		121,098			1,408,460			1,529,558			130,804			1,420,918			1,551,722
Construction & land		141,484			307,518			449,002			146,818			160,828			307,646
Total commercial		710,693			2,406,420			3,117,113			757,117			2,213,315			2,970,432
Loans receivable, gross(1)(2)		3,771,222			2,417,423			6,188,645			3,949,315			2,225,495			6,174,810
Less:
Allowance for loan and lease losses		(99,381	)		(13,086	)		(112,467	)		(121,768	)		(13,575	)		(135,343	)
Loans receivable, net	$	3,671,841		$	2,404,337		$	6,076,178		$	3,827,547		$	2,211,920		$	6,039,467

(1) Includes $2.0 billion and $1.9 billion of balloon loans, as of June 30, 2013 and December 31, 2012, respectively.

(2) Includes $875.4 million and $925.6 million of interest-only loans, per terms of the original contract, as of June 30, 2013 and December 31, 2012, respectively.

Fixed-rate loans and adjustable-rate loans were approximately $4.2 billion and $2.0 billion, respectively, at June 30, 2013, and $4.4 billion and $1.8 billion, respectively, at December 31, 2012.

The adjustable rate loans, comprised of construction & land, and commercial loans, have interest-rate adjustment limitations, and rates that are generally tied to interest-rate market indices (primarily the Prime Rate and 3-month LIBOR). Future market factors may affect the correlation between interest-rate adjustments and the rate the Company pays on its short-term deposits that primarily fund these loans.

Loan origination fees, discount points, and certain direct origination costs for loans receivable are deferred and presented as adjustments to the loan balance and amortized over the life of the loan. As of June 30, 2013 and December 31, 2012, net deferred origination fees on loans receivable totaled $23.9 million and $23.4 million, respectively.

17

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Non-accrual loans, excluding loans held for sale, as of June 30, 2013 and December 31, 2012, are as follows:

	June 30, 2013						December 31, 2012
(Dollars in thousands)	PR		US		Total		PR		US		Total
Consumer
Residential mortgage	$	408,745	$	870	$	409,615	$	432,157	$	554	$	432,711
FHA/VA guaranteed residential		34,630		—		34,630		40,177		—		40,177
Other consumer (1)		98		—		98		428		—		428
Total consumer		443,473		870		444,343		472,762		554		473,316
Commercial
Commercial real estate		190,926		646		191,572		189,200		646		189,846
Commercial & industrial		4,673		—		4,673		6,106		—		6,106
Construction & land		104,737		2,697		107,434		109,306		4,382		113,688
Total commercial		300,336		3,343		303,679		304,612		5,028		309,640
Total loans receivable on which accrual of interest has been discontinued	$	743,809	$	4,213	$	748,022	$	777,374	$	5,582	$	782,956

⁽¹⁾  Includes personal, revolving lines of credit and other consumer loans.

The Company would have recognized additional income had all loans receivable been accounted for on an accrual basis as follows:

	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2013		2012		2013		2012
Consumer
Residential mortgage	$	7,215	$	8,094	$	12,434	$	12,301
FHA/VA guaranteed residential		648		1,021		1,178		1,825
Other consumer		4		7		4		8
Total consumer		7,867		9,122		13,616		14,134
Commercial
Commercial real estate		3,573		3,459		6,762		6,427
Commercial & industrial		128		257		256		508
Construction & land		1,382		1,643		2,762		3,366
Total commercial		5,083		5,359		9,780		10,301
Total interest income	$	12,950	$	14,481	$	23,396	$	24,435

18

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The Company’s aging of loans receivable, excluding non-accrual loans, as of June 30, 2013 and December 31, 2012, is as follows:

As of June 30, 2013

	Current				30 to 89 Days Past Due				90 and Over Days Past Due				Total
(In thousands)	PR		US		PR		US		PR		US		PR		US		Total
Consumer
Residential mortgage	$	2,434,489	$	9,947	$	143,369	$	—	$	—	$	—	$	2,577,858	$	9,947	$	2,587,805
FHA/VA guaranteed residential mortgage		9,863		—		4,242		—		4,000		—		18,105		—		18,105
Other consumer		19,765		186		405		—		923		—		21,093		186		21,279
Total consumer		2,464,117		10,133		148,016		—		4,923		—		2,617,056		10,133		2,627,189
Commercial
Commercial real estate		240,156		689,797		17,029		—		—		—		257,185		689,797		946,982
Commercial & industrial		115,553		1,408,460		215		—		656		—		116,424		1,408,460		1,524,884
Construction & land		36,582		304,821		165		—		—		—		36,747		304,821		341,568
Total commercial		392,291		2,403,078		17,409		—		656		—		410,356		2,403,078		2,813,434
Total loans	$	2,856,408	$	2,413,211	$	165,425	$	—	$	5,579	$	—	$	3,027,412	$	2,413,211	$	5,440,623

As of December 31, 2012

	Current				30 to 89 Days Past Due				90 and Over Days Past Due				Total
(In thousands)	PR		US		PR		US		PR		US		PR		US		Total
Consumer
Residential mortgage	$	2,548,403	$	11,587	$	127,265	$	—	$	—	$	—	$	2,675,668	$	11,587	$	2,687,255
FHA/VA guaranteed residential mortgage		9,459		—		3,934		—		6,129		—		19,522		—		19,522
Other consumer		22,622		39		506		—		1,118		—		24,246		39		24,285
Total consumer		2,580,484		11,626		131,705		—		7,247		—		2,719,436		11,626		2,731,062
Commercial
Commercial real estate		246,642		630,923		43,653		—		—		—		290,295		630,923		921,218
Commercial & industrial		124,176		1,420,918		110		—		413		—		124,699		1,420,918		1,545,617
Construction & land		33,254		156,446		4,257		—		—		—		37,511		156,446		193,957
Total commercial		404,072		2,208,287		48,020		—		413		—		452,505		2,208,287		2,660,792
Total loans	$	2,984,556	$	2,219,913	$	179,725	$	—	$	7,660	$	—	$	3,171,941	$	2,219,913	$	5,391,854

During 2012, the Company changed how it determines the amount of loans to be reported as TDRs. Modified loans (including mortgage loans which have reset) continue to be accounted for as TDRs, but are removed from amounts reported as TDRs, if: (a) they were modified in a prior calendar year; (b) the borrower has made at least six consecutive payments in accordance with their modified terms; and (c) the new effective yield was at least equal to the market rate for similar loans at the time of modification. In addition to the aforementioned criteria, the loan must not have a payment reset pending.

19

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Loans considered TDRs and non-accrual TDRs, grouped by major modification types, as of June 30, 2013 and December 31, 2012 are as follows:

(In thousands)	As of June 30, 2013				As of December 31, 2012
Modification Type	Total TDR Balance		TDRs on Non-Accrual Status		Total TDR Balance		TDRs on Non-Accrual Status
Deferral of principal and/or interest	$	142,867	$	61,292	$	167,810	$	72,196
Combined temporary rate reduction and term extension		395,642		231,701		478,578		250,804
Maturity or term extension		47,393		38,651		54,679		43,568
Forbearance		11,574		6,991		9,768		7,529
Permanent payment reduction		12,728		1,817		13,903		2,334
Other		170,911		71,891		103,869		52,308
	$	781,115	$	412,343	$	828,607	$	428,739

The non-accrual TDRs presented in the table above include those TDRs the are currently performing in accordance with their modification terms, but do not meet the criteria to be returned to accrual status because: (a) six consecutive payments have not yet been made; or (b) six consecutive payments have been made, but there exists a pending reset which: (i) will increase the monthly payment by more than 25%; and (ii) either the borrower’s debt service to income ratio is greater than 40%, or the property loan-to-value ratio is greater than 80%. Of the total non-accrual TDRs, $121.5 million and $109.9 million are currently performing in accordance with their modified contractual terms (less than four payments in arrears for residential mortgage loans and less than 90 days past due for all other categories) as of June 30, 2013 and December 31, 2012, respectively.

20

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Loan modifications that are considered TDRs completed during the three months and six months ended June 30, 2013 and 2012 were as follows:

	Three months ended June 30,
	2013						2012
(Dollars in thousands)	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment		Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Consumer
Residential non FHA/VA		329	$	42,891	$	45,990		488	$	65,079	$	66,881
Other consumer		—		—		—		11		91		91
Total consumer		329		42,891		45,990		499		65,170		66,972
Commercial
Commercial real estate		7		32,088		32,081		6		15,320		14,152
Commercial and industrial		1		75		75		—		—		—
Total commercial		8		32,163		32,156		6		15,320		14,152
Total loan modifications		337	$	75,054	$	78,146		505	$	80,490	$	81,124
	Six months ended June 30,
	2013						2012
(Dollars in thousands)	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment		Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Consumer
Residential non FHA/VA		757	$	101,156	$	110,954		836	$	110,729	$	112,821
Other consumer		—		—		—		29		198		198
Total consumer		757		101,156		110,954		865		110,927		113,019
Commercial
Commercial real estate		21		36,631		36,691		7		15,945		14,776
Commercial & industrial		2		2,303		2,283		2		716		579
Total commercial		23		38,934		38,974		9		16,661		15,355
Total loan modifications		780	$	140,090	$	149,928		874	$	127,588	$	128,374

The post-modification amounts which are greater than their pre-modification amounts result from including amounts due from the borrower for the Company’s previous payments for property taxes, insurance, and other fees on behalf of the borrower. In certain circumstances, such fees are paid by the Company in order to maintain its lien position, or otherwise protect the Company’s interest in the property during the period in which the borrower was delinquent or otherwise negligent in making timely payments.

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate on modified loans than do defaults on newly originated loans. Therefore, modified loans present a higher risk of loss than do newly originated loans.

21

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Loan modifications considered TDRs that were modified within the twelve months prior to June 30, 2013 or 2012, as applicable, and whose borrower re-defaulted (defaulted on its obligation pursuant to the terms of the modified loan) during the six months ended June 30, 2013 or 2012, as applicable, were as follows:

	June 30, 2013				June 30, 2012
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Consumer
Residential mortgage - non FHA/VA		88	$	14,204		51	$	6,935
Other consumer		—		—		1		2
Total consumer		88		14,204		52		6,937
Commercial
Commercial real estate		3		613		3		7,276
Construction & land		2		1,023		—		—
Total commercial		5		1,636		3		7,276
Total recidivism		93	$	15,840		55	$	14,213

For the three months and six months ended June 30, 2013, the Company would have recognized $6.2 million and $10.8 million in additional interest income had all TDR loans been accounted for on an accrual basis.

As of June 30, 2013 and December 31, 2012, construction and land TDRs totaled $59.9 million and $64.0 million, respectively, with commitments to disburse additional funds of $0.8 million and $1.3 million, respectively, on those construction and land TDRs.

The following table presents commercial real estate, commercial & industrial, and construction & land loans receivable by risk category.

	As of June 30, 2013
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial real estate	$	907,876	$	25,057	$	193,713	$	11,798	$	109	$	1,138,553
Commercial and industrial		1,524,435		1,696		2,679		305		443		1,529,558
Construction and land		330,558		3,351		108,706		6,387		—		449,002
Total	$	2,762,869	$	30,104	$	305,098	$	18,490	$	552	$	3,117,113

22

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The activity in the Company’s ALLL for the three months and six months ended June 30, 2013 and 2012 was as follows:

	Three months ended June 30, 2013
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial and Industrial			Construction and Land			Total Commercial			Total
Balance at beginning of period	$	90,930		$	2,302		$	93,232		$	16,989		$	9,722		$	5,347		$	32,058		$	125,290
Provision for loan and lease losses		4,447			265			4,712			(389	)		(28	)		1,241			824			5,536
Losses charged to the allowance		(15,404	)		(552	)		(15,956	)		(3,615	)		(612	)		(99	)		(4,326	)		(20,282	)
Recoveries		870			214			1,084			708			94			37			839			1,923
Balance at end of period	$	80,843		$	2,229		$	83,072		$	13,693		$	9,176		$	6,526		$	29,395		$	112,467
Reported balance of loans(1)	$	2,997,418		$	20,558		$	3,017,976		$	1,138,553		$	1,529,558		$	449,002		$	3,117,113		$	6,135,089
ALLL for impaired loans	$	54,835		$	—		$	54,835		$	3,265		$	405		$	2,503		$	6,173		$	61,008
Reported balance of impaired loans	$	1,030,874		$	—		$	1,030,874		$	278,588		$	7,506		$	125,906		$	412,000		$	1,442,874
ALLL for non-impaired loans	$	26,008		$	2,229		$	28,237		$	10,428		$	8,771		$	4,023		$	23,222		$	51,459
Reported balance of non-impaired loans	$	1,966,544		$	20,558		$	1,987,102		$	859,965		$	1,522,052		$	323,096		$	2,705,113		$	4,692,215

(1) Excludes reported balance of FHA/VA guaranteed loans and loans on savings deposits of $52.7 million and $0.8 million, respectively.

	Three months ended June 30, 2012
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial and Industrial			Construction and Land			Total Commercial			Total
Balance at beginning of period	$	95,083		$	3,507		$	98,590		$	26,120		$	9,160		$	32,920		$	68,200		$	166,790
Provision for loan and lease losses		2,530			448			2,978			3,848			(897	)		(720	)		2,231			5,209
Losses charged to the allowance		(12,742	)		(1,085	)		(13,827	)		(4,260	)		(159	)		(2,517	)		(6,936	)		(20,763	)
Recoveries		574			318			892			526			35			—			561			1,453
Balance at end of period	$	85,445		$	3,188		$	88,633		$	26,234		$	8,139		$	29,683		$	64,056		$	152,689
Reported balance of loans(1)	$	3,234,587		$	28,531		$	3,263,118		$	991,914		$	1,431,626		$	366,385		$	2,789,925		$	6,053,043
ALLL for impaired loans	$	52,561		$	—		$	52,561		$	15,598		$	1,553		$	27,717		$	44,868		$	97,429
Reported balance of impaired loans	$	933,277		$	—		$	933,277		$	269,834		$	24,167		$	145,810		$	439,811		$	1,373,088
ALLL for non-impaired loans	$	32,884		$	3,188		$	36,072		$	10,636		$	6,586		$	1,966		$	19,188		$	55,260
Reported balance of non-impaired loans	$	2,301,310		$	28,531		$	2,329,841		$	722,080		$	1,407,459		$	220,575		$	2,350,114		$	4,679,955

(1) Excludes reported balance of FHA/VA guaranteed loans and loans on savings deposits of $67.4 million and $1.2 million, respectively.

23

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

	Six months ended June 30, 2013
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial & Industrial			Construction & Land			Total Commercial			Total
Balance at beginning of period	$	94,099		$	2,568		$	96,667		$	22,351		$	9,792		$	6,533		$	38,676		$	135,343
Provision for loan and lease losses		13,751			360			14,111			3,448			3,792			2,908			10,148			24,259
Losses charged to the allowance		(29,396	)		(1,100	)		(30,496	)		(13,213	)		(4,509	)		(2,952	)		(20,674	)		(51,170	)
Recoveries		2,389			401			2,790			1,107			101			37			1,245			4,035
Balance at end of period	$	80,843		$	2,229		$	83,072		$	13,693		$	9,176		$	6,526		$	29,395		$	112,467
Reported balance of loans (1)	$	2,997,418		$	20,558		$	3,017,976		$	1,138,553		$	1,529,558		$	449,002		$	3,117,113		$	6,135,089
ALLL for impaired loans	$	54,835		$	—		$	54,835		$	3,265		$	405		$	2,503		$	6,173		$	61,008
Reported balance of impaired loans	$	1,030,874		$	—		$	1,030,874		$	278,588		$	7,506		$	125,906		$	412,000		$	1,442,874
ALLL for non-impaired loans	$	26,008		$	2,229		$	28,237		$	10,428		$	8,771		$	4,023		$	23,222		$	51,459
Reported balance of non-impaired loans	$	1,966,544		$	20,558		$	1,987,102		$	859,965		$	1,522,052		$	323,096		$	2,705,113		$	4,692,215

(1) Excludes reported balance of FHA/VA guaranteed loans and loans on savings deposits of $52.7 million and $0.8 million, respectively.

	Six months ended June 30, 2012
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial & Industrial			Construction & Land			Total Commercial			Total
Balance at beginning of period	$	58,369		$	4,957		$	63,326		$	12,908		$	8,628		$	17,747		$	39,283		$	102,609
Provision for loan and lease losses		71,459			49			71,508			23,334			(339	)		25,887			48,882			120,390
Losses charged to the allowance		(45,073	)		(2,404	)		(47,477	)		(10,604	)		(186	)		(13,951	)		(24,741	)		(72,218	)
Recoveries		690			586			1,276			596			36			—			632			1,908
Balance at end of period	$	85,445		$	3,188		$	88,633		$	26,234		$	8,139		$	29,683		$	64,056		$	152,689
Reported balance of loans (1)	$	3,234,587		$	28,531		$	3,263,118		$	991,914		$	1,431,626		$	366,385		$	2,789,925		$	6,053,043
ALLL for impaired loans	$	52,561		$	—		$	52,561		$	15,598		$	1,553		$	27,717		$	44,868		$	97,429
Reported balance of impaired loans	$	933,277		$	—		$	933,277		$	269,834		$	24,167		$	145,810		$	439,811		$	1,373,088
ALLL for non-impaired loans	$	32,884		$	3,188		$	36,072		$	10,636		$	6,586		$	1,966		$	19,188		$	55,260
Reported balance of non-impaired loans	$	2,301,310		$	28,531		$	2,329,841		$	722,080		$	1,407,459		$	220,575		$	2,350,114		$	4,679,955

(1) Excludes reported balance of FHA/VA guaranteed loans and loans on savings deposits of $67.4 million and $1.2 million, respectively.

24

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the Company’s recorded investment (unpaid principal balance net of partial charge-offs and other amounts which reduce credit risk) in impaired loans, the contractual unpaid principal balance, and the related allowance, as of June 30, 2013 and December 31, 2012.

	June 30, 2013									December 31, 2012
(In thousands)	UPB		Recorded Investment		Related Allowance		Reserve %  (1)			UPB		Recorded Investment		Related Allowance		Reserve %  (1)
With no allowance recorded at the report date:
Residential	$	235,500	$	178,062	$	—		—	%	$	—	$	—	$	—		—	%
Total consumer		235,500		178,062		—		—	%		—		—		—		—	%
Commercial real estate		277,672		216,037		—		—	%		186,516		145,918		—		—	%
Commercial and industrial		18,070		4,652		—		—	%		14,637		1,943		—		—	%
Construction and land		93,056		92,099		—		—	%		111,896		110,769		—		—	%
Total commercial		388,798		312,788		—		—	%		313,049		258,630		—		—	%
With allowance recorded at the report date:
Residential		885,925		852,812		54,835		6.43	%		1,074,328		1,000,042		57,931		5.79	%
Total consumer		885,925		852,812		54,835		6.43	%		1,074,328		1,000,042		57,931		5.79	%
Commercial real estate		67,432		62,551		3,265		5.22	%		121,140		106,454		10,537		9.90	%
Commercial and industrial		6,586		2,854		405		14.19	%		7,632		7,565		1,445		19.10	%
Construction and land		33,855		33,807		2,503		7.40	%		21,788		21,698		3,702		17.06	%
Total commercial		107,873		99,212		6,173		6.22	%		150,560		135,717		15,684		11.56	%
Total
Residential		1,121,425		1,030,874		54,835		5.32	%		1,074,328		1,000,042		57,931		5.79	%
Total consumer		1,121,425		1,030,874		54,835		5.32	%		1,074,328		1,000,042		57,931		5.79	%
Commercial real estate		345,104		278,588		3,265		1.17	%		307,656		252,372		10,537		4.18	%
Commercial and industrial		24,656		7,506		405		5.40	%		22,269		9,508		1,445		15.20	%
Construction and land		126,911		125,906		2,503		1.99	%		133,684		132,467		3,702		2.79	%
Total commercial		496,671		412,000		6,173		1.50	%		463,609		394,347		15,684		3.98	%
Total	$	1,618,096	$	1,442,874	$	61,008		4.23	%	$	1,537,937	$	1,394,389	$	73,615		5.28	%

⁽¹⁾  Represents the amount of related allowance to recorded investment.

25

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following tables provide the Company’s average recorded investment in its impaired loans as of June 30, 2013 and 2012, and the related interest income recognized on these loans during the three and six months ended June 30, 2013 and 2012:

	Three months ended June 30,
	2013				2012
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Consumer
Non-FHA/VA residential	$	1,031,174	$	9,896	$	904,835	$	9,998
Total consumer		1,031,174		9,896		904,835		9,998
Commercial
Commercial real estate		278,802		1,260		267,293		1,366
Commercial and industrial		8,551		40		15,740		338
Construction and land		122,591		204		146,795		347
Total commercial		409,944		1,504		429,828		2,051
Total	$	1,441,118	$	11,400	$	1,334,663	$	12,049
	Six months ended June 30,
	2013				2012
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Consumer
Non-FHA/VA residential	$	1,020,796	$	19,792	$	928,374	$	19,727
Total consumer		1,020,796		19,792		928,374		19,727
Commercial
Commercial real estate		269,992		2,505		255,255		2,590
Commercial and industrial		8,870		80		14,392		672
Construction and land		125,883		406		144,599		692
Total commercial		404,745		2,991		414,246		3,954
Total	$	1,425,541	$	22,783	$	1,342,620	$	23,681

Interest income may be recognized on a cash basis if certain conditions are met. For TDRs where impairment is measured based on the present value of expected future cash flows, the entire change in present value is recognized as a provision for loan and lease losses. Therefore, interest income in the table above does not include any interest based on the change in present value attributable to the passage of time.

12. Accounts Receivable

The Company reported accounts receivable of $32.2 million and $41.6 million as of June 30, 2013 and December 31, 2012, respectively. Total accounts receivable include $14.9 million and $17.6 million related to claims for loans foreclosed to FHA and VA as of June 30, 2013 and December 31, 2012, respectively.

26

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

13. Servicing Activities

The changes in servicing assets measured using the fair value method for the three months and six months ended June 30, 2013 and 2012 is presented below:

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2013			2012			2013			2012
Balance at beginning of period	$	100,606		$	112,006		$	99,962		$	112,303
Capitalization of servicing assets		3,626			2,977			8,202			5,060
Sales of servicing asset (1)		—			—			(1,783	)		—
Servicing release due to repurchase (2)		(440	)		(316	)		(737	)		(464	)
Change in fair value and amortization		(5,655	)		(6,002	)		(7,507	)		(8,234	)
Balance at end of period (3)	$	98,137		$	108,665		$	98,137		$	108,665

⁽¹⁾  Amount represents MSRs sales related to $123.7 million in principal balance of mortgage loans for the six months ended June 30, 2013.

⁽²⁾  Amount represents the adjustment of MSR fair value related to the repurchase of $32.9 million and $22.3 million in principal balance of mortgage loans serviced for others for the three months ended June 30, 2013 and 2012, respectively, and $55.0 million and $32.6 million for the six months ended June 30, 2013 and 2012, respectively.

⁽³⁾  Outstanding balance of loans serviced for third parties totaled to $7.3 billion and $7.7 billion as of June 30, 2013 and 2012, respectively. As of June 30, 2013 and 2012, respectively, outstanding balance includes $5.3 million and $6.7 million of loans being serviced under sub-servicing arrangements.

The Company recognizes as assets the rights to service loans for others and records these assets at fair value. The fair value of the Company’s MSRs is determined based on a combination of market information on trading activity (servicing asset trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Company’s servicing assets incorporates two sets of assumptions: (i) market derived assumptions for discount rates, servicing costs, escrow earnings rate, float earnings rate and cost of funds and (ii) market derived assumptions adjusted for the Company’s loan characteristics and portfolio behavior for escrow balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties. The CPR assumptions employed for the valuation of the Company’s servicing assets at June 30, 2013 was 8.4%, compared to 7.7% for the corresponding 2012 period.

Discount rate assumptions for the Company’s servicing assets were stable at June 30, 2013 and 2012, which were 11.1% and 11.2%, respectively.

Based on recent prepayment experience, the expected weighted-average remaining life of the Company’s servicing assets at June 30, 2013 and 2012 was 7.0 years. Any projection of the expected weighted-average remaining life of servicing assets is limited by conditions that existed at the time the calculations were performed.

At June 30, 2013 and December 31, 2012, fair values of the Company’s retained interest were based on internal models that incorporate market driven assumptions, such as discount rates, prepayment speeds and implied forward LIBOR rates (in the case of variable IOs). For additional information regarding the fair value measurement of IOs, refer to note 26.

The weighted-averages of the key economic assumptions used by the Company in its internal models and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions for mortgage loans at June 30, 2013, were as follows:

(Dollars in thousands)	Servicing Assets			Interest-Only Strips
Carrying amount of retained interest	$	98,137		$	36,269
Weighted-average expected life (in years)		7.0			6.4
Constant prepayment rate (weighted-average annual rate)		8.4	%		6.2	%
Decrease in fair value due to 10% adverse change	$	(3,484	)	$	(512	)
Decrease in fair value due to 20% adverse change	$	(6,786	)	$	(1,208	)
Residual cash flow discount rate (weighted-average annual rate)		11.1	%		13.0	%
Decrease in fair value due to 10% adverse change	$	(3,782	)	$	(1,091	)
Decrease in fair value due to 20% adverse change	$	(7,299	)	$	(2,295	)

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities.

27

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

This methodology used in the valuation model of the IOs resulted in a CPR of 6.2% and 7.7% at June 30, 2013 and 2012, respectively. The change in the CPR between 2013 and 2012 was due mostly to a decrease in the refinance activity of its portfolio during 2013.

The Company continued to benchmark its internal assumptions for setting its liquidity/credit risk premium to a third party valuation provider. This methodology resulted in a discount rate of 13.0% at June 30, 2013 and 2012.

The activity of interest-only strips is shown below:

	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2013			2012			2013			2012
Balance at beginning of period	$	40,414		$	42,123		$	41,669		$	43,877
Amortization		(1,398	)		(1,437	)		(2,657	)		(3,286	)
(Loss) gain on the IO value		(2,747	)		2,155			(2,743	)		2,250
Balance at end of period	$	36,269		$	42,841		$	36,269		$	42,841

The (loss) gain in IO value results from the change in market interest rates during the period, which generally results in losses when interest rates increase and gains when interest rates decrease.

The following table summarizes the estimated change in the fair value of the Company’s IOs, the constant prepayment rate and the weighted-average expected life under the Company’s valuation model, given several hypothetical (instantaneous and parallel) increases or decreases in interest rates. As of June 30, 2013, all of the mortgage loan sales contracts underlying the Company’s floating rate IOs were subject to interest rate caps.

(Dollars in thousands)
Change in Interest Rates (Basis Points)	Constant Prepayment Rate			Weighted-Average Expected Life  (Years)		Change in Fair Value of IOs			Percentage of Change
200		3.99	%		7.4	$	(5,738	)		(15.82	)%
100		5.06	%		6.9		(3,241	)		(8.94	)%
50		5.68	%		6.6		(1,772	)		(4.88	)%
Base		6.23	%		6.4		—			—	%
-50		6.77	%		6.2		1,451			4.00	%
-100		7.27	%		6.0		2,372			6.54	%
-200		8.10	%		5.7		3,855			10.63	%

28

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Servicing Related Matters

At June 30, 2013, escrow funds and custodial accounts included approximately $89.5 million deposited with Doral Bank. These funds are included within the cash and due from banks caption in the Company’s accompanying consolidated financial statements. Escrow funds and custodial accounts also included approximately $27.4 million deposited with other banks, which were excluded from the Company’s assets and liabilities. The Company had fidelity bond and errors and omissions coverage of $30.0 million and $20.0 million, respectively, as of June  30, 2013.

14. Sale and Securitization of Mortgage Loans

For the three months and six months ended June 30, 2013, the unpaid principal balance of loan securitizations and loan sales totaled $223.0 million and $493.2 million, respectively, and $176.7 million and $301.2 million for the comparable 2012 periods. Loans with servicing rights released or derecognized due to repurchases totaled $55.0 million and $32.6 million for the six months ended June 30, 2013 and 2012, respectively.

Under most of the servicing agreements, the Company is required to advance funds to make scheduled payments to investors, if payments due have not been received from the mortgagors. At June 30, 2013 and December 31, 2012, mortgage servicing advances totaled $77.1 million and $72.7 million, respectively, net of a reserve for possible losses of $11.9 million and $11.2 million, respectively.

In general, the Company’s servicing agreements are terminable by the investors for cause. The Company’s servicing agreements with FNMA permit FNMA to terminate the Company’s servicing rights if FNMA determines that changes in the Company’s financial condition have materially adversely affected the Company’s ability to satisfactorily service the mortgage loans. Approximately 29% of Doral Financial’s mortgage loan servicing on behalf of third parties relates to mortgage servicing for FNMA. Termination of the Company’s servicing rights with respect to FNMA or other parties for which it provides servicing could have a material adverse effect on the results of operations and financial condition of Doral Financial. As of June 30, 2013, no servicing agreements have been terminated.

15. Real Estate Held for Sale, net

The Company acquires real estate held for sale through foreclosure proceedings. Real estate held for sale, net totaled $129.5 million and $111.9 million as of June 30, 2013 and December 31, 2012, respectively.

The following table provides the balances of real estate held for sale, net for the periods indicated:

(In thousands)	June 30, 2013		December 31, 2012
Residential	$	82,734	$	61,648
Commercial		19,144		22,148
Construction and land		27,609		28,127
Balance at end of period	$	129,487	$	111,923

The following table presents activity of real estate held for sale, net for the periods indicated:

(Dollars in thousands)	No. of units		Three months ended June 30, 2013			No. of units		Three months ended June 30, 2012			No. of units		Six months ended June 30, 2013			No. of units		Six months ended June 30, 2012
Balance at beginning of period		683	$	118,939			640	$	127,415			661	$	111,923			592	$	121,153
Additions		193		20,879			81		11,162			339		40,349			171		25,598
Sales		73		(8,947	)		45		(9,062	)		197		(19,284	)		84		(14,180	)
Retirements		—		—			6		(394	)		—		—			9		(571	)
Provision for OREO losses		—		(1,384	)		—		(3,591	)		—		(3,501	)		—		(6,470	)
Balance at end of period		803	$	129,487			670	$	125,530			803	$	129,487			670	$	125,530

29

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

16. Deposits

The following table summarizes deposit balances as of June 30, 2013 and December 31, 2012:

(In thousands)	June 30, 2013		December 31, 2012
Brokered deposits	$	1,784,439	$	1,996,235
Certificates of deposit		1,525,229		1,023,202
Money markets accounts		226,536		154,173
NOW and other transactions accounts		750,825		769,152
Regular savings		316,815		332,630
Total interest-bearing		4,603,844		4,275,392
Non-interest-bearing deposits		367,713		353,472
Total deposits	$	4,971,557	$	4,628,864

17. Securities Sold Under Agreements to Repurchase

As part of its financing activities, the Company enters into sales of securities under agreements to repurchase the same or substantially similar securities. The Company retains control over such securities, so accordingly, the amounts received under these agreements represent borrowings, and the securities underlying the agreements remain in the Company’s asset accounts and these transactions are carried at the amounts at which transactions will be settled. The counterparties to the contracts generally have the right to repledge the securities received as collateral. These securities are presented in the consolidated statements of financial condition of the Company as part of pledged investment securities.

As of June 30, 2013 and December 31, 2012, securities sold under agreements to repurchase consisted of the following:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Repurchase agreements with maturities ranging from June 2014 to June 2015 as of June 30, 2013 and July 2013 to June 2015 as of December 31, 2012, at various fixed rates, with the weighted average rate of 2.34% and 2.19% at June 30, 2013 and December 31, 2012, respectively.	$	59,500	$	89,500
Structured repurchase agreement with a maturity of February 2014 at a rate of 2.98% at both June 30, 2013 and December 31, 2012, with a callable date of August 2013 and February 2013 as of June 30, 2013 and December 31, 2012, respectively.		100,000		100,000
	$	159,500	$	189,500

Maximum repurchase agreements outstanding at any month end during the six month period ended June 30, 2013 was $189.5 million. The approximate average daily outstanding balance of securities sold under repurchase agreements for the six month period ended June 30, 2013 was $175.9 million. The weighted-average interest of such agreements, computed on a daily basis was 2.70% for the six month period ended June 30, 2013.

30

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

18. Advances from FHLB

Advances from FHLB consisted of the following, as of June 30, 2013 and December 31, 2012:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Non-callable advances with maturities ranging from September 2013 to February 2016 at various fixed rates with a weighted average of 3.66% and 3.09% at June 30, 2013 and December 31, 2012, respectively.	$	938,973	$	1,180,413
	$	938,973	$	1,180,413

Maximum advances outstanding at any month end during the six months ended June 30, 2013 were $1.0 billion. The approximate average daily outstanding balance of advances from FHLB for the six months ended June 30, 2013 was $1.0 billion. The weighted-average interest of such advances, computed on a daily basis was 3.66% for the six months ended June 30, 2013.

At June 30, 2013, the Company had pledged qualified collateral in the form of residential mortgage loans with an estimated market value of $1.5 billion to secure the above advances from FHLB, which the counterparty is not generally permitted to sell or repledge.

The advances from FHLB are subject to early termination fees.

19. Loans Payable

At June 30, 2013 and December 31, 2012, loans payable consisted of financing agreements with local financial institutions secured by mortgage loans and a borrowing with a U.S. third-party secured by a construction line of credit.

Outstanding loans payable consisted of the following:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Secured borrowings with local financial institutions, at variable interest rates tied to a 3-month LIBOR with a weighted average of 1.76% and 1.80% at June 30, 2013 and December 31, 2012, respectively, collateralized by residential mortgage loans.	$	246,982	$	253,877
Secured borrowings with local financial institutions, at fixed interest rates with a weighted average of 7.27% and 7.28% at June 30, 2013 and December 31, 2012, respectively, collateralized by residential mortgage loans.		12,205		12,590
Secured borrowing with a U.S. third-party at 6.50% plus or minus Doral’s rate on the underlying loan (7.34% and 7.29% at June 30, 2013 and December 31, 2012, respectively), collateralized by a construction line of credit, maturing on July 8, 2015.		14,853		3,708
	$	274,040	$	270,175

The expected maturity date of secured borrowings based on collateral is from July 2013 to December 2025. The maximum loans payable balance outstanding at any month end during the six months ended June 30, 2013 was $274.0 million. The approximate average daily outstanding balance of loans payable for the six months ended June 30, 2013 was $271.3 million. The weighted-average interest of such borrowings, computed on a daily basis was 1.95% for the six months ended June 30, 2013.

At June 30, 2013 and December 31, 2012, the Company had $86.4 million and $94.4 million, respectively, of loans held for sale and $172.5 million and $172.0 million, respectively, of loans receivable that were pledged to secure financing agreements with local financial institutions and a U.S. third-party. Such loans can be repledged by the counterparty.

31

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

20. Notes Payable

As of June 30, 2013 and December 31, 2012, notes payable consisted of the following:

(In thousands)	June 30, 2013		December 31, 2012
$100.0 million notes, net of discount, bearing interest at 7.65%, due on March 26, 2016, paying interest monthly.	$	99,311	$	99,201
$40.0 million notes, net of discount, bearing interest at 7.10%, due on April 26, 2017, paying interest monthly.		39,665		39,628
$30.0 million notes, net of discount, bearing interest at 7.15%, due on April 26, 2022, paying interest monthly.		29,577		29,560
Bonds payable secured by mortgage on building at fixed rates ranging from 6.75% to 6.90%, with maturities ranging from December 2013 to December 2029, paying interest monthly.		32,710		36,295
Bonds payable at a fixed rate of 6.25%, with maturities ranging from December 2013 to December 2029, paying interest monthly.		6,900		7,000
Note payable with a local financial institution, collateralized by IOs, at a fixed rate of 7.75%, paying principal and interest monthly, last payment due on December 2013.		3,778		7,412
$250.0 million notes, net of discount, bearing interest at a variable interest rate (3-month LIBOR plus 1.50%), due on July 21, 2020, paying interest quarterly commencing on January 2011.		249,863		249,855
$331.0 million notes, net of discount, bearing interest at a variable interest rate (3-month LIBOR plus ranges from 1.47% to 2.90%), due on May 26, 2023, paying interest quarterly commencing on November 2012.		326,489		326,263
$251.0 million notes, net of discount, bearing interest at a variable interest rate (3-month LIBOR plus ranges from 1.45% to 3.25%), due on December 19, 2022, paying interest quarterly commencing on June 2013.		248,789		248,673
	$	1,037,082	$	1,043,887

Doral Financial is the guarantor of various unregistered serial and term bonds issued by Doral Properties, a wholly-owned subsidiary, through AFICA. The bonds were issued to finance the construction and development of the Doral Financial Plaza building, the headquarters facility of Doral Financial. As of June 30, 2013, the outstanding principal balance of the bonds was $39.6 million with fixed interest rates, ranging from 6.25% to 6.90%, and maturities ranging from December 2013 to December 2029. Certain series of the bonds are secured by a mortgage on the building and underlying real property.

For additional information regarding the $250.0 million in notes issued during 2010 and the $331.0 million and $251.0 million in notes issued during 2012, refer to note 28.

21. Income Taxes

Background

Income taxes include Puerto Rico income taxes as well as applicable U.S. federal and state taxes. Except for the U.S. operations of Doral Bank (referred to as “Doral Bank U.S.”) and Doral Money, which is a U.S. corporation, most of the Company’s operations are conducted through subsidiaries in Puerto Rico. As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are generally required to pay U.S. income taxes only with respect to their income derived from the active conduct of a trade or business in the United States (excluding Puerto Rico) and certain investment income derived from U.S. assets. Any such U.S. tax is creditable, with certain limitations, against Puerto Rico income taxes.

On November 15, 2010, Act 171 was enacted into law, generally providing, among other things: (1) an income tax credit equal to 7% of the “tax liability due” to corporations that paid the Christmas bonus required by local labor laws, and (2) an extension for 10 years of the carry forward term of net operating losses incurred for years commenced after December 31, 2004 and before December 31, 2012.

32

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Until December 31, 2010, the maximum statutory corporate income tax rate in Puerto Rico was 39%. Under the 1994 Puerto Rico Internal Revenue Code, as amended (the “1994 Code”), corporations are not permitted to file consolidated returns with their subsidiaries and affiliates. Doral Financial is entitled to a 100% dividend-received deduction on dividends received from Puerto Rico Operations of Doral Bank (“Doral Bank PR”) and any other Puerto Rico subsidiary subject to tax under the 1994 Code.

On January 31, 2011, the Governor signed into law the Internal Revenue Code of 2011 (the “2011 Code”) making the 1994 Code largely ineffective, for years commenced after December 31, 2010. Under the provisions of the 2011 Code, the maximum statutory corporate income tax rate was 30% for years starting after December 31, 2010 and ending before January 1, 2014. The maximum tax rate was recently increased to 39%, effective after December 31, 2012, as the result of the new Puerto Rico tax legislation approved on June 30, 2013. The 2011 Code eliminated the special 5.00% surtax on corporations for tax year 2011. In general, the 2011 Code maintains the extension in the carry forward periods for net operating losses from seven to ten years as provided for in Act 171; maintains the concept of the alternative minimum tax although it changed the way it is computed; allows limited liability companies to have flow-through treatment under certain circumstances; imposes additional restrictions on the use of net operating loss carry forwards after certain types of reorganizations and/or changes in control; and specifies what types of auditors’ report will be acceptable when audited financial statements are required to be filed with the income tax return. Additionally, the 2011 Code provides for changes in the implications of being in a controlled group of corporations and/or a group of related corporations. Notwithstanding the 2011 Code, a corporation may be subject to the provisions of the 1994 Code if it so elects by the time it files its income tax return for the first year commenced after December 31, 2010 and ending before January 1, 2012, including extension. If the election is made to remain subject to the provisions of the 1994 Code, such election will be effective that year and the next four succeeding years.

The Company made the election to remain subject to the provisions of the 1994 Code for Doral Financial, Doral Bank and Doral Mortgage on their respective 2011 tax returns. However, the Company elected to use the 2011 Code for Doral Insurance Agency, Doral Properties, CB, LLC (currently Doral Recovery II) and Doral Investment. In the past, the Company recorded its deferred tax assets estimated to reverse after 2015 at the 30% tax rate required for all taxable earnings beginning in 2016, which is the latest taxable year that it would be permitted to elect taxation under the 1994 Code. Puerto Rico deferred tax assets subject to the maximum statutory tax rate and estimated to reverse prior to 2016, together with any related valuation allowance, are recorded at the 39% tax rate pursuant to the 1994 Code.

On June 30, 2013, the Commonwealth of Puerto Rico amended the 2011 Code effective for entities with taxable years commencing after December 31, 2012. Major changes to the 2011 Code include an increase in the maximum statutory enacted tax rates from 30% to 39% and the creation of the National Gross Receipts Tax which, in the case of financial institutions, is 1% of gross income, and is not deductible for purposes of computing net taxable income and is not part of the alternative minimum tax. This provision is retroactive to January 1, 2013 and subject to certain limitations, a financial institution will be able to claim 0.5% of its gross income as a credit against its regular income tax or the alternative minimum tax. As a result of the new tax legislation, Doral recognized a tax benefit of $4.8 million for the three months and six months ended June 30, 2013.

In the fourth quarter of 2012, the Company reassessed whether a valuation allowance for deferred tax assets at Doral Financial Corporation was needed. The Company’s evaluation considered that: (i) Doral Financial Corporation is in a three-year cumulative loss position, but its core business has shown stable results in recent quarters; (ii) the conversion of Doral Insurance Agency to a limited liability company and its election to be treated as a partnership which will allow Doral Insurance Agency to consolidate its income and expenses into Doral Financial Corporation going forward, as clarified by a tax ruling with the Puerto Rico Treasury Department and; (iii) Doral Financial Corporation’s transfer, effective January 3, 2013, of certain non-performing assets to a newly formed Puerto Rico corporate subsidiary, “Doral Recovery”, for regulatory and business purposes, which will reduce Doral Financial Corporation’s stand-alone volatility in earnings. Based on the Company’s evaluation of both positive and negative evidence, management concluded that the objective positive evidence related to: (i) Doral Insurance Agency’s profitable business to be considered as part of Doral Financial Corporation results going forward and; (ii) the reduction of credit losses and volatility to Doral Financial Corporation stand-alone results from the transfer of non-performing assets to another entity outweighed the negative evidence and that it is more likely than not that a portion of Doral Financial Corporation’s deferred tax assets will be realized. Based on the evaluation, during the fourth quarter of 2012, the Company released a $50.6 million valuation allowance for deferred tax assets at Doral Financial Corporation.

33

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Income Tax (Benefit) Expense

The components of income tax (benefit) expense are summarized below:

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2013			2012			2013		2012
Current income tax expense - United States	$	464		$	2,132		$	1,599	$	3,971
Deferred income tax (benefit) expense:
Puerto Rico		(1,488	)		(322	)		464		(114,217	)
United States		(750	)		(1,025	)		95		(1,593	)
Total deferred income tax (benefit) expense		(2,238	)		(1,347	)		559		(115,810	)
Total income tax (benefit) expense	$	(1,774	)	$	785		$	2,158	$	(111,839	)

Current income tax expense of $1.6 million for the six months ended June 30, 2013 was related to the growth of U.S. operations and the branch-level interest tax resulting from operating as a foreign branch in the U.S. The deferred income tax expense of $0.6 million for the six months ended June 30, 2013, resulted mainly from the improved profitability at Doral Financial Corporation due to the conversion of Doral Insurance Agency to a Limited Liability Corporation and electing partnership treatment, offset by both the revaluation of the Company’s net deferred tax assets at Doral Financial Corporation and Doral Insurance Agency resulting from the new Puerto Rico tax legislation and the partial release of the reserve for uncertain tax positions resulting from the closing agreement signed with the U.S. Internal Revenue Service on June 24, 2013.

Deferred Tax Components

The Company’s DTA consists primarily of net operating loss carry-forwards, the allowance for loan losses and other temporary differences arising from the daily operations of the Company.

Prior to March 2012, the largest component of the DTA arose from the IO DTA, which represented a stand-alone intangible asset subject to straight-line amortization based on a useful life of 15 years. The intangible asset was created by a series of closing agreements that Doral entered into with the Commonwealth of Puerto Rico, which were entered into in 2004 through 2010. On March 26, 2012 Doral signed a closing agreement (the “Closing Agreement”) specifying the terms and conditions under which Doral could recover certain amounts paid as taxes to the Commonwealth of Puerto Rico for certain years prior to 2005. In the Closing Agreement, the Commonwealth of Puerto Rico states that as of March 26, 2012 it has a payable to Doral of approximately $230.0 million resulting from past Doral tax payments (prepaid tax), and that Doral has the right to use the amount due from the Commonwealth of Puerto Rico to offset future Doral tax obligations, or that Doral may claim a refund that the Commonwealth of Puerto Rico may pay over a five-year period. The Closing Agreement clearly states and recognizes the source of the amount of past taxes paid by Doral, and the Commonwealth of Puerto Rico’s obligation to return the overpayments to Doral.

NOLs generated between 2005 and 2012 can be carried forward for a period of 10 years (there is no carry-back allowed in Puerto Rico). The NOLs creating deferred tax assets as of June 30, 2013, will expire beginning in 2016 until 2023 for Puerto Rico entities and 2025 through 2033 for United States entities filing in the United States. Since each legal entity files a separate income tax return, the NOLs can only be used to offset future taxable income of the entity that incurred it.

The Company evaluates its DTA to determine if it can be realized. The deferred tax asset is reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the DTA to the amount that is more likely than not to be realized.

In assessing the realization of deferred tax assets, the Company considers the expected reversal of its deferred tax assets and liabilities, projected future taxable income, cumulative losses in recent years, and tax planning strategies. The determination of a valuation allowance on DTA requires judgment based on the weight of all available evidence and considering the relative impact of negative and positive evidence.

The Company has three Puerto Rico entities which are currently in a loss position, Doral Bank, Doral Recovery and Doral Recovery II. For purposes of assessing the realization of the DTAs, the loss position for these two entities is considered significant negative evidence that has caused management to conclude that the Company will not be able to fully realize the deferred tax assets related to these two entities in the future. As of June 30, 2013 and December 31, 2012, based on the Company’s evaluation of all available evidence in determining whether the valuation allowance was needed, the Company determined that it was more likely than not that $296.0 million and $284.6 million, respectively, of its gross DTA would not be realized and maintained a valuation allowance for that amount.

34

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Deferred tax assets and liabilities by legal entity were as follows:

	As of June 30, 2013
(Dollars in thousands)	Doral Financial Corporation			Doral Recovery			Doral Bank PR Division(1)			Doral Recovery II			Doral Mortgage LLC			Doral Insurance Agency, Inc.		Doral Bank US Division(1)			Doral Money, Inc.			Total
Net operating loss carry-forwards	$	43,244		$	3,682		$	177,759		$	8,001		$	14		$	—	$	—		$	1,071		$	233,771
Allowance for loan and lease losses		1,832			1,927			16,201			18,799			—			—		2,659			2,905			44,323
Capital loss carry-forward		3,517			—			15,179			—			—			—		3			—			18,699
Reserve for losses on OREO		714			4,041			225			17,911			—			—		114			—			23,005
Unrealized loss on investment securities available for sale		1			—			—			—			—			—		—			—			1
Other		7,561			604			26,878			2,077			395			1,289		3,424			253			42,480
Gross deferred tax assets		56,869			10,254			236,242			46,787			409			1,289		6,200			4,229			362,279
Valuation allowance		(3,517	)		(10,254	)		(235,862	)		(46,787	)		—			—		—			—			(296,420	)
Net deferred tax assets		53,352			—			380			—			409			1,289		6,200			4,229			65,859
Differential in tax basis of IOs		(14,145	)		—			—			—			—			—		—			—			(14,145	)
Other		—			—			(825	)		—			(173	)		—		(1,296	)		(270	)		(2,564	)
Gross deferred tax liabilities		(14,145	)		—			(825	)		—			(173	)		—		(1,296	)		(270	)		(16,709	)
Net deferred tax asset (liability)	$	39,207		$	—		$	(445	)	$	—		$	236		$	1,289	$	4,904		$	3,959		$	49,150

	As of December 31, 2012
(Dollars in thousands)	Doral Financial Corporation			Doral Recovery		Doral Bank PR Division(1)			Doral Recovery II		Doral Mortgage LLC			Doral Insurance Agency, Inc.		Doral Bank US Division(1)			Doral Money, Inc.			Total
Net operating loss carry-forwards	$	40,824		$	—	$	172,443		$	—	$	1,110		$	—	$	—		$	2,252		$	216,629
Allowance for loan and lease losses		3,344			—		43,142			—		—			—		2,360			2,928			51,774
Capital loss carry-forward		4,344			—		15,227			—		—			—		3			—			19,574
Reserve for losses on OREO		3,376			—		15,980			—		—			—		114			—			19,470
Other		9,215			—		27,239			—		412			958		2,254			390			40,468
Gross deferred tax assets		61,103			—		274,031			—		1,522			958		4,731			5,570			347,915
Valuation allowance		(10,550	)		—		(274,031	)		—		—			—		—			—			(284,581	)
Net deferred tax assets		50,553			—		—			—		1,522			958		4,731			5,570			63,334
Differential in tax basis of IOs sold		(12,501	)		—		—			—		—			—		—			—			(12,501	)
Unrealized gains on investment securities available for sale		(1	)		—		(352	)		—		—			—		—			—			(353	)
Other		—			—		(241	)		—		(180	)		—		(908	)		(435	)		(1,764	)
Gross deferred tax liabilities		(12,502	)		—		(593	)		—		(180	)		—		(908	)		(435	)		(14,618	)
Net deferred tax asset (liability)	$	38,051		$	—	$	(593	)	$	—	$	1,342		$	958	$	3,823		$	5,135		$	48,716

(1) The deferred tax assets and liabilities of Doral Bank are segregated between the P.R. and U.S. divisions as the related deferred tax assets and liabilities are from different tax jurisdictions.

35

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Puerto Rico deferred tax assets subject to the maximum statutory tax rate and estimated to reverse prior to 2016, together with any related valuation allowance, are recorded at the 39% tax rate in effect under both the 2011 Code and the 1994 Code. As of June 30, 2013, gross DTAs totaling $316.3 million were at the 39% tax rate, with a valuation allowance of $277.8 million, while net DTAs of $29.7 million with a valuation allowance of $18.6 million were at other tax rates.

Taxable P.R. entities with positive core earnings do not have a valuation allowance on DTAs recorded since they are expected to continue to be profitable. At June 30, 2013, the net DTA associated with these companies, Doral Mortgage, Doral Financial Corporation and Doral Insurance Agency, the latter two which have been treated as a partnership since 2012 for tax purposes, was $40.7 million, compared to $40.4 million at December 31, 2012. In management’s opinion, for these companies, the positive evidence of profitable core earnings outweighs any negative evidence.

Failure to achieve sufficient projected taxable income in the entities and deferred tax assets where a valuation allowance has not been established, might affect the ultimate realization of the net deferred tax assets.

Management assesses the realization of its DTA at each reporting period. To the extent that earnings improve and the deferred tax assets become realizable, the Company may be able to reduce the valuation allowance through earnings.

As of June 30, 2013 and December 31, 2012, the DTA valuation allowance off-set the following deferred tax assets:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Net operating loss carry-forwards	$	189,442	$	172,443
Allowance for loan and lease losses		36,927		45,482
Capital loss carry-forward		18,696		19,571
Reserve for losses on OREO		22,177		19,356
Other		29,178		27,729
Total valuation allowance	$	296,420	$	284,581

Accounting for Uncertainty in Income Taxes

During 2012, the Company recognized a tax expense of $1.9 million, for an uncertain tax position arising from an IRS audit finding related to the treatment of a U.S. NOL. The Company appealed the finding and on June 24, 2013, the Company entered into a closing agreement with the U.S. Internal Revenue Service allowing the Company to carry forward $2.8 million of its U.S. net operating loss. As a result of the closing agreement, the Company released a portion of its reserve for uncertain tax positions, resulting in an tax benefit of approximately $1.1 million. As of June 30, 2013 and December 31, 2012, the Company had accrued interest and penalties on unrecognized tax benefits of $0.8 million and $1.0 million, respectively. The Company classifies all interest and penalties related to tax uncertainties as income tax expense.

22. Guarantees

In the ordinary course of business, at the time of the loan sales to third parties, and in certain other circumstances, such as in the event of early or first payment default, the Company makes certain representations and warranties to purchasers and insurers of mortgage loans regarding the characteristics of the loans sold. To the extent the loans do not meet specified characteristics and there is a breach of contract of a representation or warranty, or if there is an early payment default, the Company may be required to repurchase the mortgage loan and bear any subsequent losses related to the loan. For the six months ended June 30, 2013, the Company repurchased loans totaling $2.9 million due to breach of representation or warranty, compared to $5.6 million for the corresponding period in 2012. These repurchases were at fair value and no significant losses were incurred.

In the past, in relation to its asset securitizations and loan sale activities, the Company sold pools of delinquent FHA, VA and conventional mortgage loans while retaining the servicing rights to those loans. These loans are not reflected on the Company’s consolidated statements of financial condition. Under these arrangements, as part of its servicing responsibilities, the Company is required to advance the scheduled payments of principal, interest and taxes, whether or not collected from the underlying borrower. While the Company expects to recover a significant portion of the amounts advanced through foreclosure or, in the case of FHA and VA loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend to be greater than normal arrangements because of the delinquent status of the loans. As of June 30, 2013 and December 31, 2012, the outstanding principal balance of such delinquent loans was $80.2 million and $89.2 million, respectively.

36

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

In addition, the Company’s past loan sale activities included certain mortgage loan sale and securitization transactions subject to recourse arrangements that require the Company to repurchase or substitute any loan that is 90 to 120 days or more past due, or otherwise in default. Under certain of these arrangements, the recourse obligation is terminated upon compliance with certain conditions, which generally involve: (i) the lapse of time (normally from four to seven years), (ii) the lapse of time combined with certain other conditions, such as when the unpaid principal balance of the mortgage loans falls below a specific percentage (normally less than 80%) of the appraised value of the underlying property, or (iii) the amount of loans repurchased pursuant to recourse provisions reaches a specific percentage of the original principal amount of loans sold (generally from 10% to 15%). As of June 30, 2013 and December 31, 2012, the Company’s records reflected that the outstanding principal balance of loans sold subject to full or partial recourse was $490.6 million and $531.2 million, respectively. As of such dates, the Company’s records also reflected that the maximum contractual exposure to the Company if it were required to repurchase all loans subject to recourse was $443.6 million and $476.7 million, respectively. The Company’s contingent obligation with respect to its recourse provision is not reflected on the Company’s consolidated financial statements, except for a liability of estimated losses from such recourse agreements, which is included as part of accrued expenses and other liabilities. The Company discontinued the practice of selling loans with recourse obligations in 2005. The Company’s current strategy is to sell loans on a non-recourse basis, except for certain early payment defaults and industry standard representations and warranties. For the three months and six months ended June 30, 2013, the Company repurchased at fair value, $4.7 million and $11.1 million in loans pursuant to recourse provisions, compared to $2.5 million and $6.2 million, respectively, for the corresponding 2012 periods.

The Company’s reserve for the amount of credit loss resulting from its recourse exposure totaled $7.2 million and $8.8 million as of June 30, 2013 and December 31, 2012, respectively, and the reserve for other credit-enhanced transactions explained above was $5.6 million and $5.8 million as of June 30, 2013 and December 31, 2012, respectively.

The following table shows the changes in the Company’s liability of estimated losses from recourse agreements, included within the accrued expenses and other liabilities section of the consolidated statements of financial condition. The provision for recourse liability is included within the foreclosure and other credit related section of the consolidated statements of operations.

(In thousands)	Three months ended June 30, 2013			Three months ended June 30, 2012			Six months ended June 30, 2013			Six months ended June 30, 2012
Balance at beginning of period	$	8,734		$	8,866		$	8,845		$	10,977
Net charge-offs / termination		(604	)		(219	)		(1,733	)		(1,356	)
(Reversal) provision for recourse liability		(897	)		(43	)		121			(1,017	)
Balance at end of period	$	7,233		$	8,604		$	7,233		$	8,604

23. Financial Instruments with Off-Balance Sheet Risk

The following table summarizes Doral Financial’s commitments to extend credit, commercial and performance standby letters of credit, commitments to sell loans and the maximum contractual recourse exposure.

(In thousands)	June 30, 2013		December 31, 2012
Commitments to extend credit	$	465,488	$	338,948
Commitments to sell loans		791,744		120,931
Commercial and performance standby letter of credit		—		1,225
Maximum contractual recourse exposure		443,560		476,688
Total	$	1,700,792	$	937,792

The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and sell loans. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses.

The Company purchases mortgage loans and simultaneously enters into a sale and securitization agreement with the same counterparty, essentially a forward contract that meets the definition of a derivative during the period between trade and settlement date.

37

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

A letter of credit is an arrangement that represents an obligation on the part of the Company to a designated third party, contingent upon the failure of the Company’s customer to perform under the terms of the underlying contract with a third party. The amount of the letter of credit represents the maximum amount of credit risk in the event of non-performance by these customers. Under the terms of a letter of credit, an obligation arises only when the underlying event fails to occur as intended, and the obligation is generally up to a stipulated amount and with specified terms and conditions. Letters of credit are used by the customer as a credit enhancement and typically expire without having been drawn upon.

The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty.

Doral Financial’s loan sale activities in the past included certain mortgage loan sale and securitization transactions subject to recourse arrangements as discussed in note 22.

24. Contingencies

Doral Financial and its subsidiaries are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business, including employment related matters. Management believes, after review of the facts of each case with legal counsel, that the aggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition or results of operations of Doral Financial.

For additional information on Legal Matters and Banking Regulatory Matters refer to note 30 of the consolidated financial statements on the Company’s 2012 Annual Report on Form 10-K, filed with the SEC on March 13, 2013 and to Part II, Item 1 of this Quarterly Report on Form 10-Q.

25. Earnings (Losses) Per Share Data

The following table presents the computation of loss per share for the periods presented:

	Three months ended June  30,						Six months ended June  30,
(Dollars in thousands, except per share amounts)	2013			2012			2013			2012
Net (loss) income:
Net (loss) income	$	(10,350	)	$	(1,612	)	$	(22,727	)	$	992
Convertible preferred stock dividend		(2,415	)		(2,415	)		(4,830	)		(4,830	)
Net loss attributable to common shareholders	$	(12,765	)	$	(4,027	)	$	(27,557	)	$	(3,838	)
Weighted-Average Number of Common Shares Outstanding(2)		6,538,031			6,423,021			6,534,069			6,421,327
Net loss per common share(1)(2)	$	(1.95	)	$	(0.63	)	$	(4.22	)	$	(0.60	)

⁽¹⁾  Net loss per common share represents both the basic and diluted losses per common share for each of the periods presented.

⁽²⁾  Adjusted to reflect the 1-for-20 reverse stock split, which was effective June 28, 2013.

Common shares consist of common stock issuable under the assumed exercise of stock options and unvested shares of restricted stock using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options and unvested shares of restricted stock that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. As of June 30, 2013, there were 2,000 stock options and 49,977 shares of restricted stock outstanding.

On June 27, 2013, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended (the “Amendment”), with the Secretary of the State of the Commonwealth of Puerto Rico to effect a 20-for-1 reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding common stock. The Reverse Stock Split was approved by the

38

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Company’s stockholders at the Company’s Annual Meeting of Stockholders held on June 19, 2013 with a reverse stock split ratio of between 15-for-1 and 25-for-1 to be determined by the Company’s Board of Directors. The Board of Directors determined a ratio of 20-for-1 for the Reverse Stock Split ratio on June 24, 2013. The Amendment became effective at 4:00pm Eastern Time on June 28, 2013. Upon the effective date of the Reverse Stock Split, every twenty (20) shares of issued and outstanding common stock were automatically combined into one (1) issued and outstanding share of common stock without any change to the par value per share. As a result of the Reverse Stock Split, the number of issued and outstanding shares of the Company’s common stock was reduced from 130,601,272 shares to 6,530,064 shares, and the authorized shares of common stock were reduced from 300,000,000 to 15,000,000. As of June 30, 2013, the number of shares of the Company’s common stock outstanding was 6,650,896. The Reverse Stock Split had no effect on the Company’s authorized shares of preferred stock, which remains at 40 million authorized shares. However, the Reverse Stock Split did have an effect on the preferred stock conversion factor. Stock options and shares of restricted stocks outstanding also reflect the Reverse Stock Split effect.

The number of shares of common stock into which the company’s 4.75% perpetual cumulative convertible preferred stock is convertible was proportionally reduced. Proportional adjustments were also made to the Company’s stock incentive plans. The Company has retroactively restated all periods presented in these unaudited consolidated financial statements to conform to the current period’s presentation.

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 with the dividends for the second quarter of 2009 for Doral Financial’s one outstanding series of cumulative preferred stock.

For each of the three months and six months ended June 30, 2013 and 2012, 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. Prior to the Reverse Stock Split, each share of the Company’s 4.75% Perpetual Cumulative Convertible Preferred Stock was convertible into 0.31428 shares of Common Stock. Pursuant to the Reverse Stock Split, the Conversion Rate of the 4.75% preferred stock was proportionately reduced to 0.015714. 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 $15,909.40, or $19,091.28); (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 $15,909.40, or $20,682.22) 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.

39

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

26. Fair Value of Assets and Liabilities

Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the balance of assets and liabilities measured at fair value on a recurring basis.

	June 30, 2013								December 31, 2012
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Securities Held for Trading
MBS	$	560	$	—	$	—	$	560	$	619	$	—	$	—	$	619
IOs		36,269		—		—		36,269		41,669		—		—		41,669
Derivatives		1,556		—		1,556		—		15		—		15		—
Total Securities Held for Trading		38,385		—		1,556		36,829		42,303		—		15		42,288
Securities Available for Sale
Agency MBS		178,752		—		174,972		3,780		207,105		—		205,750		1,355
CMO Government Sponsored Agencies		5,169		—		—		5,169		6,912		—		1,221		5,691
Obligations U.S. Government Sponsored Agencies		44,971		—		44,971		—		44,981		—		44,981		—
Private Securities & Other		26,644		—		—		26,644		28,678		—		—		28,678
Total Securities Available for Sale		255,536		—		219,943		35,593		287,676		—		251,952		35,724
Loans Held for Sale, at fair value		39,882		—		39,882		—		—		—		—		—
Servicing Assets		98,137		—		—		98,137		99,962		—		—		99,962
Interest Rate Lock Commitment (2)		261		—		—		261		—		—		—		—
	$	432,201	$	—	$	261,381	$	170,820	$	429,941	$	—	$	251,967	$	177,974
Liabilities:
Derivatives (1)	$	—	$	—	$	—	$	—	$	142	$	—	$	142	$	—

⁽¹⁾  Forward contracts included as part of accrued expenses and other liabilities in the consolidated statements of financial condition.

⁽²⁾  Included as part of other assets in the consolidated statements of financial condition.

There were no transfers between Level 1 and Level 2 assets and liabilities during the six months ended June 30, 2013 and the year ended December 31, 2012.

40

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The changes in Level 3 assets and liabilities, measured at fair value on a recurring basis, for the respective periods:

	For the three months ended June 30, 2013
(In thousands)	Balance, beginning of period		Change in fair value included in the statement of operations			Capitalization of servicing assets included in the statement of operations		Net gains (losses) included in other comprehensive income			Principal repayments and amortization of premium and discount (4)			Purchases / (Sales) and Transfers		Balance, end of period
Securities held for trading
MBS	$	615	$	(55	)	$	—	$	—		$	—		$	—	$	560
IOs (1)		40,414		(4,145	)		—		—			—			—		36,269
Total securities held for trading		41,029		(4,200	)		—		—			—			—		36,829
Securities available for sale (2)
Agency MBS		1,303		—			—		142			2,335			—		3,780
CMO Government Sponsored Agencies		5,255		—			—		(27	)		(59	)		—		5,169
Private Securities & Other		27,583		—			—		(398	)		(541	)		—		26,644
Total securities available for sale		34,141		—			—		(283	)		1,735			—		35,593
Servicing Assets (3)		100,606		(6,096	)		3,627		—			—			—		98,137
Interest Rate Lock Commitment		1,273		(1,012	)		—		—			—			—		261
	$	177,049	$	(11,308	)	$	3,627	$	(283	)	$	1,735		$	—	$	170,820

	For the three months ended June 30, 2012
(In thousands)	Balance, beginning of period		Change in fair value included in the statement of operations			Capitalization of servicing assets included in the statement of operations		Net gains (losses) included in other comprehensive loss			Principal repayments and amortization of premium and discount (4)			Purchases / (Sales) and Transfers			Balance, end of period
Securities held for trading
MBS	$	692	$	(70	)	$	—	$	—		$	—		$	—		$	622
IOs (1)		42,123		718			—		—			—			—			42,841
Total securities held for trading		42,815		648			—		—			—			—			43,463
Securities available for sale (2)
Agency MBS		1,451		—			—		(7	)		(50	)		—			1,394
CMO Government Sponsored Agencies		6,551		—			—		116			(170	)		—			6,497
Non-Agency CMOs		1,852		—			—		—			—			(1,852	)		—
Private Securities & Other		38,476		—			—		211			(7,441	)		(1,485	)		29,761
Total securities available for sale		48,330		—			—		320			(7,661	)		(3,337	)		37,652
Servicing Assets (3)		112,006		(6,318	)		2,977		—			—			—			108,665
Interest Rate Lock Commitment		—		—			—		—			—			—			—
Balance at end of period	$	203,151	$	(5,670	)	$	2,977	$	320		$	(7,661	)	$	(3,337	)	$	189,780

⁽¹⁾  Changes in fair value are recognized in net (loss) gain on trading assets and derivatives in non-interest income and the amortization of the IOs is recognized in interest income on interest-only strips. For the three months ended June 30, 2013, IOs had a loss of approximately $2.7 million due to changes in fair value and amortization of $1.4 million. For the three months ended June 30, 2012, IOs had a gain of $2.1 million due to changes in fair value and amortization of $1.4 million.

⁽²⁾  OTTI is recognized within non-interest income. Amortization of premiums and discounts are recognized as interest income on mortgage-backed and investment securities.

⁽³⁾  Changes in fair value of servicing assets are recognized as non-interest income within mortgage loan servicing income. The capitalization of servicing assets is recognized as non-interest income within net gain on loans securitized and sold and capitalization of mortgage servicing.

⁽⁴⁾  Amortization of premium and discount of $0.7 million and $1.9 million for the three months ended June 30, 2013 and 2012, respectively, was recognized within interest income from mortgage-backed and investment securities in the consolidated statement of operations.

41

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

	For the six months ended June 30, 2013
(In thousands)	Balance, beginning of period		Change in fair value included in the Statement of Operations			Capitalization of servicing assets included in the Statement of Operations		Net gains (losses) included in other comprehensive income			Principal repayments and amortization of premium and discount (4)			Transfers / (Sales)			Balance, end of period
Securities available for trading
MBS	$	619	$	(59	)	$	—	$	—		$	—		$	—		$	560
IOs(1)		41,669		(5,400	)		—		—			—			—			36,269
Total securities held for trading		42,288		(5,459	)		—		—			—			—			36,829
Securities available for sale(2)
Agency MBS		1,355		—			—		140			2,285			—			3,780
CMO Government Sponsored Agencies		5,691		—			—		(61	)		(461	)		—			5,169
Other		28,678		—			—		(480	)		(1,554	)		—			26,644
Total securities available for sale		35,724		—			—		(401	)		270			—			35,593
Servicing assets(3)		99,962		(8,244	)		8,202		—			—			(1,783	)		98,137
Interest rate lock commitments		—		261			—		—			—			—			261
Balance at end of period	$	177,974	$	(13,442	)	$	8,202	$	(401	)	$	270		$	(1,783	)	$	170,820

	For the six months ended June 30, 2012
(In thousands)	Balance, beginning of period		Change in fair value included in the Statement of Operations			Capitalization of servicing assets included in the Statement of Operations		Net gains included in other comprehensive income			Principal repayments and amortization of premium and discount (4)			Transfers / (Sales)			Balance, end of period
Securities held for trading
MBS	$	721	$	(99	)	$	—	$	—		$	—		$	—		$	622
IOs(1)		43,877		(1,036	)		—		—			—			—			42,841
Total securities held for trading		44,598		(1,135	)		—		—			—			—			43,463
Securities available for sale(2)
Agency MBS		1,445		—			—		(1	)		(50	)		—			1,394
CMO Government Sponsored Agencies		6,748		—			—		180			(431	)		—			6,497
Non-Agency CMOs		5,621		(4,881	)		—		1,313			(201	)		(1,852	)		—
Other		29,028		(1,515	)		—		1,706			(8,492	)		9,034			29,761
Total securities available for sale		42,842		(6,396	)		—		3,198			(9,174	)		7,182			37,652
Servicing assets(3)		112,303		(8,698	)		5,060		—			—			—			108,665
Interest rate lock commitments		—		—			—		—			—			—			—
Balance at end of period	$	199,743	$	(16,229	)	$	5,060	$	3,198		$	(9,174	)	$	7,182		$	189,780

⁽¹⁾  Changes in fair value are recognized in net (loss) gain on trading activities in non-interest income and the amortization of the IOs is recognized in interest income on interest-only strips. For the six months ended June 30, 2013, the IO had a loss of $2.7 million for change in fair value and an amortization of $2.7 million. For the six months ended June 30, 2012, the IO had a gain of $2.3 million for change in fair value and an amortization of $3.3 million.

⁽²⁾  OTTI is recognized as part of non-interest income. Amortization of premium and discount is recognized as part of interest income mortgage-backed securities.

⁽³⁾  Change in fair value of servicing assets is recognized in non-interest income as servicing income. Capitalization of servicing assets is recognized in non-interest income as net gain on mortgage loan sales and fees.

⁽⁴⁾  Amortization of premium and discount of $2.1 million and $3.8 million for the six months ended June 30, 2013 and 2012 respectively is recognized within interest income from MBS in the consolidated financial statements.

42

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table includes quantitative information about significant unobservable inputs used to measure the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Company, such as the prices of prior transactions and/or unadjusted third-party pricing sources.

	As of June 30, 2013
(Dollars in thousands)	Fair value		Valuation technique		Significant unobservable inputs			Range of inputs (WA)
IOs	$	36,269		Discounted cash flow model		Weighted average remaining life			6.4 years
						Discount rate			13.0	%
						Constant prepayment rate			6.2	%
CMO Government Sponsored Agencies		2,406		Discounted cash flow model		Zero volatility spread or yield curve spread on MBS			4.45 - –1.64 (0.76	)%
						Weighted average maturity			120 - 129 (115	)
						Prepayment speed assumption			350 - 486 (377	)
Other and Private Securities		5,002		Linear regression analysis		Collateral term to maturity	(1)		1.62 - 6.18 (4.16) years
						Collateral coupon	(1)		3.45 - 5.40 (4.24	)%
						Collateral weighted average price	(1)		96.86 - 98.53 (97.66	)
						Collateral weighted average yield	(1)		4.38 - 5.69 (4.88	)%
						Investment security’s term to maturity	(2)		0.61 years
						Investment security’s coupon	(2)		3.5	%
Servicing asset		98,137		Discounted cash flow model		Weighted average remaining life			7.0 years
						Discount rate			9.0 - 14.13 (11.1	)%
						Constant prepayment rate			7.51 - 9.29 (8.4	)%
Derivatives (IRLCs)		261		Quoted market price approach		Estimated closing rate			80.0	%

	As of December 31, 2012
(Dollars in thousands)	Fair value		Valuation technique		Significant unobservable inputs			Range of inputs (WA)
IOs				Discounted cash flow model		Weighted average remaining life			5.9 years
	$	41,669				Discount rate			13.0	%
						Constant prepayment rate			7.0	%
CMO Government Sponsored Agencies		2,474		Discounted cash flow model		Zero volatility spread or Yield curve spread on MBS			0.54 - 0.79 (0.67	)%
						Weighted average maturity			120 - 129 (124) months
						Prepayment speed assumption			405 - 486 (456	)
Other and Private Securities		5,006		Linear regression analysis		Collateral term to maturity	(1)		2.13 - 6.69 (4.66) years
						Collateral Coupon	(1)		3.45 - 5.40 (4.24	)%
						Collateral Weighted average price	(1)		98.82 - 100.53 (99.73	)
						Collateral Weighted average yield	(1)		3.19 - 7.38 (4.63	)%
						Investment security’s Term to maturity	(2)		1.11 years
						Investment security’s Coupon	(2)		3.5	%
Servicing asset		99,962		Discounted cash flow model		Weighted average remaining life			7.1 years
						Discount rate			9.0 - 14.13 (11.1	)%
						Constant prepayment rate			7.94 - 9.69 (8.7	)%

43

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

⁽¹⁾  Inputs are related to the investment securities’ underlying collateral.

⁽²⁾  Inputs are related to the investment securities.

The unobservable inputs used in the fair value measurement of the Company’s IOs and MSRs include constant prepayment rates, discount rates, and the weighted average remaining life of the underlying mortgages. Changes in market interest rates may affect prepayment rates, thereby affecting the remaining life of the underlying mortgages and, ultimately, the fair value of the IOs and MSRs. Discount rates vary according to the perceived risks of a specific loan portfolio. Increases in discount rates result in a lower fair value measurement, while decreases result in a higher fair value measurement.

The Company internally determines the fair value of IOs and MSRs based on discounted cash flows. Constant prepayment rate and discount rate assumptions are developed internally using (1) market derived assumptions and (2) market derived assumptions calibrated to the Company’s loan characteristics and portfolio behavior. These assumptions are then benchmarked to other institutions’ valuation assumptions for MSRs and other retained interests to assess reasonability.

The Company measures the fair value of CMO Government Sponsored Agencies using unobservable inputs such as the zero-volatility spread, yield curve spread on MBSs, the weighted average maturity of the mortgages held as collateral, and prepayment speed assumptions. There is an inverse relationship between the prepayment speed assumption used and the CMOs fair value. Increases in the prepayment speed assumption results in a decrease in the term to maturity for the underlying mortgages, which, in turn, results in a lower CMO fair value measurement. Conversely, decreases in the prepayment speed assumption results in an increase in the term to maturity, thereby resulting in a higher CMO fair value measurement. There is also an inverse relationship between the yield curve spread on MBSs assumption and the CMOs fair value. As the yield curve spread for similar instruments increases relative to the coupon rate on the underlying mortgages, the CMO fair value decreases. Conversely, as the yield curve spread for similar instruments decreases relative to the collateral’s coupon rate, the CMO fair value increases.

The unobservable inputs used in measuring the fair value of securities within the Other category include the security’s term to maturity and coupon rate, as well as the term to maturity, coupon rate, weighted average price and weighted average yield of the mortgages held as collateral. There is an inverse relationship between the collateral’s coupon rate and the fair value of the investment security. Therefore, as the collateral’s coupon rate increases, the fair value measurement will decrease, and vice versa. There is also an inverse relationship between the collateral’s term to maturity and the fair value of the investment security, in which the security’s fair value will increase as the collateral’s term to maturity increases, and vice versa.

The IRLCs on those residential mortgage loans to be held for sale are accounted for as derivatives carried at fair value, in accordance with the applicable accounting guidance. The fair values of the IRLCs are based on the difference between the notional amount of the designated loan commitments and quoted market prices for similar loans, adjusted for an unobservable input. The unobservable input used is the estimated closing rate of the loan commitments, as not all loans are expected to close.

Investment securities available for sale also include securities for which the fair value measurement is provided by third parties. For Agency MBS available for sale securities, the fair value measurement is obtained from a third party provider who uses a tax-exempt basis within a pool-specific valuation model that: (i) creates a projected prepayment speed related to the seasoning of the underlying mortgages; (ii) uses the projected speed together with the unit range to project the tranche cash flow and determine an average life and; (iii) applies the appropriate spread to a curve that is equal to the average life for each tranche, resulting in the yield used to discount the cash flows. The fair value measurement of certain CMO Government Sponsored Agencies is obtained from a third party that uses a yield table analysis considering factors such as; (i) tax status; (ii) coupon rate; (iii) maturity and; (iv) cash flows or prepayments. The fair value measurement of certain securities in the Other category is derived from a third-party broker dealer that uses the value of the collateral to arrive at the security’s fair value. Prices obtained from third parties are evaluated for reasonableness by comparing them against previous quoted prices. In the event that there are significant variances when compared to prior periods, the quotes prices are referred to the third-party price provider for an explanation or validation.

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with current accounting guidance. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

44

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents financial and non-financial assets subject to fair value measurement on a non-recurring basis at June 30, 2013 and December 31, 2012, and which are still included in the consolidated statement of financial condition as of such dates.

(Dollars in thousands)	Carrying Value		Level 3
June 30, 2013
Loans receivable (1)	$	196,053	$	196,053
Real estate held for sale (2)		25,388		25,388
Total	$	221,441	$	221,441
December 31, 2012
Loans receivable (1)	$	227,183	$	227,183
Real estate held for sale (2)		73,110		73,110
Total	$	300,293	$	300,293

⁽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.

The valuation methodologies used to arrive at the nonrecurring fair value adjustments included above are:

Loans receivable

Loans receivable include collateral dependent loans for which the repayment of the loan is expected to be provided solely by the underlying collateral. From time to time, the Company records nonrecurring fair value adjustments to collateral dependent loans to reflect: (i) partial write-downs that are based on the fair value of the collateral; or (ii) the full charge off of the loan carrying value. The fair value of the collateral is mainly derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. The Company classifies loans receivable subject to nonrecurring fair value adjustments as Level 3.

Real estate held for sale

The Company acquires real estate through foreclosure proceedings. These properties are held for sale and are stated at the lower of cost or fair value (after deduction of estimated disposition costs). A loss is recognized for any initial write down to fair value less costs to sell. The fair value of the properties is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties, which are not market observable. The Company records nonrecurring fair value adjustments to reflect any losses in the carrying value arising from periodic appraisals of the properties charged to expense in the period incurred. The Company classifies real estate held for sale subject to nonrecurring fair value adjustments as Level 3.

The following table summarizes losses relating to assets classified as Level 3.

	Location of Loss Recognized in the Statement of Operations	For the three months ended June 30,				For the six months ended June 30,
(In thousands)		2013		2012		2013		2012
Loans receivable	Provision for loan and lease losses	$	7,522	$	24,705	$	19,995	$	39,248
Real estate held for sale	Other real estate owned expenses		1,384		3,591		3,501		6,470

45

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Disclosures about Fair Value of Financial Instruments

The following table discloses the carrying amounts of financial instruments and their estimated fair values as of June 30, 2013 and December 31, 2012. The estimates presented herein are not necessarily indicative of the amounts the Company may realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect in the estimated fair value amounts.

	June 30, 2013
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	592,950	$	592,950	$	592,950	$	—	$	—
Restricted cash		121,799		121,799		121,799		—		—
Securities held for trading		38,385		38,385		—		1,556		36,829
Securities available for sale		255,536		255,536		—		219,943		35,593
Loans held for sale, at fair value		39,882		39,882		—		39,882		—
Loans held for sale, at lower of cost or market (1)		476,861		483,737		—		—		483,737
Loans receivable, net		6,076,178		6,036,977		—		—		6,036,977
Servicing assets, net		98,137		98,137		—		—		98,137
Interest rate lock commitments		261		261		—		—		261
Financial liabilities:
Deposits	$	4,971,557	$	5,009,987	$	—	$	5,009,987	$	—
Securities sold under agreements to repurchase		159,500		160,023		—		160,023		—
Advances from FHLB		938,973		904,632		—		904,632		—
Loans payable		274,040		274,040		—		274,040		—
Notes payable		1,037,082		1,031,355		—		1,031,355		—

	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	634,432	$	634,432	$	634,432	$	—	$	—
Restricted cash		95,461		95,461		95,461		—		—
Securities held for trading		42,303		42,303		—		15		42,288
Securities available for sale		287,676		287,676		—		251,952		35,724
Loans held for sale, at lower of cost or market (1)		438,055		439,699		—		—		439,699
Loans receivable, net		6,039,467		5,880,760		—		—		5,880,760
Servicing assets, net		99,962		99,962		—		—		99,962
Interest rate lock commitments		—		—		—		—		—
Financial liabilities:
Deposits	$	4,628,864	$	4,673,496	$	—	$	4,673,496	$	—
Securities sold under agreements to repurchase		189,500		190,143		—		190,143		—
Advances from FHLB		1,180,413		1,153,681		—		1,153,681		—
Loans payable		270,175		270,175		—		270,175		—
Notes payable		1,043,887		947,669		—		947,669		—
Derivatives		142		142		—		142		—

⁽¹⁾  Includes $210.6 million and $213.7 million for June 30, 2013 and December 31, 2012, respectively, related to GNMA defaulted loans for which the Company has an unconditional buy-back option.

Cash and due from banks and restricted cash

The carrying value of short-term financial instruments, which includes cash and due from banks as well as restricted cash, approximates fair value since they have short-term or no stated maturity and pose limited credit risk to the Company. Under the fair value hierarchy, cash and due from banks and restricted cash are classified as Level 1.

46

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Securities held for trading

The Company uses a valuation model that calculates the present value of estimated future cash flows and incorporates the Company’s own estimate of assumptions regarding market participants to determine the fair value of securities held for trading. These securities, which include the Company’s IOs, are classified as Level 3.

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Their fair value is based upon quoted prices for similar instruments in actively traded markets, if available, and classified as Level 2. If quoted prices are not available, fair values are measured using independent pricing models or another model-based valuation technique, such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors. Securities with fair values derived from independent pricing or other valuation models are classified as Level 3.

Loans held for sale

Loans held for sale consist primarily of mortgage loans. Loans held for sale have historically been carried at the lower of cost or market on an aggregate portfolio basis. In doing so, the amount by which cost exceeds market value, if any, is accounted for as a loss through a valuation allowance. Effective March 18, 2013, the Company irrevocably elected to carry at fair value each newly originated residential mortgage loan in the Puerto Rico portfolio classified as held for sale. By electing the fair value option, these loans are marked to market and unrealized gains and losses are included in current earnings within the mark-to-market adjustment on loans held for sale, at fair value, in the consolidated statements of operations. This will allow the Company to better match the earnings impact of changes in the fair value of the loans held for sale and the derivative contracts entered to economically hedge the interest rate risk associated with the loans held for sale in the Puerto Rico portfolio. The Company’s fair value election does not apply to certain other loans classified as held for sale, such as GNMA loans with right of repurchase or loans pledged to secure borrowings, or any loans in the U.S. portfolio. The market value of loans held for sale, at fair value, is measured using significant other observable inputs, specifically quoted prices for similar assets obtained from the Freddie Mac Conventional Loan Cash Pricing Market, which is an active market. As such, loans held for sale, at fair value, are classified as Level 2. The market value of loans held for sale, at lower of cost or market, is measured using observable and non-observable inputs. Unobservable inputs include a multi-component model for prepayments, weighted average life of the loans and duration. As such, loans held for sale, at lower of cost or market, are classified as Level 3.

Loans receivable

Loans receivable are carried at their unpaid principal balance, less unearned interest, net of deferred loan fees or costs (including premiums and discounts), and net of the allowance for loans and lease losses. Loans receivable are classified by type, such as residential mortgage, consumer, commercial real estate, commercial and industrial, and construction and land. The fair value of residential mortgage loans is based on quoted market prices for MBSs, adjusted for specific loan characteristics such as guarantee fees, servicing fees, actual delinquencies, and associated credit risk. For syndicated commercial loans, fair value is measured based on market information from trading activity. For all other loans, the fair value is estimated using a discounted cash flow analysis, based on LIBOR and adjusted for factors the Company believes a market participant would consider in determining fair value for similar assets. The Company classifies loans receivable not subject to nonrecurring fair value adjustments as Level 3.

Deposits

The fair value of deposits with no stated maturity is based on the amount payable on demand as of the respective date. These deposits include non-interest bearing deposits, regular savings, NOW and other transaction accounts, and money market accounts. The fair value measurement of deposits with stated maturities is calculated using a discounted cash flow valuation technique using both observable and unobservable inputs. The observable input used is the broker certificates of deposit curve, while the unobservable input used is the forward curve. Deposits are classified as Level 2 in the fair value hierarchy.

Loans payable

Loans payable are secured lending arrangements with local financial institutions that are generally floating rate instruments, and therefore, have fair values determined to be at par. Loans Payable are classified as Level 2 in the fair value hierarchy.

47

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Notes payable, Advances from the FHLB and Securities sold under agreements to repurchase

The fair values of notes payable, advances from the FHLB, and securities sold under agreements to repurchase are measured using a discounted cash flow valuation technique using both observable and unobservable inputs. The observable input used is the LIBOR curve, while the unobservable input used is the forward curve. These liabilities are classified as Level 2 in the fair value hierarchy.

27. Derivatives

The Company uses derivatives to manage its exposure to interest rate risk. The Company maintains an overall interest-rate-risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate changes. Derivatives include interest rate swaps, interest rate caps and forward contracts. The Company’s goal is to manage interest rate sensitivity by modifying the re-pricing or maturity characteristics of certain balance sheet assets and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates.

The Company accounts for derivatives on a mark-to-market basis, with gains or losses charged to operations as they occur. The fair value of derivatives is generally reported net by counterparty. The fair value of derivatives accounted for as hedges is also reported net of accrued interest and included in other liabilities within the consolidated statement of financial condition. Derivatives not accounted for as hedges that are in a net asset position are recorded as securities held for trading and derivatives in a net liability position are recorded as other liabilities within the consolidated statement of financial condition.

As of June 30, 2013 and December 31, 2012, the Company had the following derivative financial instruments outstanding:

	June 30, 2013						December 31, 2012
			Fair Value						Fair Value
(In thousands)	Notional Amount		Asset		Liability		Notional Amount		Asset		Liability
Derivatives (non hedges):
Forward contracts	$	65,000	$	1,556	$	—	$	125,000	$	15	$	(142	)
Interest rate lock commitments		24,543		261		—		—		—		—
Total	$	89,543	$	1,817	$	—	$	125,000	$	15	$	(142	)

48

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The table below presents the offsetting of derivative assets and derivative liabilities in accordance with applicable netting agreements, and their net presentation in the statements of financial condition as of June 30, 2013 and December 31, 2012, respectively:

	June 30, 2013
(In thousands)	Counterparty	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial  Position			Net Amount of Assets Presented in the Statement of Financial Position
Description
Forward contracts	Credit Suisse	$	131	$	—		$	131
Forward contracts	Citigroup Global Markets	$	1,425	$	—		$	1,425
	December 31, 2012
(In thousands)	Counterparty	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position			Net Amount of Assets Presented in the Statement of Financial Position
Description
Forward contracts	Citigroup Global Markets	$	23	$	(8	)	$	15
(In thousands)	Counterparty	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position			Net Amount of Liabilities Presented in the Statement of Financial Position
Description
Forward contracts	Credit Suisse	$	142	$	—		$	142
	Citigroup Global Markets		8		(8	)		—

Cash Flow Hedges

The Company had previously designated the pay-fixed-interest rate swaps to hedge the variability of future interest cash flows of adjustable rate advances from the FHLB. As of both June 30, 2013 and December 31, 2012, the Company did not have any pay-fixed-interest rate swaps designated as cash flow hedges. As of June 30, 2013 no unrealized losses on cash flow hedges were recorded in accumulated other comprehensive income. As of June 30, 2012, accumulated other comprehensive income included unrealized gains on cash flow hedges of $0.2 million.

49

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the location and effect of cash flow derivatives on the Company’s results of operations and financial condition during the three months ended June 30, 2012. The Company did not have any cash flow derivatives for the three months ended June 30, 2013.

(Dollars in thousands)	Location of Loss Reclassified from Accumulated Other Comprehensive (Loss) Income to Operations	Notional Amount		Fair Value			Accumulated Other Comprehensive Income		Loss Reclassified from Accumulated Other Comprehensive Income (Loss) to Operations
Cash flow Hedges June 30, 2012
Interest rate swaps	Interest expense - Advances from FHLB	$	50,000	$	(883	)	$	538	$	(556	)

The following table presents the location and effect of cash flow derivatives on the Company’s results of operations and financial condition during the six months ended June 30, 2012. The Company did not have any cash flow derivatives for the six months ended June 30, 2013.

(In thousands)	Location of Loss Reclassified from Accumulated Other Comprehensive (Loss) Income to Operations	Notional Amount		Fair Value			Accumulated Other Comprehensive Income		Loss Reclassified from Accumulated Other Comprehensive Income (Loss) to Operations
Cash flow Hedges June 30, 2012
Interest rate swaps	Interest expense - Advances from FHLB	$	50,000	$	(883	)	$	1,002	$	(1,080	)

50

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Trading and Non-Hedging Activities

The following table summarizes the total derivatives positions at June 30, 2013 and 2012, respectively, and their different designations. The table also includes net gains on trading assets and derivatives for the periods indicated.

		June 30, 2013
(Dollars in thousands)	Location of Gain (Loss) Recognized in the Consolidated Statement of Operations	Notional Amount		Fair Value		Net Gain (Loss) for the Three Months Ended			Net Gain (Loss) for the Six Months Period
Derivatives not designated as cash flow hedges:
Forward contracts	Net loss on trading assets and derivatives	$	65,000	$	1,556	$	2,456		$	2,470
Interest rate lock commitments	Net loss on trading assets and derivatives		24,543		261		(1,012	)		261
		$	89,543	$	1,817	$	1,444		$	2,731

		June 30, 2012
(Dollars in thousands)	Location of Gain (Loss) Recognized in the Consolidated Statement of Operations	Notional Amount		Fair Value			Net Gain (Loss) for the Three Months Ended			Net Gain (Loss) for the Six Months Period
Derivatives not designated as cash flow hedges:
Interest rate caps	Net gain on trading assets and derivatives	$	180,000	$	—		$	—		$	—
Forward contracts	Net gain on trading assets and derivatives		105,000		(340	)		(1,905	)		(1,715	)
		$	285,000	$	(340	)	$	(1,905	)	$	(1,715	)

The Company held $89.5 million and $125.0 million in notional value of derivatives not designated as hedges at June 30, 2013 and December 31, 2012, respectively.

The Company periodically purchases interest rate caps to manage its interest rate exposure. Interest rate cap agreements generally involve the purchase of out-of-the-money caps to protect the Company from the adverse effects of rising interest rates. These products are not linked to specific assets and liabilities that appear on the balance sheet or to a forecasted transaction and, therefore, do not qualify for hedge accounting. As of June 30, 2013 and December 31, 2012, the Company had no outstanding interest rate caps.

The Company periodically enters into forward contracts to create an economic hedge on its MSRs and mortgage pipeline. As of June 30, 2013, the Company had no outstanding forward contracts hedging its MSRs. The notional amount of forward contracts used to hedge its MSRs as of December 31, 2012 was $50.0 million. As of June 30, 2013 and 2012, the Company had a notional amount of $65.0 million and $75.0 million, respectively, of forward contracts hedging its mortgage pipeline. For the three months and six months ended June 30, 2013, the Company recorded gains of approximately $2.5 million and $2.5 million, respectively, on forward contracts, including losses of $1.8 million and $2.3 million, respectively, related to the economic hedge on its MSRs. For the three months and six months ended June 30, 2012, the Company recorded losses of $1.9 million and $1.7 million, respectively, on forward contracts, including gains of $0.3 million and $0.4 million, respectively, related to the economic hedge on its MSRs.

Interest rate lock commitments (“IRLCs”) are commitments with a loan applicant in which the loan terms, including interest rate and price, are guaranteed for a designated period of time subject to credit approval. The Company enters into IRLCs in connection with its residential mortgage banking activities to fund residential mortgage loans at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value, with changes in fair value recorded in earnings as a net gain on trading assets and derivatives in the period they occur.

51

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Credit risk related to derivatives arises when amounts receivable from counterparties exceed amounts payable. Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or payable, the risk of loss with any counterparty is limited to a small fraction of the notional amount. The Company’s maximum loss related to credit risk is equal to the gross fair value of its derivative instruments. The Company deals only with derivative dealers that are national market makers with strong credit ratings in their derivatives activities. The Company further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, counterparties are required to provide cash collateral to the Company when their unsecured loss positions exceed certain negotiated limits.

Derivative contracts used as economic hedges, such as forward contracts, to which the Company is a party, settle monthly, quarterly or semiannually. Furthermore, the Company has netting agreements with the dealers and only does business with creditworthy dealers. Because of these factors, the Company’s credit risk exposure related to derivatives contracts at June 30, 2013 and December  31, 2012 was not considered material.

28. Variable Interest Entities

A VIE is a legal entity that, by design, possesses any of the following characteristics: (a) the total equity investment at risk is not sufficient for the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders; (b) as a group, holders of the equity investment at risk do not possess either: i) the power, through voting 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; (c) symmetry between voting rights and economic interests; (d) 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 no substantive voting rights).

Based on current accounting guidance, the Company is required to consolidate any VIEs in which it is deemed to be the primary beneficiary through having: (i) power over the significant activities of the entity and; (ii) having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE.

The Company has identified four potential sources of variable interests: (i) its servicing portfolio, (ii) its investment portfolio, (iii) its construction lending portfolio; and (iv) the special purpose entities with which the Company is involved. The Company assessed each for the existence of VIEs and determination of possible consolidation requirements. In all instances where the Company identified a variable interest in a VIE, a primary beneficiary analysis was then performed.

Non-consolidated VIEs

Servicing Assets: During the ordinary course of business, the Company transfers financial assets (via whole loan sales/securitizations) for which it retains the right to service those assets. The servicing portfolio is considered a potential source of variable interest and was analyzed to determine the existence of any VIEs requiring consolidation. The servicing portfolio was grouped into three segments: (i) GSEs, (ii) governmental agencies and (iii) private investors. Except for two private investors (further analyzed as investment securities below), the Company concluded that the servicing fee received from providing this service did not represent a variable interest as defined by the guidance. The Company determined that its involvement with these entities is within the ordinary course of business and meets the criteria established to be considered the activities of a service provider (fiduciary in nature) rather than a decision-maker.

Investment Securities: The Company analyzed its investment portfolio and determined that it had several residual interests in Non Agency CMOs which required full analysis to determine the primary beneficiary of those interests. For trading assets and insignificant residual interests, as well as investments in non-profit vehicles, the Company determined that it was not the primary beneficiary, as it does not have power over the significant activities of the entities. For two residual interests in non-agency CMOs where the Company is also the servicer of the underlying assets, it was determined that due to: (i) the unilateral ability of the issuers to remove the Company from its role as servicer for loans more than 90 days past due; (ii) the issuer’s right to object to the commencement of foreclosure procedures; and (iii) the requirement of issuer authorization of the sales price for all foreclosed property, the Company did not have power over the significant activities of the entity and, therefore, consolidation was not appropriate. During the second quarter of 2012, the Company sold the securities related to the two private investors. Therefore, the Company determined that it no longer had a variable interest in the servicing assets.

52

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Construction Loans: Through its construction portfolio, the Company provides financing to legal entities created with the limited purpose of developing and selling residential or commercial properties. Often these entities do not have sufficient equity investment at risk to finance their activities, and the Company may potentially have a variable interest in the entities, since it may absorb losses related to the loans granted. In situations where the loan defaults or is restructured by the Company, the loan could result in the Company’s potential absorption of the entity’s losses. However, the Company is not involved in the design, operations, or management of these entities and has, therefore, concluded that it does not have the power over those activities that most significantly impact the economic performance of the VIEs. As such, the Company is not the primary beneficiary in any of these entities. The Company will continue to assess this portfolio on an ongoing basis to determine if there are any changes in its involvement with these VIEs that could potentially lead to consolidation treatment.

Assets sold - During 2010, the Company sold to a third-party special purpose entity an asset portfolio consisting of performing and non-performing late-stage residential construction and development loans and real estate, with carrying amounts at the transfer date of $33.8 million, $63.4 million and $4.8 million, respectively. As consideration for the transferred assets, the Company received a $5.1 million cash payment and a $96.9 million note receivable, which had a 10-year maturity and a fixed interest rate of 8.0% per annum. The financing provided by the Company is secured by a general pledge of all of the acquiring entity’s assets.

Concurrent with this transaction, the Company provided the acquirer with a $28.0 million construction line of credit having a 10-year maturity and a fixed interest rate of 8.0% per annum. The line of credit will be used by the acquirer of the assets to provide construction advances on the transferred loans or to fund construction on foreclosed properties.

On July 28, 2012, the Company and the third party amended the existing credit agreement which, for accounting purposes, extinguished the existing loans receivable and extended new loans bearing interest at three-month LIBOR plus 300 basis points. In the event that the three-month LIBOR rate falls below 1.0%, the rate on the note receivable and the line of credit will be 1.0% plus 300 basis points. All amounts owed to the Company by the third party remained unchanged. As of June 30, 2013, the carrying amount of the note receivable was $98.3 million and the carrying amount of the line of credit was $9.1 million, and are reported as commercial and industrial loans receivable. There are no terms or conditions in the amended loan agreement that would change the Company’s considerations or conclusions related to the accounting for the original transfer of the assets.

The pledged assets of the acquirer are comprised of the transferred asset portfolio, in addition to $10.2 million of in-kind capital contributions provided by a single third party. The sole equity holder has unconditionally committed to contribute an additional $7.0 million of capital through July of 2016.

The aforementioned transfer of the portfolio, consisting of construction loans and real estate assets, was accounted for as a sale, with the obtained note receivable recognized at its initial fair value of $96.9 million. The initial fair value measurement of the note receivable was determined using discount rate adjustment techniques with significant unobservable (Level 3) inputs. Management based its fair value estimate using cash flows forecasted, considering the initial and future loan advances, when the various construction project units would be complete, current absorption rates of new housing in Puerto Rico, and a market interest rate that reflects the estimated credit risk of the acquirer and the nature of the loan collateral. The Company considered the loans to be construction loans for the purpose of determining a market rate.

The Company has determined that the acquirer is a VIE, but the Company is not its primary beneficiary. The primary beneficiary of a VIE is an enterprise that has a controlling financial interest in the VIE, which exists when an enterprise has both the power to direct the activities that most significantly impact the VIE’s economic performance, as well as the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The rights provided to the Company as creditor are protective in nature. As the Company does not have the right to manage the loan portfolio, impact foreclosure proceedings, or manage the construction and sale of the property, the Company does not have power over the activities that most significantly impact the economic performance of the acquirer. The Company’s maximum exposure to loss from the VIE is limited to the interest and principal outstanding on the note receivable and line of credit. Therefore, the Company is not the primary beneficiary of the VIE.

53

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the carrying amount of assets related to the Company’s unconsolidated VIEs and presents the maximum exposure to loss that would be incurred under severe, hypothetical circumstances.

(In thousands)	June 30, 2013		December 31, 2012
Carrying amount
Loans receivable:
Commercial and industrial	$	107,490	$	111,884
Construction and land (2)(3)		427,549		285,428
Maximum exposure to loss(1)
Loans receivable:
Commercial and industrial	$	107,490	$	111,884
Construction and land (2)(3)		427,549		285,428

⁽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⁾  Does not include construction spot loans and construction development loans to non-developers.

⁽³⁾  Net of ALLL of $6.5 million and $6.5 million as of June 30, 2013 and December 31, 2012, respectively.

Consolidated VIEs

Doral CLO I, Ltd. - During the third quarter of 2010, the Company, through its Doral Money subsidiary, entered into a $450.0 million CLO arrangement in which mostly U.S. mainland based commercial loans, as well as cash, were pledged to collateralize AAA rated debt in the amount of $250.0 million from third parties and $200.0 million funded by the Company. The debt originally paid three-month LIBOR plus 1.85%, but was adjusted to three month LIBOR plus 1.50% as the result of a subsequent agreement in 2012. Doral CLO I, Ltd. is a variable interest entity created to hold the commercial loans and issue the previously noted senior debt and $200.0 million of subordinated notes due to the Company, whereby the Company receives any excess proceeds after payment of the senior debt, interest, and other fees and charges specified in the indenture agreement. The Company also serves as collateral manager of the assets of Doral CLO I, Ltd. Doral Money is considered the primary beneficiary and, therefore, Doral CLO I, Ltd. is ultimately consolidated within the Company’s financial statements.

Doral CLO II, Ltd. - On April 26, 2012, the Company, through its Doral Money subsidiary, entered into a $416.2 million CLO arrangement in which mostly U.S. mainland based commercial loans, as well as cash, were pledged to collateralize AAA, AA, A, BBB and BB rated notes, as well as a non-rated subordinated debt tranche. Doral CLO II, Ltd. raised approximately $331.0 million from third parties and $85.5 million funded by the Company, at a cost of three-month LIBOR plus a spread ranging from 1.47% to 2.50%. Doral CLO II, Ltd. is a variable interest entity created to hold the commercial loans and issue the previously mentioned debt. The Company has retained the BBB and BB subordinated notes as of the transaction date and, as such, is entitled to receive the interest on these notes, as well as any excess proceeds attributable to the subordinated, non-rated note after fees and charges, as specified in the indenture agreement. The Company also serves as collateral manager of the assets of Doral CLO II, Ltd. Doral Money is considered the primary beneficiary and, therefore, Doral CLO II, Ltd. is consolidated within the Company’s financial statements.

Doral CLO III, Ltd. - On December 19, 2012, the Company, through its Doral Money subsidiary, entered into a $311.0 million CLO arrangement in which mostly U.S. mainland based commercial loans as well as cash were pledged to collateralize AAA, AA, A, BBB and BB rated notes, as well as a non-rated subordinated debt tranche. Doral CLO III, Ltd. raised approximately $251.0 million from third parties and $59.8 million funded by the Company, at a cost of three-month LIBOR plus a spread ranging from 1.45 to 3.25%. Doral CLO III, Ltd. is a variable interest entity created to hold the commercial loans and issued the aforementioned debt. The Company has retained the BBB and BB subordinated notes as of the transaction date and, as such, is entitled to receive the interest on these notes, as well as any excess proceeds attributable to the subordinated, non-rated note after fees and charges, as specified in the indenture agreement. The Company also serves as collateral manager of the assets of Doral CLO III, Ltd. Doral Money is considered the primary beneficiary and, therefore, Doral CLO III, Ltd. is consolidated within the Company’s financial statements.

A CLO is a securitization where a special purpose entity purchases a pool of assets consisting of loans and issues multiple tranches of equity or notes to investors. Typically, the asset manager has the power over the significant decisions of the VIE through its discretion to manage the assets of the CLO.

54

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Doral CLO I, Ltd. Doral CLO II, Ltd. and Doral CLO III, Ltd. (together referred to as “Doral CLOs”) are VIEs because the entities do not have sufficient equity investment at risk and the Company, through its investment in the subordinated notes, provides additional financial support to each. Management has determined that the Company is the primary beneficiary of the Doral CLOs because it has a variable interest in each through its collateral manager fee and its obligation to both absorb potentially significant losses and the right to receive potentially significant benefits of the CLOs through the subordinated securities held. The most significant activities of the Doral CLOs are those associated with managing the collateral obligations on a day-to-day basis and, as collateral manager, the Company controls the significant activities of the VIEs.

The classifications of assets and liabilities on the Company’s consolidated statements of financial condition associated with the consolidated VIEs follow:

(Dollars in thousands)	June 30, 2013			December 31, 2012
Carrying amount
Cash	$	44,746		$	85,179
Loans receivable		1,116,858			1,067,640
Allowance for loan and lease losses		(5,688	)		(5,526	)
Other assets		17,131			17,311
Total assets		1,173,047			1,164,604
Notes payable (third party liability)		825,141			824,791
Other liabilities		2,950			3,327
Total liabilities		828,091			828,118
Net assets	$	344,956		$	336,486

29. Segment Information

Management determined the reportable segments based upon the Company’s organizational structure and the information provided to the Chief Operating Decision Maker, to the senior management team and, to a lesser extent, the board of directors of the Company. Management also considered the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments.

Effective January 1, 2013, the Company redefined its operating segments concurrent with a restructuring plan for its business, as follows: the Puerto Rico segment was renamed Puerto Rico Growth and the Liquidating Operations segment was renamed Recovery. In addition to changing the segment’s name, there are certain differences on how the segments will manage the assets post-restructure reflecting changes in the Company’s strategy.

Prior to the restructuring, the Liquidating Operations segment did not have Residential loans and that segment’s sole strategy was to liquidate its assets. Post-redefinition, the renamed Recovery segment (formerly Liquidating Operations segment) now holds certain residential loans, and the strategy now involves maximizing the benefit to the Company either by: (a) modifying its loans; or (b) liquidating its assets. Under the applicable accounting guidance, when a company changes the organization structure, it should generally prepare its segment information based on the new segments and provide for comparative information for related periods. However, in certain instances, when changes in the structure of a company’s internal organization cause changes to the composition of its reportable segments, it may not be practicable for management to retrospectively revise prior periods. With respect to the January 1, 2013 restructuring, management performed a feasibility analysis which concluded that it was impracticable to retrospectively revise the composition of the Company’s reportable segments.

The Company currently operates in the following four reportable segments:

• Puerto Rico Growth - This segment is the Company’s principal market and includes all mortgage and retail banking activities in Puerto Rico including loans, deposits and insurance activities. This segment operates a network of 26 branches in Puerto Rico offering a variety of consumer loan products as well as deposit products and other retail banking services. This segment’s primary lending activities have traditionally focused on the origination of residential mortgage loans in Puerto Rico.

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Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

• United States - This segment is the Company’s principal source of growth in the current economic environment. It includes retail banking in the United States which operates three branches in New York and five branches in Florida. This segment also includes the Company’s middle market syndicated lending unit that is engaged in purchasing participations in senior credit facilities in the U.S. syndicated leverage loan market.

• Recovery - This segment includes selected Puerto Rico domiciled performing and non-performing residential mortgage, consumer, commercial real estate, commercial & industrial and construction and land portfolios, as well as repossessed assets (such as real estate held for sale). The Recovery segment’s purpose is to maximize the Company’s returns on these assets by restructuring and, in some cases, liquidating the assets. Periodically, the Company will evaluate non-performing loans and other assets to determine if any should be transferred to the Recovery segment. Prior to January 1, 2013, the Recovery segment (previously Liquidating Operations), was comprised primarily of construction and land portfolios (loans and repossessed assets) that the Company managed as part of its workout function. As part of its redefinition of reportable segments, during the three months ended March 31, 2013, the Company transferred approximately $1.6 billion in loans and $110.6 million in repossessed assets from the Puerto Rico Growth segment to the Recovery segment. Doral is reflecting the reclassified loans and related income and expenses in the appropriate segment beginning with the March 31, 2013 Form 10-Q.

• Treasury - The Company’s treasury segment handles its investment portfolio, interest rate risk management and liquidity position. It also serves as a source of funding for the Company’s other lines of business.

The Corporate group includes expenses and assets assigned to the Company’s areas that give support to the four business segments described above.

The accounting policies followed by the segments are the same as those described in the Summary of Significant Accounting Policies described in the Company’s notes to the consolidated financial statements included in the 2012 Annual Report on Form 10-K, filed with the SEC on March 13, 2013, as well as in note 2 of the accompanying consolidated financial statements.

The following table presents financial information of the four reportable segments for the three months and six months ended June 30, 2013 with the new reportable segment structure. Management determined that it was impracticable to present the segment information for the current period under the previous basis of segmentation. Management also determined that it was impracticable to change the composition of reportable segments for earlier periods to match the new reportable segment structure; therefore, the Company has presented its prior segment information using the previous reportable segment structure.

56

Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents financial information of the four reportable segments for the three months ended June 30, 2013 with the redefined reportable segment structure:

	Three months ended June 30, 2013
(Dollars in thousands)	Puerto Rico Growth			United States			Treasury			Recovery			Corporate			Intersegment Eliminations		Total
Net interest income (loss) from external customers	$	26,262		$	24,318		$	(2,849	)	$	2,821		$	(21	)	$	—	$	50,531
Intersegment net interest (loss) income		(548	)		(610	)		1,996			(746	)		(92	)		—		—
Total net interest income (loss)		25,714			23,708			(853	)		2,075			(113	)		—		50,531
(Reversal) provision for loan and lease losses		(59	)		580			—			5,015			—			—		5,536
Non-interest income (loss)		19,992			1,966			(3,069	)		(2,138	)		—			—		16,751
Depreciation and amortization		2,346			501			—			3			132			—		2,982
Non-interest expense		34,432			11,913			1,340			14,646			8,557			—		70,888
Net income (loss) before income taxes		8,987			12,680			(5,262	)		(19,727	)		(8,802	)		—		(12,124	)
Identifiable assets		2,596,508			2,569,479			1,063,508			1,875,996			415,678			—		8,521,169

The following table presents financial information of the four reportable segments for the three months ended June 30, 2012 with the previous reportable segment structure:

	Three months ended June 30, 2012
(Dollars in thousands)	Puerto Rico			United States			Treasury			Liquidating Operations			Corporate			Intersegment Eliminations			Total
Net interest income (loss) from external customers	$	38,069		$	21,023		$	(9,076	)	$	4,755		$	—		$	—		$	54,771
Intersegment net interest (loss) income		(7,770	)		(1,475	)		10,682			(1,437	)		—			—			—
Total net interest income		30,299			19,548			1,606			3,318			—			—			54,771
Provision (reversal) for loan and lease losses		4,625			1,032			—			(448	)		—			—			5,209
Non-interest income		16,764			953			2,414			—			—			—			20,131
Depreciation and amortization		3,217			413			—			1			9			—			3,640
Non-interest expense		41,285			7,535			3,815			7,730			6,515			—			66,880
Net (loss) income before income taxes		(2,064	)		11,521			205			(3,965	)		(6,524	)		—			(827	)
Identifiable assets		5,699,480			2,011,664			3,399,379			598,207			—			(3,362,856	)		8,345,874

The following table presents financial information of the four reportable segments for the six months ended June 30, 2013 with the redefined reportable segment structure:

	Six months ended June 30, 2013
(Dollars in thousands)	Puerto Rico Growth			United States			Treasury			Recovery			Corporate			Intersegment Eliminations		Total
Net interest income (loss) from external customers	$	52,666		$	50,212		$	(4,984	)	$	13,398		$	(21	)	$	—	$	111,271
Intersegment net interest (loss) income		(1,249	)		(1,172	)		4,103			(1,477	)		(205	)		—		—
Total net interest income (loss)		51,417			49,040			(881	)		11,921			(226	)		—		111,271
Provision for loan and lease losses		3,269			410			—			20,580			—			—		24,259
Non-interest income (loss)		43,522			3,941			(2,227	)		(4,027	)		—			—		41,209
Depreciation and amortization		4,824			941			—			4			253			—		6,022
Non-interest expense		62,945			24,001			2,497			30,795			22,530			—		142,768
Net income (loss) before income taxes		23,901			27,629			(5,605	)		(43,485	)		(23,009	)		—		(20,569	)
Identifiable assets		2,596,508			2,569,479			1,063,508			1,875,996			415,678			—		8,521,169

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Doral Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents financial information of the four reportable segments for the six months ended June 30, 2012 with the previous reportable segment structure:

	Six months ended June 30, 2012
(Dollars in thousands)	Puerto Rico			United States			Treasury			Liquidating Operations			Corporate			Intersegment			Total
Net interest income (loss) from external customers	$	76,646		$	42,153		$	(20,053	)	$	8,765		$	—		$	—		$	107,511
Intersegment net interest (loss) income		(18,760	)		(2,967	)		24,470			(2,743	)		—			—			—
Total net interest income		57,886			39,186			4,417			6,022			—			—			107,511
Provision for loan and lease losses		117,991			2,399			—			—			—			—			120,390
Non-interest income (loss)		35,861			1,821			(2,159	)		—			—			—			35,523
Depreciation and amortization		6,112			759			—			2			18			—			6,891
Non-interest expense		80,227			14,595			7,159			14,555			10,064			—			126,600
Net (loss) income before income taxes		(110,583	)		23,254			(4,901	)		(8,535	)		(10,082	)		—			(110,847	)
Identifiable assets	$	5,699,480		$	2,011,664		$	3,399,379		$	598,207		$	—		$	(3,362,856	)	$	8,345,874

30. Subsequent Events

The Company evaluated events through the date that the consolidated financial statements were issued and determined that no events have occurred that require disclosure or adjustment.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, Doral Financial may make forward-looking statements in its press releases, other filings with the Securities and Exchange Commission or in other public or shareholder communications and its senior management may make forward-looking statements orally to analysts, investors, the media and others.

These forward-looking statements may relate to the Company’s financial condition, results of operations, plans, prospects, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan and lease losses, delinquency trends, market risk and the impact of general economic conditions, interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal or regulatory proceedings, tax legislation and tax rules, deferred tax assets and related reserves, compliance and regulatory matters and new accounting standards and guidance on the Company’s financial condition and results of operations. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, but instead represent Doral Financial’s current expectations regarding future events. Such forward-looking statements may be generally identified by the use of words or phrases such as “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” “expect,” “predict,” “forecast,” “anticipate,” “plan,” “outlook,” “target,” “goal,” and similar expressions and future conditional verbs such as “would,” “should,” “could,” “might,” “can” or “may” or similar expressions.

Doral Financial cautions readers not to place undue reliance on any of these forward-looking statements since they speak only as of the date made and represent Doral Financial’s expectations of future conditions or results and are not guarantees of future performance. The Company does not undertake and specifically disclaims any obligations to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of those statements, other than as required by law, including the requirements of applicable securities laws.

Forward-looking statements are, by their nature, subject to risks and uncertainties and changes in circumstances, many of which are beyond Doral Financial’s control. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain important factors (including our management’s ability to identify and manage these and other risks) that could cause actual results to differ materially from those contained in any forward-looking statement:

• the continued recessionary conditions of the Puerto Rico economy and any deterioration in the performance of the United States economy and capital markets that adversely affect the general economy, housing prices and absorption, the job market, consumer confidence and spending habits leading to, among other things, (i) a further 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 weakness of the Puerto Rico and United States real estate markets and of the Puerto Rico and United States consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets which have contributed and may continue to contribute to, among other things, an increase in our non-performing loans, charge-offs and loan loss provisions and may subject the Company to further risk from loan defaults and foreclosures;

• uncertainty about whether Doral Financial and Doral Bank will be able to fully comply with the terms and conditions of the written agreement dated September 11, 2012 (the “Written Agreement”) that Doral Financial entered into with the Federal Reserve Bank of New York and the consent order dated August 8, 2012 (the “Consent Order”) that Doral Bank entered into with the Federal Deposit Insurance Corporation and the Office of the Commissioner of Financial Institutions of Puerto Rico (the “Office of the Commissioner”);

• uncertainty as to whether the FRBNY, FDIC and/or the Office of the Commissioner will continue to allow us to diversify our business operations through the development of our banking operations in New York and Florida;

• the operating and other conditions imposed by the FDIC and the Office of the Commissioner under the Consent Order and by the FRBNY under the Written Agreement, which may lead to, among other things, an increase in our charge-offs, loan loss provisions, and compliance costs, and an increased risk of being subject to additional regulatory actions, as well as additional actions resulting from future regular annual safety and soundness and compliance examinations by these federal and state regulators;

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• our reliance on brokered certificates of deposit and our ability to obtain, on a periodic basis, approval from the FDIC to issue brokered certificates of deposit to fund operations and provide liquidity in accordance with the terms of the Consent Order;

• uncertainty as to what additional regulatory actions the FRBNY, FDIC and/or the Office of the Commissioner may take against us if we fail to comply with the Written Agreement, the Consent Order or any other operating condition imposed by any such regulator or if any such regulator determines our financial condition has significantly deteriorated;

• a credit default by the Commonwealth of Puerto Rico or any of its public corporations or other instrumentalities, and recent and/or future downgrades of the long-term debt ratings of the United States and the Commonwealth of Puerto Rico, which could adversely affect economic conditions in the United States and the Commonwealth of Puerto Rico;

• a decline in the market value and estimated cash flows of our mortgage-backed securities and other assets may result in the recognition of other-than-temporary impairment of such assets under generally accepted accounting principles in the United States of America;

• uncertainty about the tax and other revenue raising measures recently 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;

• the effect of recently adopted regulatory capital standards applicable to banks and bank holding companies, including the final Basel III requirements and their implementation through rulemaking by the Federal Reserve and the FDIC, including requirements to hold higher levels of regulatory capital and meet higher regulatory capital ratios as a result of final Basel III or other capital standards, and our ability to generate capital internally or raise new capital on favorable terms if required under such capital standards;

• the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications or changes in such requirements or guidance;

• 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 counterparty is not sufficient or to possible delays or losses in recovering any excess collateral belonging to us held by the counterparty;

• 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 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations adopted and to be adopted thereunder by various federal and state securities and banking regulatory agencies, and the impact of such developments on our business, business practices, capital requirements and costs of operations;

• the exposure of Doral Financial, as originator of residential mortgage loans, sponsor of residential mortgage loan securitization transactions, or servicer of such loans or such transactions, or in other capacities, to government sponsored enterprises, investors, mortgage insurers or other third parties as a result of representations and warranties made in connection with the transfer or securitization of such loans;

• residential mortgage borrower performance different than that estimated in the cash flow forecasts for troubled debt restructured loans;

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• the risk of possible failure or circumvention of our controls, practices and procedures, including those designed to protect our networks, systems, computers and data from attack, damage or unauthorized access, and the risk that our risk management policies and/or processes may be inadequate;

• an increase in our non-interest expense as a result of increases in our FDIC assessments brought about by: (i) additional increases in FDIC deposit insurance premiums and/or special assessments by the FDIC to replenish its insurance fund, or (ii) additional deterioration in our FDIC assessment rating;

• changes in our accounting policies or in accounting standards, and changes in how accounting standards are interpreted or applied;

• an adverse change in our ability to attract new clients and retain existing clients;

• general competitive factors and industry consolidation;

• the strategies adopted by the FDIC and the three banks who purchased in April 2010 three other failed banks in Puerto Rico, in connection with the resolution of the residential, construction and commercial real estate loans acquired in connection with those “forced bank sales,” which may adversely affect real estate values in Puerto Rico;

• potential adverse outcome in the legal or regulatory actions or proceedings described in Part I, Item 3 “Legal Proceedings” in the 2012 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2013, as updated from time to time in the Company’s quarterly and other reports filed with the SEC (including this Quarterly Report on Form 10-Q); and

• the other risks and uncertainties detailed in Part I, Item 1A “Risk Factors” in the 2012 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2013, as updated from time to time in the Company’s quarterly and other reports filed with the SEC (including this Quarterly Report on Form 10-Q).

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EXECUTIVE SUMMARY

This financial discussion contains an analysis of the consolidated financial position and consolidated results of operations of Doral Financial Corporation and its wholly-owned subsidiaries and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report.

In addition to the information contained in this Form 10-Q, readers should consider the description of the Company’s business contained in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 13, 2013. While not all inclusive, Items 1 and 1A of the Form 10-K and this Form 10-Q disclose additional information about the business of the Company, risk factors, many beyond the Company’s control, and provides additional detail and discussion of the operating results, financial condition and credit, market and liquidity risks beyond that which is presented in the narrative and tables included herein.

As discussed in greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, the Puerto Rico economy has contracted nearly 13% since the beginning of fiscal year 2007. The sustained recessionary economic conditions in Puerto Rico is the primary contributing factor to the Company having a high level of non-performing loans and has caused the Company to change its business strategies over time. In 2007, the Company suspended making any new construction loans and land loans in Puerto Rico. In 2008, the Company suspended new commercial lending activities in Puerto Rico as well, focusing on servicing its loans to existing commercial customers. In 2009, the Company further altered its strategy by significantly increasing mortgage loan underwriting standards for loans originated for Puerto Rico borrowers. Despite these actions the Company’s non-performing loans increased as a result of defaults by previously existing customers. In response to the economic difficulties of the Company’s customers, in 2010 the Company initiated programs to modify the credit terms of a significant number of Puerto Rico residential mortgage and commercial borrowers as a means to optimize the performance of our borrowers and the Company. The Company continues to focus on rationalizing the revenue and expense opportunities available in an economically stressed Puerto Rico. As part of our strategy to return the Company to a safe and sound condition in Puerto Rico, the Company re-embarked in 2009 on expanding its U.S. based funding sources and commercial lending to U.S. businesses in order to diversify risk and to generate income.

The Company expects that the conditions which have driven the adoption of its current business strategies to continue to affect the Company’s risk profile and earnings into the foreseeable future. Evolving conditions may also present new operational and strategic challenges to the Company. The continuing weakness in the economy in Puerto Rico is expected to continue to adversely affect the quality of the Company’s Puerto Rico home mortgage, commercial real estate, and construction and land portfolios, as well as its ability to generate new quality home mortgage loans – the most significant part of the Company’s business. The Company anticipates that its operating capabilities will continue to be restricted by the consent order with the FDIC and the Office of the Commissioner, and the Written Agreement with the Federal Reserve Bank of New York, and that compliance with the consent order and the Written Agreement will cause the Company’s operating costs to increase. The Company’s operations will also be negatively affected by the continuing consolidation of other banks in the Puerto Rico market, as these banks, by virtue of their larger size, have greater access to capital and customers than the Company, and the ability to adopt competitive strategies that are adverse to the interests of the Company.

Regarding the benefits of the Company’s strategy to develop U.S. funding and lending opportunities, at June 30, 2013, $2.4 billion of the Company’s $6.2 billion gross loans receivable, or 38.7%, are to U.S. operating businesses and individuals for business purposes. Funding sources specific to its U.S. businesses, specifically deposits and collateralized loan obligations, aggregated to $2.0 billion as of June 30, 2013, with the remainder of the assets funded by the general funding sources available to Doral Bank. The U.S. based commercial loans have lower defaults than the Company’s Puerto Rico commercial loan portfolio. As a result, of the $20.6 million loss before income taxes, the Company’s U.S. business contributed $27.6 million in income before income taxes over the first six months of 2013, compared to income before income taxes of $23.9 million from Puerto Rico Growth. The income before income taxes from the U.S. and Puerto Rico Growth operations were partially offset by a loss before income taxes of $43.5 million and $23.0 million from Recovery and Corporate operations, respectively.

The preparation of financial statements and other financial information in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. These estimates and assumptions include management’s estimates affecting the allowance for loan and lease losses, including the provision for loan and lease losses, the conditions under which a loan or security is determined to be accounted for as non-performing, the conditions under which a non-performing loan is returned to accrual status, the circumstances under which a loan is determined to be a TDR, the circumstances under which a TDR is no longer reported as a TDR, the valuation of interest only strips and

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mortgage servicing rights, when a loan is determined to be of such little value it is charged-off, when a security is considered to be other than temporarily impaired and the credit loss charged to income, the collectability of other receivables, the estimate of income tax expense and payable and the fair values of financial assets and liabilities. Each of these factors requires subjective judgment and those judgments have a significant impact on the Company’s reported results of operations and disclosures. In 2012, the Company changed its loss provision assumptions to better reflect the ongoing economic and regulatory environment in which it operates in Puerto Rico. Each of the identified factors, as well as others not identified, where management is making subjective judgments because the accounting does not relate to actual cash gain or loss but estimated future financial effects, can positively or negatively affect reported earnings. See “Critical Accounting Policies” below.

OVERVIEW OF RESULTS OF OPERATIONS

Net loss for the three months ended June 30, 2013 totaled $10.4 million, compared to a net loss of $1.6 million for the comparable 2012 period. The Company’s net loss increased $8.8 million primarily due to a decrease in total interest income of $7.9 million, a decrease of $3.4 million in non-interest income and an increase of $3.4 million in non-interest expense that were partially offset by a decrease in total interest expense of $3.6 million and a decrease of $2.6 million in income tax expense.

The Company’s financial results and condition for the three months ended June 30, 2013 included the following:

• Net interest income for the three months ended June 30, 2013 was $50.5 million, compared to $54.8 million for the corresponding period in 2012. The $4.3 million decrease in net interest income for 2013, compared to 2012, was due to a decrease in total interest income of $7.9 million, partially offset by a decrease of $3.6 million in interest expense. Interest expense decreased as securities sold under repurchase agreements and advances from the FHLB have matured and are not being replaced. Additionally, older certificates of deposit are maturing and are being replaced by similar duration contracts at lower rates. Interest income decreased mostly due to a less interest income recognized on MBS and investment securities being sold during the latter part of 2012. This decrease in interest income is due to a cumulative correction of $6.2 million related to capitalized interest income associated with loans modified between January 1, 2011 and June 30, 2013 which was reversed in the current quarter and the decreased balance of MBS and investment securities.

• The provision for loan and lease losses for the three months ended June 30, 2013 was $5.5 million, reflecting a slight increase of $0.3 million compared to the $5.2 million provision for the corresponding 2012 period, not withstanding the $4.6 million reduction related to a cumulative correction of $6.2 million in overstated forebearance balances on modified loans.

• Non-interest income for the three months ended June 30, 2013 was $16.8 million, a decrease of $3.4 million compared to non-interest income of $20.1 million for the corresponding 2012 period. The decrease in non-interest income for the three months ended June 30, 2013, compared to the same period in 2012, resulted largely from an decrease of $1.6 million in net gains on trading assets and derivatives, primarily due to a drop in the IOs fair value, losses on the MSR economic hedge, and a decrease of $1.3 million on the mark-to-market adjustment of loans held for sale at fair value due to the increase in mortgage rates during the three months ended June 30, 2013.

• Non-interest expense for the three months ended June 30, 2013 was $73.9 million, compared to $70.5 million for the corresponding period in 2012. The $3.4 million increase in non-interest expense for the three months ended June 30, 2013, compared to the same period in 2012, was due largely to increases of $6.0 million in compensation and benefits, increase of $1.7 million in taxes other than payroll and an increase of $0.9 million in FDIC insurance expense, partially offset by a decrease of $3.3 million in professional services.

• Income tax benefit was $1.8 million for the three months ended June 30, 2013, compared to an income tax expense of $0.8 million for the corresponding period in 2012 mostly due to a revaluation of the Company’s deferred tax asset in light of the new legislation approved by the Commonwealth of Puerto Rico on June 30, 2013.

• Net loss attributable to common shareholders for the three months ended June 30, 2013 totaled $12.8 million, or a loss of $1.95 per common share, compared to net loss attributable to common shareholders for the corresponding 2012 period of $4.0 million, or a loss of $0.63 per common share.

• The Company’s loan production for the three months ended June 30, 2013 was $630.7 million, an increase of $107.3 million, or 20.5%, when compared to the loan production of $523.4 million for the three months ended June 30, 2012. Major components of the increase in loan production include $81.6 million and $34.0 million in construction & land loans and commercial & industrial loans originated in the U.S, partially offset by a decrease of $4.4 million in residential mortgage loan originations in Puerto Rico.

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• Assets as of June 30, 2013 totaled $8.5 billion compared to $8.5 billion as of December 31, 2012, with an increase of $42.1 million primarily related to an increase of $115.4 million in total loans, net, an increase of $17.6 million in real estate held for sale, net, and an increase of $26.3 million in restricted cash. These increases were partially offset by a decrease of $41.5 million in cash and equivalents, a decrease of $47.3 million in investment securities, a decrease of $9.5 million in accounts receivables and a decrease of $17.0 million in other assets.

• Total deposits of $5.0 billion as of June 30, 2013 increased $342.7 million, or 7.4%, from deposits of $4.6 billion as of December 31, 2012, mostly due to increase deposit capture in the Doral Bank U.S branches.

• Non-performing loans, excluding FHA/VA loans guaranteed by the U.S. government, as of June 30, 2013 totaled $713.4 million, a decrease of $29.4 million from December 31, 2012. The decrease in NPLs during the six months ended June 30, 2013 is primarily related to a decrease of $72.4 million in loans that were cured, $53.7 million in write-downs, and $27.2 million of loans transferred to the OREO, partially offset by an increase of $124.0 million in new non-performing loans.

64

Table A - Selected Financial Data

	Three months ended June  30,						Six months ended June  30,
(In thousands, except for share data)	2013			2012			2013			2012
Selected Income Statement Data:
Interest income	$	84,432		$	92,289		$	179,176		$	183,777
Interest expense		33,901			37,518			67,905			76,266
Net interest income		50,531			54,771			111,271			107,511
Provision for loan and lease losses		5,536			5,209			24,259			120,390
Net interest income (loss) after provision for loan and lease losses		44,995			49,562			87,012			(12,879	)
Non-interest income		16,751			20,131			41,209			35,523
Non-interest expenses		73,870			70,520			148,790			133,491
Loss before income taxes		(12,124	)		(827	)		(20,569	)		(110,847	)
Income tax (benefit) expense		(1,774	)		785			2,158			(111,839	)
Net (loss ) income	$	(10,350	)	$	(1,612	)	$	(22,727	)	$	992
Net loss attributable to common shareholders	$	(12,765	)	$	(4,027	)	$	(27,557	)	$	(3,838	)
Net loss per common share(1)(2)	$	(1.95	)	$	(0.63	)	$	(4.22	)	$	(0.60	)
Accrued dividends, preferred stock	$	2,415		$	2,415		$	4,830		$	4,830
Book value per common share(2)	$	68.26		$	76.45		$	68.26		$	76.45
Preferred shares outstanding at end of period		5,811,391			5,811,391			5,811,391			5,811,391
Weighted average common shares outstanding(2)		6,538,031			6,423,021			6,534,069			6,421,327
Common shares outstanding at end of period(2)		6,650,896			6,423,021			6,650,896			6,423,021
Selected Balance Sheet Data at Period End:
Cash and cash equivalents (including restricted cash)	$	714,729		$	423,473		$	714,729		$	423,473
Total investment securities		346,500			742,343			346,500			742,343
Total loans, net(3)		6,592,921			6,333,939			6,592,921			6,333,939
Allowance for loan and lease losses		112,467			152,689			112,467			152,689
Servicing assets, net		98,137			108,665			98,137			108,665
Total assets		8,521,169			8,344,574			8,521,169			8,344,574
Deposits		4,971,557			4,558,482			4,971,557			4,558,482
Total borrowings		2,409,595			2,659,842			2,409,595			2,659,842
Total liabilities		7,715,117			7,501,434			7,715,117			7,501,434
Preferred equity		352,082			352,082			352,082			352,082
Common equity		453,970			491,058			453,970			491,058
Total stockholders’ equity		806,052			843,140			806,052			843,140
Operating Data:
Loan production	$	630,696		$	523,428		$	1,250,394		$	1,005,185
Loan servicing portfolio (4)		7,314,394			7,710,969			7,314,394			7,710,969
Selected Financial Ratios:
Performance:
Net interest margin		2.70	%		2.95	%		3.00	%		2.92	%
Return on average assets		(0.49	)%		(0.08	)%		(0.55	)%		0.02	%
Return on average common equity		(10.92	)%		(3.29	)%		(11.75	)%		(1.56	)%
Capital:
Leverage ratio		8.98	%		9.92	%		8.98	%		9.92	%
Tier 1 risk-based capital ratio		11.21	%		12.94	%		11.21	%		12.94	%
Total risk-based capital ratio		12.51	%		14.21	%		12.51	%		14.21	%
Asset quality:
Total NPAs as percentage of net loans receivable portfolio and OREO		14.14	%		13.63	%		14.14	%		13.63	%
Total NPAs as percentage of consolidated total assets		10.30	%		10.55	%		10.30	%		10.55	%
NPLs to total loans (excluding FHA/VA guaranteed loans)		11.63	%		11.38	%		11.63	%		11.38	%
ALLL to period-end loans receivable		1.82	%		2.49	%		1.82	%		2.49	%
ALLL to period-end loans receivable (excluding FHA/VA guaranteed loans)		1.83	%		2.52	%		1.83	%		2.52	%
ALLL to NPLs (excluding NPLs held for sale)		15.77	%		21.64	%		15.77	%		21.64	%
ALLL to net charge-offs, on an annualized basis		153.15	%		196.60	%		119.30	%		108.58	%
Provision for loan and lease losses to net charge-offs		30.15	%		26.98	%		51.47	%		171.23	%
Net annualized charge-offs to average loans receivable outstanding		0.30	%		0.32	%		1.53	%		2.30	%
Recoveries to charge-offs		9.48	%		7.00	%		7.89	%		2.64	%
Other ratios:
Average common equity to average assets		5.57	%		5.93	%		5.64	%		5.94	%
Average total equity to average assets		9.75	%		10.17	%		9.85	%		10.15	%
Tier 1 common equity to risk-weighted assets		5.99	%		7.40	%		5.99	%		7.40	%

⁽¹⁾  Net loss per common share represents the basic and diluted loss per common share.

⁽²⁾  Adjusted to reflect the Company’s 1-for-20 reverse stock split, which was effective June 28, 2013. See note 25.

⁽³⁾  Includes loans held for sale.

⁽⁴⁾  Represents the total portfolio of loans serviced for third parties. Excludes $4.0 billion of mortgage loans owned by the Company at both June 30, 2013 and 2012.

65

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 as well as the disclosure of contingent assets and liabilities. Certain of these estimates are critical to the presentation of the Company’s financial condition and results of operations since they are particularly sensitive to the Company’s judgment and are highly complex in nature. Of particular significance are judgments and estimates made to estimate the amount of the allowance and provision for loan and lease losses, the determination to place loans on non-accrual status and return loans to accrual status, the determination of whether a loan restructure is a TDR and whether loan performance meets the criteria not to be reported as a TDR, the valuation of mortgage servicing rights, interest only strips, repossessed assets, investment securities (including identification of those that are other than temporarily impaired), and the collectability of receivables and income taxes. Doral Financial believes that the judgments, estimates and assumptions used in the preparation of its consolidated financial statements are appropriate given the factual circumstances as of June 30, 2013. 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. Critical Accounting Policies are detailed in Part II, Item 7 “Management’s Discussion and Analysis” of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 13, 2013, and also in note 2 of the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of recent accounting pronouncements, please refer to note 3 of the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2013 AND 2012

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 resulting from the repricing and maturity mismatch in the Company’s assets and liabilities. Generally, Doral Financial’s assets have a longer maturity and a longer period to 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. Refer to “Risk Management” below for additional information on the Company’s exposure to interest rate risk.

Three months ended June 30, 2013 vs. 2012

Net interest income for the three months ended June 30, 2013 totaled $50.5 million, a decrease of $4.3 million from $54.8 million for the three months ended June 30, 2012. Net interest rate margin decreased to 2.70% from 2.95% when comparing June 30, 2013 to the same period in 2012. For the three months ended June 30, 2013, the yield on interest-earning assets decreased by 46 basis points to 4.51%, from 4.97% for the three months ended June 30, 2012.

It has been the Company’s strategy to reduce the reliance on high-cost brokered deposits, Advances from the FHLB and securities sold under agreements to repurchase and to replace them with deposits and internet-originated certificates of deposit, with lower rates. This strategy has resulted in the Company’s cost of funds reflecting a decrease of 23 basis points, to 1.97% for the three months ended June 30, 2013 from 2.20% for the same period in 2012.

Total interest income for the three months ended June 30, 2013 totaled $84.4 million, compared to $92.3 million for the corresponding 2012 period, a decrease of $7.9 million, or 8.51%, as the yield on interest earning assets decreased by 46 basis points when comparing these two periods. The decrease in total interest income for the three months ended June 30, 2013, compared to the corresponding period in 2012, was mostly the result of decreases of $11.6 million in interest income from residential mortgage loans. This decrease reflects the effect, totaling $6.2 million, related to a correction of the cumulative effect of errors in loan modifications from January 1, 2011 through June 30, 2013. Average balances on residential mortgage loans decreased by $239.0 million when comparing June 30, 2013 to June 30, 2012. The decline also reflects a decrease of $2.5 million in interest income on available for sale securities as the average balance on these securities decreased by $368.9 million when comparing June 30, 2013 to June 30, 2012. These decreases were partially offset by increases of $2.8 million in interest income from construction & land loans, $2.4 million in interest income from commercial real estate loans and $2.3 million in interest income from loans held for sale. The change in the mix of earning assets results from the Company’s strategy to move out of lower-yielding investment securities and to replace maturities of single-family loans with U.S.-based commercial credits, with higher-yields and lower credit risk. Average interest-earning assets increased by approximately $43.4 million when comparing June 30, 2013 to the corresponding 2012 period.

66

Total interest expense for the three months ended June 30, 2013 totaled $33.9 million, compared to $37.5 million for the corresponding 2012 period, reflecting a decrease of $3.6 million, as the cost of funds decreases by 23 basis points when comparing these two periods. The decrease in total interest expense for the three months ended June 30, 2013, compared to the corresponding period in 2012, was principally the result of: (i) a decrease of $2.0 million in interest expense on deposits as Doral replaced maturing longer term certificates of deposit by renewing like products for like terms at lower rates; (ii) a decrease of $1.7 million in interest expense on securities sold under agreements to repurchase as securities sold under agreements to repurchase maturing in 2012 and during the first six months of 2013 were not replaced; and (iii) a decrease of $1.0 million in interest expense on Advances from the FHLB as Doral has prepaid several of the advances during 2013. These decreases were partially offset by an increase of $1.4 million in interest expense on notes payable, related to the issuance of approximately $582.0 million in collateralized loan obligations during the latter half of the year 2012. Average interest-bearing liabilities increased by $58.2 million, when comparing June 30, 2013 to the corresponding 2012 period.

Six months ended June 30, 2013 vs. 2012

Net interest income for the six months ended June 30, 2013 amounted to $111.3 million, an increase of $3.8 million when compared to the corresponding period in 2012. Net interest rate margin increased from 2.92% to 3.00% when comparing the six months ended June 30, 2013 to the respective 2012 period.

For the six months ended June 30, 2013, the yield on interest-earning assets decreased to 4.83%, from 4.99% for the six months ended June 30, 2012.

During the first six months of 2013, it has been the Company’s strategy to reduce the reliance on high-cost brokered deposits, Advances from the FHLB and securities sold under agreements to repurchase and to replace them with deposits and internet-originated certificates of deposit, with lower rates. This strategy has resulted in the Company’s cost of funds reflecting a decrease of 28 basis points, to 1.99% for the six months ended June 30, 2013 from 2.27% for the same period in 2012.

Total interest income for the six months ended June 30, 2013 totaled $179.2 million, compared to $183.8 million for the corresponding 2012 period, a decrease of $4.6 million. The decrease in total interest income for the six months ended June 30, 2013, compared to the corresponding period in 2012, was principally the result of a decrease of $13.2 million in interest income on residential loans. This decrease reflects the effect, totaling $6.2 million, related to a correction of the cumulative effect of errors in loan modifications from January 1, 2011 through June 30, 2013. The average balance of residential mortgage loans decreased by $245.2 million when comparing June 30, 2013 to 2012. The decrease is also related to a decrease of $4.8 million in interest income on available for sale securities as the average balance decreased by $313.8 million when comparing June 30, 2013 to 2012. These decreases were partially offset by: (i) an increase of $6.5 million in interest income on commercial real estate loans as the average balance increased by $177.1 million when comparing June 30, 2013 to 2012; (ii) an increase of $3.8 million in interest income on construction and land loans as the average balance increased by $76.0 million when comparing June 30, 2013 to 2012; (iii) an increase of $2.4 million in interest income on commercial & industrial loans as the average balance increased by $158.0 million when comparing June 30, 2013 to 2012; and (iv) an increase of $1.9 million in interest income on loans held for sale as the average balance increased by $101.6 million when comparing June 30, 2013 to 2012. Total interest-earning assets increased by $62.5 million when comparing June 30, 2013 to the corresponding 2012 period.

Total interest expense for the six months ended June 30, 2013 totaled $67.9 million, compared to $76.3 million for the corresponding 2012 period, a decrease of $8.4 million. The decrease in total interest expense for the six months ended June 30, 2013, compared to the corresponding period in 2012, was mostly the result of: (i) a decrease of $5.4 million in interest expense on deposits as Doral replaced maturing longer term certificates of deposit by renewing like products for like terms at lower rates; (ii) a decrease of $3.3 million in interest expense on securities sold under agreements to repurchase as securities sold under agreements to repurchase maturing in 2012 and during the first six months of 2013 were not replaced; and (iii) a decrease of $2.8 million in interest expense on advances from the FHLB as Doral has prepaid several of the advances during 2013. These decreases were partially offset by an increase of $3.7 million in interest expense on notes payable, related to the issuance of approximately $582.0 million in collateralized loan obligations during the latter half of the year 2012. Average interest-bearing liabilities increased by $122.0 million, when comparing June 30, 2013 to the corresponding 2012 period.

67

Table B - Average Balance Sheet and Net Interest Income

	Three months ended June 30,
	2013							2012
(Dollars in thousands)	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
ASSETS:
Interest-earning assets:
Held for trading securities	$	109,641	$	1,880		6.88	%	$	94,299	$	1,942		8.28	%
Available for sale securities:
US obligations		47,136		13		0.11	%		44,992		9		0.08	%
CMO agencies		5,169		70		5.44	%		21,193		130		2.48	%
Agency MBS		182,976		565		1.24	%		532,473		2,877		2.17	%
Other and private securities		27,333		215		3.16	%		32,833		318		3.90	%
Total available for sale securities		262,614		863		1.32	%		631,491		3,334		2.12	%
Total loans held for sale		420,845		3,581		3.41	%		332,493		1,298		1.57	%
Loans receivable
Consumer:
Residential (1)		3,088,719		36,362		4.72	%		3,327,750		47,935		5.79	%
Consumer		22,215		1,215		21.94	%		31,992		1,664		20.92	%
		3,110,934		37,577		4.84	%		3,359,742		49,599		5.94	%
Commercial:
Commercial real estate		1,111,671		15,210		5.49	%		970,596		12,813		5.31	%
Commercial and industrial		1,550,800		19,655		5.08	%		1,434,636		20,183		5.66	%
Construction and land		395,307		4,938		5.01	%		276,611		2,168		3.15	%
		3,057,778		39,803		5.22	%		2,681,843		35,164		5.27	%
Total loans (2)		6,589,557		80,961		4.93	%		6,374,078		86,061		5.43	%
Other interest-earning assets		552,154		728		0.53	%		370,748		952		1.03	%
Total interest-earning assets/interest income		7,513,966	$	84,432		4.51	%		7,470,616	$	92,289		4.97	%
Total non-interest-earning assets		904,508							838,070
Total assets	$	8,418,474						$	8,308,686
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Deposits:
Interest bearing deposits	$	2,659,762	$	6,206		0.94	%	$	2,086,631	$	4,704		0.91	%
Brokered deposits		1,829,200		7,800		1.71	%		2,141,125		11,282		2.12	%
Total deposits		4,488,962		14,006		1.25	%		4,227,756		15,986		1.52	%
Securities sold under agreements to repurchase		162,467		1,120		2.76	%		442,300		2,849		2.59	%
Advances from FHLB		942,591		8,563		3.64	%		1,172,385		9,585		3.29	%
Notes payable		1,040,489		8,936		3.44	%		727,809		7,582		4.19	%
Loans payable		273,031		1,276		1.87	%		279,120		1,516		2.18	%
Total interest-bearing liabilities/interest expense		6,907,540	$	33,901		1.97	%		6,849,370	$	37,518		2.20	%
Non-interest bearing deposits		356,633							319,795
Other non-interest bearing liabilities		333,552							295,108
Total non-interest-bearing liabilities		690,185							614,903
Total liabilities		7,597,725							7,464,273
Stockholders’ equity		820,749							844,413
Total liabilities and stockholders’ equity	$	8,418,474						$	8,308,686
Net interest-earning assets	$	606,426						$	621,246
Net interest income on a non-taxable equivalent basis			$	50,531						$	54,771
Interest rate spread (3)						2.54	%						2.77	%
Interest rate margin (4)						2.70	%						2.95	%
Net interest-earning assets ratio (5)						108.78	%						109.07	%

⁽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 approximately $52,000 and $45,000 for the first three months of 2013 and 2012, respectively, of income from prepayment penalties related to the Company’s loan portfolio.

⁽³⁾  Interest rate spreads represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest bearing liabilities.

⁽⁴⁾  Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.

⁽⁵⁾  Net interest-earning assets ratio represents average interest-earning assets as a percentage of average interest-bearing liabilities.

68

Table C - Average Balance Sheet and Summary of Net Interest Income

	Six months ended June 30,
	2013							2012
(Dollars in thousands)	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
ASSETS:
Interest-earning assets:
Held for trading securities	$	111,145	$	3,872		7.03	%	$	85,179	$	3,752		8.86	%
Available for sale securities:
US obligations		46,067		27		0.12	%		44,991		16		0.07	%
CMO agencies		5,866		81		2.78	%		24,402		314		2.59	%
Agency MBS		190,255		1,318		1.40	%		474,341		5,324		2.26	%
Other and private securities		27,533		408		2.99	%		39,813		938		4.74	%
Total available for sale securities		269,721		1,834		1.37	%		583,547		6,592		2.27	%
Total loans held for sale		421,794		6,655		3.18	%		320,206		4,779		3.00	%
Loans receivable
Consumer:
Residential (1)		3,119,099		81,678		5.28	%		3,364,259		94,908		5.67	%
Consumer		23,122		2,527		22.04	%		35,415		3,444		19.56	%
		3,142,221		84,205		5.40	%		3,399,674		98,352		5.82	%
Commercial:
Commercial real estate		1,108,995		30,451		5.54	%		931,938		23,909		5.16	%
Commercial and industrial		1,557,586		42,348		5.48	%		1,399,539		39,954		5.74	%
Construction and land		357,609		8,117		4.58	%		281,654		4,353		3.11	%
		3,024,190		80,916		5.40	%		2,613,131		68,216		5.25	%
Total loans (2)		6,588,205		171,776		5.26	%		6,333,011		171,347		5.44	%
Other interest-earning assets		504,389		1,694		0.68	%		409,196		2,086		1.03	%
Total interest-earning assets/interest income		7,473,460	$	179,176		4.83	%		7,410,933	$	183,777		4.99	%
Total non-interest-earning assets		912,068							791,200
Total assets	$	8,385,528						$	8,202,133
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Deposits:
Interest bearing deposits	$	2,505,851	$	11,479		0.92	%	$	2,030,852	$	9,624		0.95	%
Brokered deposits		1,889,782		16,414		1.75	%		2,171,570		23,716		2.20	%
Total deposits		4,395,633		27,893		1.28	%		4,202,422		33,340		1.60	%
Securities sold under agreements to repurchase		175,909		2,354		2.70	%		442,327		5,699		2.59	%
Advances from FHLB		980,832		17,199		3.54	%		1,200,490		19,966		3.34	%
Notes payable		1,041,901		17,839		3.45	%		616,882		14,152		4.61	%
Loans payable		271,343		2,620		1.95	%		281,456		3,109		2.22	%
Total interest-bearing liabilities/interest expense		6,865,618	$	67,905		1.99	%		6,743,577	$	76,266		2.27	%
Non-interest bearing deposits		354,032							300,494
Other non-interest bearing liabilities		340,936							310,233
Total non-interest-bearing liabilities		694,968							610,727
Total liabilities		7,560,586							7,354,304
Stockholders’ equity		824,942							847,829
Total liabilities and stockholders’ equity	$	8,385,528						$	8,202,133
Net interest-earning assets	$	607,842						$	667,356
Net interest income on a non-taxable equivalent basis			$	111,271						$	107,511
Interest rate spread (3)						2.84	%						2.72	%
Interest rate margin (4)						3.00	%						2.92	%
Net interest-earning assets ratio (5)						108.85	%						109.90	%

⁽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 approximately $86,000 and $0.1 million for the six months ended June 30, 2013 and 2012, respectively, 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 rate on interest-bearing liabilities.

⁽⁴⁾  Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.

⁽⁵⁾  Net interest-earning assets ratio represents average interest-earning assets as a percentage of average interest-bearing liabilities.

The following tables present the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Doral Financial’s interest income and interest expense during the period indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rate (change in rate multiplied by prior year volume); and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated in proportion to the absolute dollar amounts of the changes due to rate and volume.

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Table D - Net Interest Income Variance Analysis

	Three months ended June 30, 2013 compared to 2012
	Increase (Decrease) Due To:
(In thousands)	Volume			Rate			Total
Interest Income Variance
Held for trading securities	$	292		$	(354	)	$	(62	)
Available for sale securities:
US obligations		—			4			4
CMO agencies		(145	)		85			(60	)
Agency MBS		(1,399	)		(913	)		(2,312	)
Other and private securities		(48	)		(55	)		(103	)
Total available for sale securities		(1,592	)		(879	)		(2,471	)
Total loans held for sale		422			1,861			2,283
Loans receivable
Consumer:
Residential		(3,239	)		(8,334	)		(11,573	)
Consumer		(528	)		79			(449	)
		(3,767	)		(8,255	)		(12,022	)
Commercial:
Commercial real estate		1,944			453			2,397
Commercial and industrial		1,598			(2,126	)		(528	)
Construction and land		1,166			1,604			2,770
		4,708			(69	)		4,639
Total loans		1,363			(6,463	)		(5,100	)
Other interest-earning assets		352			(576	)		(224	)
Total Interest Income Variance	$	415		$	8,272		$	7,857
Interest Expense Variance
Deposits:
Interest bearing deposits	$	1,341		$	161		$	1,502
Brokered deposits		(1,496	)		(1,986	)		(3,482	)
Total deposits		(155	)		(1,825	)		(1,980	)
Repurchase agreements		(1,906	)		177			(1,729	)
Advances from FHLB		(1,989	)		967			(1,022	)
Notes payable		2,877			(1,523	)		1,354
Loans payable		(32	)		(208	)		(240	)
Total Interest Expense Variance		(1,205	)		(2,412	)		(3,617	)
Net Interest Income Variance	$	1,620		$	(5,860	)	$	(4,240	)

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Table E - Net Interest Income Variance Analysis

	Six months ended June 30, 2013 compared to 2012 Increase (Decrease) Due To:
(In thousands)	Volume			Rate			Total
Interest Income Variance
Held for trading securities	$	993		$	(873	)	$	120
Available for sale securities:
US obligations		—			11			11
CMO agencies		(254	)		21			(233	)
Agency MBS		(2,450	)		(1,556	)		(4,006	)
Other and private securities		(241	)		(289	)		(530	)
Total available for sale securities		(2,945	)		(1,813	)		(4,758	)
Total loans held for sale		1,578			298			1,876
Loans receivable
Consumer:
Residential		(6,806	)		(6,424	)		(13,230	)
Consumer		(1,310	)		393			(917	)
		(8,116	)		(6,031	)		14,147
Commercial:
Commercial real estate		4,715			1,827			6,542
Commercial and industrial		4,284			(1,890	)		2,394
Construction and land		1,367			2,397			3,764
		10,366			2,334			12,700
Total loans		3,828			(3,399	)		429
Other interest-earning assets		418			(810	)		(392	)
Total Interest Income Variance	$	2,294		$	(6,895	)	$	(4,601	)
Interest Expense Variance
Deposits:
Interest bearing deposits	$	2,167		$	(312	)	$	1,855
Brokered deposits		(2,834	)		(4,468	)		(7,302	)
Total deposits		(667	)		(4,780	)		(5,447	)
Repurchase agreements		(3,575	)		230			(3,345	)
Advances from FHLB		(3,879	)		1,112			(2,767	)
Notes payable		7,899			(4,212	)		3,687
Loans payable		(112	)		(377	)		(489	)
Total Interest Expense Variance		(334	)		(8,027	)		(8,361	)
Net Interest Income Variance	$	2,628		$	1,132		$	3,760

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses is charged to earnings to bring the total allowance for loan and lease losses to a level considered appropriate by management to reflect all losses inherent in the portfolio as of the financial statement date considering the Company’s historical loss experience, current delinquency rates, known and inherent risks in the loan portfolio, individual assessment of significant impaired loans, the estimated value of the underlying collateral or discounted expected cash flows, and an assessment of current economic conditions and emerging risks. While management believes that the current allowance for loan and lease losses is maintained at a level appropriate to provide for the inherent probable losses in the loan portfolio, future additions to the allowance could be necessary if economic conditions change or if credit losses increase substantially from those forecast by Doral Financial in determining the allowance. Unanticipated increases in the allowance for loan and lease losses could materially affect the Company’s net income in future periods.

Three months ended June 30, 2013 vs. 2012 – The provision for loan and lease losses for the three months ended June 30, 2013 totaled $5.5 million, reflecting a slight increase of $0.3 million, when compared to the PLLL for the same period of 2012. The Company recorded charge-offs, net of recoveries, of $18.4 million and $19.3 million for the three months ended June 30, 2013 and 2012, respectively. The provision for loan and lease losses by loan category was:

• Residential mortgage – provision for loan and lease losses of $4.4 million compared to $2.5 million recorded for the same 2012 period. The increase in the 2013 provision resulted principally from additional loans reaching 180 days past due.

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• Commercial real estate – reversal of provision for loan and lease losses of $0.4 million compared to a provision of $3.9 million recorded for the same 2012 period. The 2013 reversal of provision resulted largely from a decrease in charge-offs of $7.0 million, or 65.9% when compared to the same period in 2012, reducing the allowance required.

• Commercial and industrial – reversal of provision for loan and lease losses of $28,000 for the three months ended June 30, 2013 mostly the result of an enhanced risk-rating provision approach for the leveraged lending business in the US, partially offset by downgrades in the Shared National Credit risk rating.

• Construction and land – provision for loan and lease losses of $1.2 million compared to a reversal of provision of $0.7 million recorded for the same 2012 period. The 2013 provision is largely the result of new valuations received on loans measured individually for impairment.

Six months ended June 30, 2013 vs. 2012 – The provision for loan and lease losses for the six months ended June 30, 2013 totaled $24.3 million, reflecting a decrease of $96.1 million, when compared to the PLLL for the same period of 2012. The Company recorded charge-offs, net of recoveries, of $47.1 million and $70.3 million for the six months ended June 30, 2013 and 2012, respectively. The provision for loan and lease losses by loan category was:

• Residential mortgage – provision for loan and lease losses of $13.8 million compared to $71.5 million recorded for the same 2012 period. The decrease of $57.7 million consists of a $4.6 million cumulative effect impact related to the second quarter of 2013 correction of $6.2 million in overstated forbearance balances on loans modified between January 1, 2011 and June 30, 2013, and a reduced reserve requirement as charge-offs decreased by $15.7 million, or 34.8%.

• Commercial real estate – provision for loan and lease losses of $3.4 million compared to $23.3 million recorded for the same 2012 period. The decrease of $19.9 million, or 85.4% resulted principally from a decrease of $7.0 million decrease in charge-offs, when compared to the same period in 2012.

• Commercial and industrial – provision for loan and lease losses of $3.8 million compared to a reversal of provision of $0.3 million recorded for the same 2012 period. The 2013 provision was principally the result of an increase of $4.3 million, in charge-offs when comparing the six months ended June 30, 2013 to the same period in 2012.

• Construction and land – provision for loan and lease losses of $2.9 million compared to a provision of $25.9 million recorded for the same 2012 period. The 2013 provision is largely the result of new valuations received on loans measured individually for impairment, reflecting a decrease in collateral values.

The Company’s provision expense for non-residential loan products appears to be moderating from recent years reflecting that: (i) Doral’s provision expense is nearly entirely the result of loans made to borrowers in Puerto Rico; (ii) the Puerto Rico economy and housing market appears to be stabilizing; (iii) Doral’s efforts to obtain updated valuations on real estate properties collateralizing delinquent loans is nearly completed and; (iv) as Doral has not made new commercial loans in the Puerto Rico market area since 2008, the portfolio is seasoned with relatively fewer new non-performing loans. An additional characteristic of such a mature portfolio of underperforming loans is that many loans individually reviewed for impairment have been written down to their net realizable value, resulting in a low level of allowance for loan and leases losses relative to peers even though credit risks are fully recognized.

Notwithstanding the $4.6 million cumulative correction recorded in the second quarter of 2013 related to the incorrect recording of interest income associated with a number of loan modifications, the Company’s PLLL for the residential loan portfolio reflects: (i) the concentration of residential lending to borrowers in Puerto Rico; (ii) the recent past declines in the economy and the continuing high rate of unemployment; (iii) ongoing efforts to obtain current valuations on all real estate properties collateralizing delinquent loans and; (iv) the level of recidivism of previously modified residential mortgage loans. For both commercial and residential lending, during 2013, Doral changed its organizational structure and retained additional internal and external resources to improve the collections, performance and provisioning of its loan portfolios.

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Table F - Non-Interest Income

	Three months ended June 30,									Six months ended June 30,
(Dollars in thousands)	2013			2012			Variance			2013			2012			Variance
Net credit related other-than-temporary impairment losses	$	—		$	—		$	—		$	—			(6,396	)	$	6,396
Net gain on loans securitized and sold and capitalization of mortgage servicing		9,025			9,818			(793	)		18,491			16,022			2,469
Mortgage loan servicing income (net of mark-to-market adjustments):
Servicing fees		6,194			6,597			(403	)		12,581			13,045			(464	)
Late charges		1,136			1,241			(105	)		2,224			2,505			(281	)
Prepayment penalties		877			57			820			506			105			401
Other servicing fees		470			259			211			931			442			489
Loss on serial notes and repurchased loans		(2,367	)		(1,480	)		(887	)		(4,605	)		(2,274	)		(2,331	)
Mark-to-market adjustment of servicing assets		(6,096	)		(6,318	)		222			(8,244	)		(8,698	)		454
Total mortgage loan servicing income (net of mark-to-market adjustments)		214			356			(142	)		3,393			5,125			(1,732	)
Mark-to-market loans held for sale at fair value		(1,296	)		—			(1,296	)		(297	)		—			(297	)
Net (loss) gain on trading assets and derivatives:
(Loss) gain on IO valuation		(2,748	)		2,155			(4,903	)		(2,743	)		2,250			(4,993	)
(Loss) gain on MSR economic hedge		(1,806	)		325			(2,131	)		(2,322	)		430			(2,752	)
Gain (loss) on hedging derivatives		3,251			(2,230	)		5,481			5,053			(2,145	)		7,198
Net (loss) gain on trading assets and derivatives		(1,303	)		250			(1,553	)		(12	)		535			(547	)
Commissions, fees and other income:
Retail banking fees		6,067			6,407			(340	)		12,191			12,668			(477	)
Insurance agency commissions		2,359			2,559			(200	)		4,790			4,746			44
Other income		695			413			282			2,117			737			1,380
Total commissions, fees and other income		9,121			9,379			(258	)		19,098			18,151			947
Net gain on early repayment of debt		661			—			661			207			—			207
Net gain on sale of investment securities available for sale		329			328			1			329			2,086			(1,757	)
Total non-interest income	$	16,751		$	20,131		$	(3,380	)	$	41,209		$	35,523		$	5,686

Three months ended June 30, 2013 vs. 2012 - Non-interest income of $16.8 million for the three months ended June 30, 2013 decreased by $3.4 million compared to the three months ended June 30, 2012, primarily due to the following:

• A decrease of $1.6 million, or 621.2%, in net gain on trading assets and derivatives from the prior year, comprised of decreases of $4.9 million and $2.1 million in the gain on IO valuation and gain on MSR economic hedge, respectively, partially offset by an increased gain of $5.5 million on hedging derivatives.

• A $1.3 million mark-to-market expense incurred in 2013 related to the first quarter election to hold newly originated residential mortgage loans held for sale at fair value.

• A decrease of approximately $0.8 million, or 8.07%, in net gain on loans securitized and sold and capitalization of mortgage servicing which is related to $1.8 million more in deferred origination fees which was partially offset by a $0.7 million increase on capitalization of MSRs and a $0.3 million increase on gains on securities held for trading.

• A net gain of approximately $0.7 million on the early repayment of debt as the Company repurchased a portion of its outstanding AFICA bonds at a discount during the second quarter of 2013.

Six months ended June 30, 2013 vs. 2012 - Non-interest income of $41.2 million for the six months ended June 30, 2013 increased by $ 5.7 million compared to the six months ended June 30, 2012, primarily due to the following:

• A decrease of $6.4 million in other than temporary impairment losses based on sales of certain mortgage backed and other securities during the first quarter of 2012. There were no other than temporary impairment losses recognized during the first six months of 2013.

• A $2.5 million, or 15.4%, increase in net gain on loans securitized and sold and capitalization of mortgage servicing related to increases of approximately $9.5 million and $3.1 million in gains on securities held for trading and the capitalization of mortgage servicing rights, respectively, which were partially offset by $10.1 million more in deferred origination fees.

• A decrease of $1.8 million, or 84.2%, in the gain on sale of investment securities available for sale.

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• A decrease of $1.7 million, or 33.8%, in mortgage loan servicing income, mostly related to a decrease of $3.1 million in losses on serial notes and repurchased loans, partially offset by increases in prepayment penalties, mark-to-market adjustment of servicing assets and other servicing fees totaling $1.4 million.

• An increase of $1.0 million, or 5.2%, in commissions, fees and other income, mostly related to commercial loan fees from U.S. operations.

• A decrease of $0.5 million in net gain on trading assets and derivatives resulting from decreases of $5.0 million and $2.7 million in the gain on MSR economic hedges and the I/O valuation, respectively, partially offset by an improvement in the gain on hedging derivatives of $7.2 million.

Table G - Non-Interest Expense

	Three months ended June 30							Six months ended June 30
(In thousands)	2013		2012		Variance			2013		2012		Variance
Compensation and benefits	$	24,920	$	18,943	$	5,977		$	49,443		36,837	$	12,606
Professional services		10,939		14,287		(3,348	)		21,555		25,297		(3,742	)
Occupancy expenses		5,531		5,108		423			10,471		9,389		1,082
Communication expenses		2,747		3,482		(735	)		5,844		7,136		(1,292	)
FDIC insurance expense		5,022		4,105		917			10,112		7,365		2,747
Depreciation and amortization		2,982		3,640		(658	)		6,022		6,891		(869	)
Taxes, other than payroll and income taxes		4,362		2,616		1,746			6,719		5,231		1,488
Electronic data processing expenses		4,166		3,889		277			9,131		7,422		1,709
Corporate insurance		1,883		1,569		314			3,722		3,177		545
Advertising		1,140		1,527		(387	)		2,865		3,167		(302	)
Office expenses		828		1,675		(847	)		1,771		3,055		(1,284	)
Other		4,609		2,958		1,651			8,550		5,769		2,781
		69,129		63,799		5,330			136,205		120,736		15,469
Other provisions and other real estate owned expenses:
Foreclosure and other credit related expenses		1,115		1,654		(539	)		4,516		3,872		644
Other real estate owned expenses		3,626		5,067		(1,441	)		8,069		8,883		(814	)
		4,741		6,721		1,980			12,585		12,755		(170	)
Total non-interest expense	$	73,870	$	70,520	$	3,350		$	148,790	$	133,491	$	15,299

Three months ended June 30, 2013 vs. 2012 - Non-interest expense of $73.9 million for the three months ended June 30, 2013 increased by $3.4 million, or 4.8%, compared to the same period in 2012. Significant variances in non-interest expense for the three months ended June 30, 2013 compared to 2012 were as follows:

• Compensation and benefits increased $6.0 million, or 31.6%, mostly due to an increase of approximately $6.0 million, or 32.5%, in employee salaries, bonuses and benefits, due to additional headcount in U.S. and Corporate operations and increased loss mitigation efforts associated with establishment of the Recovery divisions.

• Professional service expenses decreased by $3.3 million, or 23.4%, with decreases of $2.0 million and $580 thousand in the non-recurring advisory and accounting/auditing categories, as well as a decrease of $380 thousand in both legal and security expense.

• Taxes other than Payroll increased by $1.7 million, or 66.8%, related to $2.0 million in Gross Revenue Tax expense incurred in 2013, partially offset by a decrease of $246 thousand in municipal taxes between the three months ended June 30, 2013 and the same period in 2012.

• FDIC insurance expense increased $917,000, or 22.3%, due to a change in the calculation methodology and a change in the assessment rating.

• Communication expenses decreased $735,000, or $21.1%, related to an $802 thousand, decrease in retail network fees expenses, partially offset by an $85 thousand increase in telephone expenses.

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Six months ended June 30, 2013 vs. 2012 - Non-interest expense of $148.8 million for the six months ended June 30, 2013 increased by $15.3 million, or 11.5%, compared to the same period in 2012. Significant variances in non-interest expense for the six months ended June 30, 2013 compared to 2012 were as follows:

• Compensation and benefits increased $12.6 million, or 34.2%, mostly due to an increase of approximately $13.8 million, or 38.7% in employee salaries, bonuses and benefits due to additional headcount in the U.S., increased regulatory compliance costs and an increased level of loss mitigation efforts associated with the new Recovery divisions, partially offset by an increase of $1.8 million, or 40%, in deferred compensation costs resulting from increased originations in Puerto Rico mortgage and U.S. commercial lending operations.

• Professional service expense decreased by $3.7 million, or 14.8%, corresponding to a $3.8 million decrease in non-recurring advisory services between the six month periods ended June 30, 2013 and the same period in 2012.

• FDIC insurance expense increased $2.7 million, or 37.3%, due to a change in the methodology used to calculate the assessment and a change in the assessment rating between periods.

• Electronic data processing expenses increased $1.7 million, or 23.0%, due to the outsourcing of the retail baking core application processes and technology optimization efforts.

• Taxes other than Payroll increased by $1.5 million, or 28.4%, related to a $2.0 million Gross Revenue Tax expenses incurred in 2013 which was partially offset by a decrease of $480 thousand in municipal taxes.

• Communication expenses decreased $1.3 million, or 18.1%, associated with a $1.1 million decrease in credit card processing fees and a $612 thousand decrease in ATH expenses.

INCOME TAXES

For the three months and six months ended June 30, 2013, Doral Financial recognized income tax benefit of $2.6 million and income tax expense of $1.4 million, respectively, compared to an income tax expense of $0.8 million and an income tax benefit of $111.8 million for the comparable periods of 2012. The components of income tax expense (benefit) are summarized below:

Table H - Income Tax (Benefit) Expense

	Three months ended June 30,						Six months period ended June 30,
(Dollars in thousands)	2013			2012			2013		2012
Current income tax expense - United States	$	464		$	2,132		$	1,599	$	3,971
Deferred income tax (benefit) expense:
Puerto Rico		(1,448	)		(322	)		464		(114,217	)
United States		(750	)		(1,025	)		95		(1,593	)
Total deferred income tax (benefit) expense		(2,238	)		(1,347	)		559		(115,810	)
Total income tax (benefit) expense	$	(1,774	)	$	785		$	2,158	$	(111,839	)

Current income tax expense of $1.6 million for the six months ended June 30, 2013 was related to the growth of U.S. operations and the branch-level interest tax resulting from operating as a foreign branch in the U.S. The deferred income tax expense of $0.6 million for the six months ended June 30, 2013, resulted mainly from the improved profitability at Doral Financial Corporation due to the conversion of Doral Insurance Agency to a Limited Liability Corporation and electing partnership treatment, offset by both the revaluation of the Company’s net deferred tax assets at Doral Financial Corporation and Doral Insurance Agency resulting from the new Puerto Rico tax legislation and the partial release of the reserve for uncertain tax positions resulting from the closing agreement signed with the U.S. Internal Revenue Service on June 24, 2013.

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The deferred income tax benefit of $0.2 million for the six months ended June 30, 2013 resulted from growth of the U.S. operations and the branch-level interest tax resulting from operating as a foreign branch in the U.S. for tax purposes, while the deferred income tax benefit of $115.8 million for the same period in 2012 resulted mainly from the $112.0 million benefit recorded when Doral Financial Corporation and its Puerto Rico domiciled subsidiaries entered into a Closing Agreement dated March 26, 2012 with the Commonwealth of Puerto Rico related to past income tax overpayments, which allowed Doral to convert certain DTAs into a prepaid tax.

Refer to note 21 of the accompanying consolidated financial statements for additional information related to the Company’s income taxes.

BALANCE SHEET AND OPERATING DATA ANALYSIS

LOAN PRODUCTION

Loan production includes loans internally originated by Doral Financial as well as residential mortgage loans purchased from third parties with the related servicing rights. Purchases of mortgage loans from third parties were $38.4 million and $94.9 million for the three months and six months ended June 30, 2013, respectively, compared to $29.8 million and $56.9 for the corresponding 2012 periods.

The following tables set forth the number and dollar amount of Doral Financial’s loan production for the periods indicated:

Table I - Loan Production

	Three months ended June 30,
	2013						2012
(Dollars in thousands)	PR		US		Total		PR		US		Total
FHA/VA mortgage loans	$	133,590	$	—	$	133,590	$	93,470	$	—	$	93,470
Conventional conforming mortgage loans		59,267		—		59,267		98,206		—		98,206
Conventional non-conforming mortgage loans		13,227		—		13,227		17,762		1,050		18,812
Construction development loans		—		89,220		89,220		—		7,618		7,618
Disbursement under existing construction development loans		1,072		6,609		7,681		3,388		1,260		4,648
Commercial real estate		—		88,444		88,444		8,298		87,003		95,301
Commercial and industrial (1)		—		239,075		239,075		50		205,061		205,111
Consumer loans (1)		165		27		192		262		—		262
Total loan production	$	207,321	$	423,375	$	630,696	$	221,436	$	301,992	$	523,428

	Six months ended June 30,
	2013						2012
(Dollars in thousands)	PR		US		Total		PR		US		Total
FHA/VA mortgage loans	$	327,713	$	—	$	327,713	$	154,849	$	—	$	154,849
Conventional conforming mortgage loans		115,111		—		115,111		164,077		—		164,077
Conventional non-conforming mortgage loans		23,703		—		23,703		32,315		1,050		33,365
Construction development loans		—		116,787		116,787		—		15,574		15,574
Disbursement under existing construction development loans		1,762		6,609		8,371		6,744		1,721		8,465
Commercial real estate		—		215,127		215,127		8,298		236,731		245,029
Commercial and Industrial (1)		—		443,058		443,058		50		383,296		383,346
Consumer loans (1)		357		167		524		480		—		480
Total loan production	$	468,646	$	781,748	$	1,250,394	$	366,813	$	638,372	$	1,005,185

⁽¹⁾  Commercial and consumer lines of credit in consumer loans are included in the loan production according to the credit limit approved.

Loan production increased $107.3 million, or 20.5%, in the three months ended June 30, 2013, and $245.2 million, or 24.4%, for the six month period ended June 30, 2013 when compared to the corresponding 2012 periods. For the three months ended June 30, 2013, loan production reflects a decrease of $14.1 million, or 6.4%, in P.R. operations and an increase of $121.4 million, or

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40.2%, in US operations, when compared to the corresponding 2012 periods. The lower volume in P.R. operations was related to decreases of $38.9 million, $4.5 million, $2.3 million and $8.3 million in conventional conforming loans, conventional non-conforming loans, disbursement under existing construction development loans and commercial real estate loans that was partially offset by an increase of $40.1 million in FHA/VA loans. The higher volume in U.S. operations was mainly driven by increases of $81.6 million, $5.3 million and $34.0 million in Construction Development loans, Disbursement under existing construction development loans and Commercial and Industrial loans, respectively.

For the six months ended June 30, 2013, loan production reflects an increase of $101.8 million or 27.8%, in P.R. operations and an increase of $143.4 million or 22.5%, in US operations, when compared to the corresponding 2012 period. The higher volume in PR operations was related to an increase of $172.9 million in FHA/VA loans partially offset by decreases of $49.0 million, $8.6 million, $5.0 million and $8.3 million in conventional conforming loans, conventional non-conforming loans, disbursement under existing construction development loans and commercial real estate loans, respectively. The higher volume in U.S. operations was mainly driven by increases of $101.2 million and $59.8 million in Construction Development loans and Commercial and Industrial loans, respectively, that was partially offset by a decrease of $21.6 million in Commercial Real Estate loans.

The increase in PR residential mortgage loan originations was driven by low interest rates. PR operations also improved its market share through robust marketing efforts capitalizing on the Doral brand with an emphasis on customer awareness and excellence in customer service. The increase in US Operation’s loan production Commercial and Industrial loan volume is attributed to the ramp up of the CLO launched in late 2012 (For additional information regarding CLO operations refer to note 28). The US Operation’s construction loan volume increase is the result of continued expansion by both the Property Finance and Bank Lending business units.

Doral’s loan production for the three months and six months ended June 30, 2013 includes $196.6 million and $381.5 million, respectively, of interests in loans acquired from the lead financial institutions through syndications.

A substantial portion of Doral Financial’s total residential mortgage loan originations has consistently been composed of refinancing transactions. For the six months ended June 30, 2013 and 2012 refinancing transactions represented approximately 88% and 78%, respectively, of the total dollar volume of internally originated mortgage loans. Doral Financial’s future results could be adversely affected by a significant increase in mortgage interest rates that may reduce refinancing activity. However, the Company believes that refinancing activity in Puerto Rico is less sensitive to interest rate changes than in the mainland United States because a significant number of refinance loans in the Puerto Rico mortgage market are made for debt consolidation purposes rather than interest savings due to lower rates.

MORTGAGE LOAN SERVICING

Doral Financial’s principal source of servicing rights has traditionally been sales of loans from its internal loan production. However, Doral Financial has also purchased mortgage loans and mortgage loan servicing rights, though not in recent periods. Doral Financial intends to continue growing its mortgage-servicing portfolio primarily by internal loan originations, but may also continue to seek and consider attractive opportunities for wholesale purchases of loans with the related servicing rights and bulk purchases of servicing rights from third parties.

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The following table sets forth certain information regarding the total mortgage loan-servicing portfolio of Doral Financial for the periods indicated:

Table J - Loans Serviced For Third Parties

	As of June 30,
(Dollars in Thousands, Except for Average Size of Loans Serviced)	2013			2012
Composition of Portfolio Serviced for Third Parties at Period End:
GNMA	$	2,686,028		$	2,574,887
FHLMC/FNMA		2,486,643			2,617,044
Other conventional mortgage loans(1)(2)		2,141,723			2,519,038
Total portfolio serviced for third parties	$	7,314,394		$	7,710,969
Activity of Portfolio Serviced for Third Parties:
Beginning servicing portfolio	$	7,594,352		$	7,898,328
Additions to servicing portfolio		493,249			301,201
Servicing released due to repurchases		(55,007	)		(32,562	)
MSRs sales		(123,740	)		—
Run-off (3)		(594,460	)		(455,998	)
Ending servicing portfolio	$	7,314,394		$	7,710,969
Selected Data Regarding Mortgage Loans Serviced for Third Parties:
Number of loans		88,553			93,503
Weighted-average interest rate		5.62	%		6.00	%
Weighted-average remaining maturity (months)		235			236
Weighted-average gross servicing fee rate		0.41	%		0.40	%
Average servicing portfolio (4)	$	7,502,879		$	7,804,592
Principal prepayments	$	416,051		$	186,315
Constant prepayment rate		9.98	%		4.56	%
Average size of loans	$	82,599		$	82,468
Servicing assets, net	$	98,137		$	108,665
Mortgage-servicing advances (5)	$	77,098		$	61,580
Delinquent Mortgage Loans and Pending Foreclosures at Period End:
60-89 days past due		2.50	%		2.43	%
90 days or more past due		3.79	%		4.56	%
Total delinquencies excluding foreclosures		6.29	%		6.99	%
Foreclosures pending		5.49	%		4.84	%

⁽¹⁾  Excludes $3.8 billion and $4.0 billion of mortgage loans owned by Doral Financial at June 30, 2013 and 2012, respectively.

⁽²⁾  Includes portfolios of $80.2 million and $99.7 million at June 30, 2013 and 2012, 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 $3.8 billion and $4.0 billion at June 30, 2013 and 2012, respectively.

⁽⁵⁾  Includes reserves for possible losses on principal and interest advances of $11.9 million and $12.0 million at June 30, 2013 and 2012, respectively.

Substantially all of the mortgage loans in Doral Financial’s servicing portfolio are secured by single (one to four individual) family residences located in Puerto Rico. At June 30, 2013 and 2012, less than one percent of Doral Financial’s mortgage-servicing portfolio was related to mortgages secured by real property located on the U.S. mainland.

The main component of Doral Financial’s servicing income is loan servicing fees, which depend on the type of mortgage loan being serviced. The servicing fees on residential mortgage loans generally range from 0.25% to 0.50% of the outstanding principal balance of the serviced loan.

The amount of principal prepayments on mortgage loans serviced for third parties by Doral Financial was $416.1 million and $186.3 million for the six month periods ended June 30, 2013 and 2012, respectively. Total delinquencies excluding foreclosures decreased from 6.99% to 6.29% from June 30, 2012 to June 30, 2013. The pending foreclosures increased from 4.84% to 5.49% from June 30, 2012 to June 30, 2013. The Company does not expect significant losses related to these delinquencies and it has a reserve for losses for loans under recourse agreements. Additionally, the Company has not experienced significant losses in the past related to its non-recourse portfolio.

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As part of its servicing responsibilities, in some servicing agreements, Doral Financial is required to advance the scheduled payments of principal and/or interest whether or not collected from the underlying borrower. While Doral Financial generally recovers funds advanced pursuant to these arrangements within 30 days, it must absorb the cost of funding the advances during the time the advance is outstanding. In the past, Doral Financial sold pools of delinquent FHA and VA and conventional mortgage loans. Under these arrangements, Doral Financial is required to advance the scheduled payments whether or not collected from the underlying borrower. While Doral Financial expects to recover a significant portion of the amounts advanced through foreclosure or, in the case of FHA and VA loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend to be greater than normal arrangements because of the large number of delinquent loans.

LIQUIDITY AND CAPITAL RESOURCES

Doral Financial has an ongoing need for capital to finance its lending, servicing and investing activities. The Company’s cash requirements arise mainly from loan originations and purchases of loans, purchases and holding of securities, repayment of debt upon maturity, payment of operating and interest expenses, servicing advances and loan repurchases pursuant to recourse or warranty obligations. Sources of funds include deposits, advances from FHLB and other borrowings, proceeds from the sale of loans, and of certain available for sale investment securities and other assets, payment from loans held on the balance sheet and cash income from assets owned, including payments from owned mortgage servicing rights and interest only strips. The Company’s Asset and Liability Committee establishes and monitors liquidity guidelines to ensure the Company’s ability to meet these needs. Doral Financial believes that it will continue to have adequate liquidity, financing arrangements and capital resources to finance its operations in the ordinary course of business.

Liquidity of the Holding Company

The holding company’s principal uses of funds are the payment of its obligations, primarily the payment of principal and interest on its debt obligations and its operating expenses. The holding company does not fund any lending activities. Beyond the amount of unencumbered liquid assets on its balance sheet, the main sources of funds for the holding company are principal and interest payments on its portfolio of loans, securities retained on its balance sheet and dividends from its subsidiaries, including Doral Bank and Doral Insurance Agency. The existing written agreement with the Federal Reserve Bank of New York applicable to the holding company and the Consent Order with the FDIC and the Office of the Commissioner, applicable to Doral Bank, require prior regulatory approval for the payment of any dividends from Doral Bank to the holding company. In addition, various federal and Puerto Rico statutes and regulations limit the amount of dividends that the Company’s banking and other subsidiaries may pay without regulatory approval. No restrictions exist on the dividends available from Doral Insurance Agency, other than those generally applicable under the Puerto Rico corporation law.

Liquidity is managed at the holding company level that owns the banking and non-banking subsidiaries and at the level of the banking and non-banking subsidiaries.

During the next twelve months, the Company will have to repay approximately $672.8 million in borrowings. The Company anticipates that financing will continue to be available from its deposit customer base, deposits acquired in the markets, collateralized borrowings from the FHLB, collateralized loan obligations, and other sales or securitizations of certain assets. The Company believes that its cash and other current assets, its cash generated from operations, as well as its access to financing sources, is sufficient to meet its operating needs for the next twelve months.

In summary, the Company finances its activities through its cash on hand, deposit acquisition, securities available for sale, borrowings and cash generated from operating activities. The Company’s primary cash outflows include payment of interest on its obligations, lending activities, operating expenses, and repayment of borrowings. As of June 30, 2013, the Company had unrestricted cash and securities available for sale totaling $630.5 million and generated $73.1 million of cash from operations in the first six months of 2013 (excluding financing and investing activities).

During 2009, the Company announced that, in order to preserve capital the board of directors approved the suspension of the payment of dividends on all of its outstanding series of cumulative and non-cumulative preferred stock. The suspension of dividends is effective and commenced with the dividends for the month of April 2009 for the Company’s noncumulative preferred stock and the dividends for the second quarter of 2009 for the Company’s cumulative preferred stock. In addition, Doral Financial has not paid dividends on the Company’s common stock since April 2006.

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The following items have impacted the Company’s liquidity, funding activities and strategies during 2013 and 2012:

• changes in short-term borrowings and deposits in the normal course of business;

• changes in interest rates on short-term and long-term deposits and other funding alternatives;

• strategic decision to de-lever the Bank;

• limitations on the use of brokered deposits as a result of the Consent Order with the FDIC and the Office of the Commissioner and subsequent brokered deposit waivers obtained from the FDIC;

• repayment of certain long-term callable certificates of deposit;

• sales of investment securities;

• early repayment of debt;

• adoption of an initiative to moderately-shorten the term on brokered certificates of deposit to improve earnings;

• suspension of payment of dividends on outstanding preferred stock;

• repurchases of GNMA defaulted loans;

• merger of Doral Bank FSB into and with Doral Bank;

• launching of alternative deposit channels such as Doral Direct internet platform and deposit listing services;

• meet collateral requirements from Federal Home Loan Bank NY related to outstanding borrowings;

• meet collateral requirements in relation to non-wire transaction activities cleared through the Federal Reserve Bank system;

• on April 26, 2012, the Company entered into a $416.2 million collateralized loan arrangement in which commercial loans were pledged to collateralize $331.0 million from a third party and $85.2 million funded by the Company, paying 3-month LIBOR plus a spread that ranges from 1.47 percent to 2.50 percent. The entity holding the loans is consolidated into Doral and the third party funding is reported as a note payable in the accompanying consolidated financial statements. The third-party financing provides an additional source of liquidity for the Company’s U.S. operations.

• on December 19, 2012, the Company entered into a $311.0 collateralized loan arrangement in which largely U.S. based commercial loans were pledged to collateralize $251.0 million from a third party and $59.8 million funded by Doral, paying 3-month LIBOR plus a spread that ranges from 1.45 percent to 3.25 percent. The entity holding the loans is consolidated into Doral and the third party financing is reported as a note payable in the accompanying consolidated financial statements. The third party funding provides an additional source of liquidity for the Company’s U.S. operations.

The Company is aware that some of its outstanding debt securities have traded at discounts to their respective face amounts. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, the Company may from time to time, purchase such debt for cash in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, regulatory capital and other regulatory requirements and other factors.

The following sections provide further information on the Company’s major funding activities and needs. Also, refer to the consolidated statements of cash flows in the accompanying consolidated financial statements for further information.

Liquidity of the Banking Subsidiary

Doral Financial’s liquidity and capital position at the holding company differ from the liquidity and capital position of the Company’s banking subsidiary. The Company’s banking subsidiary relies primarily on deposits, including brokered deposits, borrowings under advances from FHLB, collateralized loan arrangements and repurchase agreements secured by pledges of its securities portfolio and other borrowings. The banking subsidiary has significant investments in loans, which together with the owned mortgage servicing rights, serve as a source of cash from interest and principal received from loan customers. The market liquidity conditions in the national markets for mortgages have improved considerably since 2008.

Cash Sources and Uses

The Company’s sources of cash as of June 30, 2013 include retail and commercial deposits, borrowings under advances from FHLB, repurchase financing agreements, principal repayments and sales of loans and investment securities.

Management does not contemplate material uncertainties in the rolling over of deposits, both retail and wholesale, and is not engaged in capital expenditures that would materially affect the capital and liquidity positions. However, on a quarterly basis, as required under the Consent Order with the FDIC and the Office of the Commissioner, Doral must request authorization from the FDIC to replace a percentage of maturing brokered certificates of deposit. In addition, the Company’s banking subsidiary maintains borrowing facilities with the FHLB and at the discount window of the Federal Reserve, and has available collateral that can be used to raise funds under these facilities.

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Doral Financial’s uses of cash as of June 30, 2013 include the origination and purchase of loans, the purchase of investment securities, the repayment of obligations as they become due and other operational needs. The Company is also required to deposit cash or qualifying securities to meet margin and collateral requirements. To the extent that the value of securities previously pledged as collateral declines due to changes in interest rates, a liquidity crisis or any other factor, the Company will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.

Primary Sources of Cash

The following table presents Doral Financial’s sources of borrowing and the related average interest rates as of June 30, 2013 and December 31, 2012:

Table K - Sources of Borrowings

	As of June 30, 2013					As of December 31, 2012
(Dollars in thousands)	Amount Outstanding		Average Rate			Amount Outstanding		Average Rate
Deposits	$	4,971,557		1.14	%	$	4,628,864		1.25	%
Securities sold under agreements to repurchase		159,500		2.74	%		189,500		2.61	%
Advances from FHLB		938,973		3.66	%		1,180,413		3.09	%
Loans payable		274,040		2.26	%		270,175		2.13	%
Notes payable		1,037,082		3.01	%		1,043,887		3.23	%

As of June 30, 2013, Doral Financial’s banking subsidiary held approximately $4.6 billion in interest-bearing deposits at a weighted-average interest rate of 1.23%. For additional information on the Company’s sources of borrowings, refer to notes 16 to 20 of the consolidated financial statements accompanying this Quarterly Report on Form 10-Q.

The following table presents the average balance and the annualized average rate paid on each deposit type for the period indicated:

Table L - Average Deposit Balance

	Six months ended June 30, 2013					Year ended December 31, 2012
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Certificates of deposit	$	1,255,633		1.22	%	$	833,858		1.31	%
Brokered deposits		1,889,782		1.75	%		2,121,389		2.06	%
Regular passbook savings		324,779		0.46	%		379,890		0.48	%
NOW and other transaction accounts		925,439		0.69	%		902,290		0.77	%
Total interest-bearing		4,395,633		1.28	%		4,237,427		1.50	%
Non-interest bearing		354,032		—	%		324,274		—	%
Total deposits	$	4,749,665		1.18	%	$	4,561,701		1.39	%

The following table sets forth the maturities of retail and brokered certificates of deposit having principal amounts of $100,000 or more:

Table M - Certificates of Deposits Maturities

(Dollars in thousands)	June 30, 2013
Certificates of deposit maturing:
Three months or less	$	309,842
Over three through six months		385,562
Over six through twelve months		761,278
Over twelve months		1,243,544
Total	$	2,700,226

The amounts in the preceding table include $1.6 billion in brokered deposits issued in denominations greater than $250,000 to broker-dealers, but within the applicable FDIC insurance limit of $250,000.

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As of June 30, 2013 and December 31, 2012, Doral Financial’s banking subsidiary had approximately $1.8 billion and $2.0 billion, respectively, in brokered deposits which include certificates of deposit and money market deposits. Brokered deposits are used by the Company´s banking subsidiary as a source of long-term funds. Historically, Doral Financial’s banking subsidiary has been able to replace maturing brokered deposits as needed. Brokered deposits, however, are generally considered by some a less stable source of funding than deposits obtained through retail bank branches. Brokered-deposit investors are generally more sensitive to interest rates and sometimes move funds from one depository institution to another based on minor differences in rates offered on deposits. In addition, as discussed above, Doral’s banking subsidiary is required to obtain approval from the FDIC to accept, renew or rollover brokered deposits pursuant to the Consent Order with the FDIC and the Office of the Commissioner.

The Company’s banking subsidiary, as a member of the FHLB, has access to collateralized borrowings from the FHLB up to a maximum of 30% of total assets. In addition, the FHLB makes available additional borrowing capacity in the form of repurchase agreements on qualifying high grade securities. Advances and reimbursement obligations with respect to letters of credit must be secured by qualifying assets with a market value of 100% of the advances or reimbursement obligations. As of June 30, 2013, Doral Financial’s banking subsidiary had $939.0 million in outstanding advances from the FHLB at a weighted-average interest rate of 3.66%. Refer to Note 18 to the consolidated financial statements accompanying this Quarterly Report on Form 10-Q for additional information regarding such advances.

Doral Financial also derives liquidity from the sale of mortgage loans in the secondary mortgage markets. The U.S. (including Puerto Rico) secondary mortgage market is the most liquid in the world in large part because of the sale, securitization or guarantee programs maintained by FHA, VA, HUD, FNMA and FHLMC. To the extent these programs are curtailed or the standard for insuring or selling loans under such programs is materially increased, or, for any reason, Doral Financial were to fail to qualify for such programs, Doral Financial’s ability to sell mortgage loans and consequently its liquidity would be materially adversely affected.

Other Uses of Cash

Servicing agreements relating to the MBS programs of FNMA, FHLMC and GNMA, and to mortgage loans sold to certain other investors, require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. While the Company generally recovers funds advanced pursuant to these arrangements within a reasonable time, it must absorb the cost of funding these advances during the time they are outstanding. For the six months ended June 30, 2013, the monthly average amount of funds advanced by the Company under such servicing agreements was approximately $86.5 million, compared to $74.2 million for the corresponding period of 2012. To the extent the mortgage loans underlying the Company’s servicing portfolio experience increased delinquencies, the Company would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. In the past, the Company sold pools of delinquent FHA, VA and conventional mortgage loans. Under these arrangements, the Company is required to advance the scheduled payments whether or not collected from the underlying borrower. While the Company expects to recover the amounts advanced through foreclosure or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend to be greater than normal arrangements because of the initial delinquent status of the loans. As of June 30, 2013 and December 31, 2012, the outstanding principal balance of such delinquent loans was $80.2 million and $89.2 million, respectively, and the aggregate monthly amount of funds advanced by the Company was $11.9 million and $13.2 million, respectively.

When the Company sells mortgage loans to third parties (which serve as a source of cash) it also generally makes customary representations and warranties regarding the characteristics of the loans sold. To the extent the loans do not meet specified characteristics; investors are generally entitled to require the Company to repurchase such loans.

In addition to its servicing and warranty obligations, in the past the Company’s loan sale activities have included the sale of non-conforming mortgage loans subject to recourse arrangements that generally require the Company to repurchase or substitute the loans if the loans are 90 days or more past due or otherwise in default up to a specified amount or limited to a period of time after the sale. To the extent the delinquency ratios of the loans sold subject to recourse are greater than anticipated and the Company is required to repurchase more loans than anticipated, the Company’s liquidity requirements would increase. Please refer to “Off-balance sheet activities” below for additional information on these arrangements.

In the past, the Company sold or securitized mortgage loans with FNMA on a partial or full recourse basis. The Company’s contractual agreements with FNMA authorize FNMA to require Doral Financial to post collateral in the form of cash or marketable securities to secure such recourse obligation to the extent the Company does not maintain an investment grade rating. As of June 30, 2013, the Company’s maximum recourse exposure with FNMA totaled $362.7 million and required the posting of

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a minimum of $44.0 million in collateral to secure recourse obligations. While considered unlikely by the Company, FNMA has the contractual right to request collateral for the full amount of the Company’s recourse obligations. Any such request by FNMA would have a material adverse effect on the Company’s liquidity and business. Refer to note 23 of the accompanying consolidated financial statements and “Financial Instruments with Off-Balance Sheet Risk” below for additional information on these arrangements.

Under the Company’s repurchase lines of credit and derivative contracts, Doral Financial is required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of changes in interest rates or other market conditions, the Company will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.

ASSETS AND LIABILITIES

Doral Financial’s total assets were $8.5 billion at June 30, 2013, compared to $8.5 billion at December 31, 2012, an increase of $42.1 million or 0.50%. This increase was due to growth in net loans of $115.4 million and increases in real estate held for sale, mortgage-servicing advances and the net deferred tax asset of $17.6 million, $4.6 million and $0.4 million, respectively. These increases were partially offset by a decline in cash and money market deposit balances of $15.1 million, and a reduction of $47.3 million in investment securities of which $11.2 million was related to mandatory repurchases of FHLB stock. Additionally there were declines of $16.9 million, $9.5 million, and $2.7 million in other assets, accounts receivable and premises and equipment, respectively, along with a decrease of $1.8 million, $1.4 million and $1.0 million in servicing assets, prepaid income taxes and accrued interest receivable, respectively. The decrease in total cash of $15.1 million was due to the pay down of FHLB advances and a reduction in brokered deposits, partially offset by the increase in non-brokered deposits. The increase in loans was attributable to an increase of $146.7 million in commercial loans partially offset by a $132.8 million decrease in residential and consumer loans and an $22.9 million decrease in the allowance for loan losses.

Total liabilities were $7.7 billion at June 30, 2013, compared to $7.6 billion at December 31, 2012. The $71.7 million increase in total liabilities as of June 30, 2013, when compared to December 31, 2012, was largely due to an increase of $342.7 million in total deposits along with increases of $3.4 million and $3.9 million in accrued expenses and loans payable, respectively, partially offset by decreases of $241.4 million in advances from FHLB, and decreases of $30.0 million and $6.8 million in securities sold under agreements to repurchase and notes payable, respectively. Total deposits increased as the Company grew its retail deposits base by $554.5 million, which is attributable to the continued growth of the U.S. customer base in Florida and New York, partially offset by a $211.8 million decrease in brokered deposits.

CAPITAL

Doral Financial reported total equity of $806.1 million at June 30, 2013, compared to $835.7 million at December 31, 2012. The Company reported accumulated other comprehensive loss (net of tax) of $2.2 million as of June 30, 2013, compared to other comprehensive income (net of tax) of $2.0 million as of December 31, 2012.

Regulatory Capital Ratios

As of June 30, 2013, Doral Bank was in compliance with all the applicable regulatory capital requirements as a state non-member bank (i.e., Total capital and Tier 1 capital to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 4%). The Consent Order requires Doral Bank to develop a capital plan that details the manner in which Doral Bank will meet and maintain a Tier 1 Capital ratio of at least 8.0%, a Tier 1 Risk-Based Capital ratio of at least 10.0% and a Total Risk-Based Capital ratio of at least 12.0%.

Set forth below are Doral Financial’s and Doral Bank’s regulatory capital ratios as of June 30, 2013 and December 31, 2012, based on existing Federal Reserve and FDIC guidelines.

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Table N - Regulatory Capital Ratios

	As of June 30, 2013						As of December 31, 2012						Well Capitalized Minimum (Under FDICIA’s Prompt Corrective  Action Provisions)
	Doral Financial			Doral Bank			Doral Financial			Doral Bank
Total Capital Ratio (Total capital to risk-weighted assets)		12.5	%		12.7	%		13.2	%		12.8	%		10.0	%
Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets)		11.2	%		11.4	%		11.9	%		11.5	%		6.0	%
Tier 1 Leverage Ratio (1)		9.0	%		8.5	%		9.4	%		8.2	%		5.0	%

⁽¹⁾  Tier 1 capital to average assets

As of June 30, 2013 and December 31, 2012, Doral Bank was in compliance with all the regulatory capital requirements that were applicable to it as a state non-member bank as well as those minimums related to the Consent Order and the Written Agreement.

Failure to meet the minimum regulatory capital requirements could result in the initiation of certain mandatory and additional discretionary actions by banking regulators against Doral Financial and its banking subsidiary that, if undertaken, could have a material adverse effect on Doral Financial, such as a variety of enforcement remedies, including, with respect to an insured bank, the termination of deposit insurance by the FDIC, and certain restrictions on its business.

As of June 30, 2013, Doral Financial exceeded the thresholds for well-capitalized banks as set forth in the prompt corrective action plan regulations adopted by the FDIC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. In addition, Doral exceeded the capital ratios set forth as appropriate for Doral Bank by the FDIC in its consent order. The consent order requires Doral Bank to maintain a Tier 1 Capital Ratio of 8%, a Tier 1 Risk-Based Capital Ratio of at least 10%, and a Total Risk-Based Capital Ratio of at least 12%. The Written Agreement with the FRBNY does not provide for any specific capital ratios for Doral Financial Corporation.

Housing and Urban Development Requirements

The Company’s mortgage operation is a U.S. Department of Housing and Urban Development approved non-supervised mortgagee and is required to maintain an excess of current assets over current liabilities and a minimum net worth, as defined by the various regulatory agencies. Such equity requirements are tied to the size of the Company’s servicing portfolio and range up to $1.0 million plus an additional net worth of one percent of the total volume in excess of $25.0 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced up to a maximum required net worth of $2.5 million. The Company is also required to maintain fidelity bonds and errors and omissions insurance coverage based on the balance of its servicing portfolio. Non-compliance with these requirements could result in actions from the regulatory agencies such as monetary penalties and the suspension of the license to originate loans, among others.

As of June 30, 2013 and December 31, 2012, Doral Mortgage maintained $32.9 million and $35.3 million, respectively, in excess of the required minimum level for adjusted net worth required by HUD.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company uses fair value measurements to state certain assets and liabilities at fair value and to support fair value disclosures. Securities held for trading, securities available for sale, loans held for sale at fair value, servicing assets, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other financial assets at fair value on a nonrecurring basis, such as loans held for sale at lower of cost or market, loans receivable and certain other assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The Company groups its assets and liabilities measured at fair value within three levels, based on the markets in which they are traded and the reliability of assumptions used to determine fair value. These levels are:

•  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 derived 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 the use of option pricing models, discounted cash flow models and similar techniques.

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The Company bases fair values on the price that would be received upon sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. It is the Company’s intent to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in the current accounting guidance.

Fair value measurements for assets and liabilities where there is limited or no observable market data are based primarily on the Company’s estimates, and are generally calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability, and other such factors. Therefore, the fair values represent management’s best estimates and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.

The Company’s instruments recorded at fair value on a recurring basis represent approximately 5.07% of the Company’s total assets of $8.5 billion at June 30, 2013, compared with 5.1% of the Company’s total assets of $8.5 billion as of December 31, 2012. Assets for which fair values were measured using significant Level 3 inputs represented approximately 39.5% and 41.4% of these financial instruments at June 30, 2013 and December 31, 2012, respectively.

Refer to note 26 of the accompanying consolidated financial statements for a discussion about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used, and its impact on earnings.

OFF-BALANCE SHEET ACTIVITIES

In the ordinary course of business, Doral Financial makes certain representations and warranties to purchasers and insurers of mortgage loans at the time of loan sales to third parties and in certain circumstances, such as in the event of early or first payment default, regarding the characteristics of the loans sold. To the extent the loans do not meet specified characteristics, if there is a breach of contract of a representation or warranty or if there is an early payment default, Doral Financial may be required to repurchase the mortgage loan and bear any subsequent loss related to the loan. For the six month periods ended June 30, 2013 and 2012, repurchases were approximately $2.9 million and $5.6 million, respectively. These repurchases were recorded at fair value and no significant losses were incurred.

In the past, in relation to its asset securitization and loan sale activity, the Company sold pools of delinquent FHA, VA and conventional mortgage loans on a servicing retained basis. Following these transactions, the loans were not reflected on Doral Financial’s consolidated statements of financial condition. Under these arrangements, as part of its servicing responsibilities, Doral Financial is required to advance the scheduled payments of principal and interest regardless of whether they are collected from the underlying borrower. While Doral Financial expects to recover a significant portion of the amounts advanced through foreclosure or, in the case of FHA and VA loans, under the applicable FHA and VA insurance and guarantee programs, as a result of the delinquent status of the loans, the amounts advanced tend to be greater than normal. As of June 30, 2013 and December 31, 2012, the outstanding principal balance of such delinquent loans amounted to $80.2 million and $89.2 million, respectively.

In addition, Doral Financial’s loan sale activities in the past included certain mortgage loan sale and securitization transactions subject to recourse arrangements that require Doral Financial to repurchase or substitute loans if they are 90-120 days or more past due or otherwise in default. The Company is also required to pay interest on delinquent loans in the form of servicing advances. Under certain of these arrangements, the recourse obligation is terminated upon compliance with certain conditions, which generally involve: (i) the lapse of time (normally from four to seven years), (ii) the lapse of time combined with certain other conditions such as when the unpaid principal balance of the mortgage loans fall below a specific percentage (normally less than 80%) of the appraised value of the underlying property or (iii) the amount of loans repurchased pursuant to recourse provisions reach a specific percentage of the original principal amount of loans sold (generally from 10% to 15%). As of June 30, 2013 and December 31, 2012, the Company’s records reflected that the outstanding principal balance of loans sold subject to full or partial recourse was $490.6 million and $531.2 million, respectively. As of such dates, the Company’s records also reflected that the maximum contractual exposure to Doral Financial if it were required to repurchase all loans subject to recourse was $443.6 million and $476.7 million, respectively. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral Financial’s consolidated Statement of Condition, except for a liability of estimated losses from such recourse agreements, which is included as part of “Accrued expenses and other liabilities” in the Company’s consolidated

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financial statements. The Company discontinued the practice of selling loans with recourse obligations in 2005. Doral Financial’s current strategy is to sell loans on a non-recourse basis, except for certain early payment defaults. For the three months and six months period ended June 30, 2013, the Company repurchased at fair value $4.7 million and $11.1 million of loans, pursuant to recourse provisions, compared to $2.5 million and $6.2 million, for the corresponding periods of 2012. For additional information regarding sales of delinquent loans please refer to “Liquidity and Capital Resources” above.

Doral Financial’s reserves for its exposure to recourse totaled $9.2 million and $8.8 million as of June 30, 2013 and December 31, 2012, respectively, and the reserve for other credit-enhanced transactions explained above was $5.6 million and $5.8 million as of June 30, 2013 and December 31, 2012, respectively. For additional information regarding the recourse liability activity, refer to note 22, in the accompanying consolidated financial statements.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition.

The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit losses in the event of non-performance by the other party to the financial instrument for commitments to extend credit or for forward sales is represented by the contractual amount of these instruments. Doral Financial uses the same credit policies in making these commitments as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses.

The Company purchases mortgage loans and simultaneously enters into a sale and securitization agreement with the same counterparty, essentially a forward contract that meets the definition of a derivative during the period between trade and settlement date.

A letter of credit is an arrangement that represents an obligation on the part of the Company to a designated third party, contingent upon the failure of the Company’s customer to perform under the terms of the underlying contract with the designated third party. The amount of the letter of credit represents the maximum amount of credit risk in the event of non-performance by these customers. Under the terms of a letter of credit, an obligation arises only when the underlying event fails to occur as intended, and the obligation is generally up to a stipulated amount with specified terms and conditions. Letters of credit are used by the customer as a credit enhancement and typically expire without having been drawn upon.

The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if considered necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty.

For additional information, refer to note 23 in the accompanying consolidated financial statements and the “Contractual obligations and other commercial commitments” section included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which was filed with the SEC on March 13, 2013.

RISK MANAGEMENT

The Company’s business is subject to four broad risk categories: interest rate risk, credit risk, operational risk and liquidity risk. The Company has specific policies and procedures which have been designed to identify, measure, and manage those risks to which it is exposed.

Interest Rate and Market Risk Management

Interest rate risk refers to the risk that changes in interest rates may adversely affect the value of the Company’s assets and liabilities, as well as its net interest income. The Company’s risk management policies are designed with the goal of maximizing shareholder value, with an emphasis on the stability of net interest income and the market value of its equity. These policies are also targeted towards the Company remaining well capitalized, preserving adequate liquidity, and meeting various regulatory requirements. The objectives of these risk management policies are pursued within the limits established by the Board of Directors. The Board of Directors has delegated the oversight of interest rate and liquidity risks to the Risk Policy Committee of the Board of Directors.

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The Company’s Asset/Liability Management Committee has been created under the authority of the Board of Directors to manage the Company’s interest rate, market value of equity and liquidity risk. The ALCO is primarily responsible for ensuring that the Company operates within the established asset/liability management policy guidelines and procedures. The ALCO reports directly to the Risk Policy Committee.

The ALCO is responsible for:

• 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.

Interest Rate Risk Measurement and Control

Changes in interest rates can affect the volume of the Company’s mortgage loan originations, the net interest income earned on its portfolio of loans and securities, the amount of gains on loan sales, and the value of its servicing assets, loans, investment securities and other retained interests. Doral Financial manages interest rate exposure related to its assets and liabilities on a consolidated basis.

As part of its interest rate risk management practices, the Company has implemented measures to identify the interest rate risks associated with the Company’s assets, liabilities and off-balance sheet activities. The Company has also developed policies and procedures to control and manage these risks, and continues to improve its interest rate risk management practices. The Company currently manages its interest rate risk by principally focusing on the following metrics: (i) net interest income sensitivity; (ii) market value of equity sensitivity; (iii) effective duration of equity; and (iv) maturity/repricing gaps. The Company’s Asset/Liability Management Policies provide a limit structure for each of these four metrics. A single limit is defined for the effective duration of equity. Net interest income sensitivity limits are set for instantaneous parallel rate shifts. Specific parallel rate shifts defined for net interest income and market value equity limits are -100 bps and 100 bps. Net interest income sensitivity limits are established for different time horizons. Additional limits are also defined for maturity/repricing mismatches, but management continues to emphasize risk management practices and controls based on net interest income and MVE sensitivity, as these measures incorporate the effect of existing asset/liability mismatches. The explanations below provide a brief description of the metrics used by the Company and the methodologies/assumptions employed in the estimation of these metrics:

• Net Interest Income Sensitivity. This refers to the relationship between market interest rates and net interest income due to the maturity mismatches and re-pricing characteristics of the Company’s interest-earning assets, interest-bearing liabilities, and off-balance sheet positions. To measure net interest income’s sensitivity to changes in market interest rates, the Company uses earnings simulation techniques. These simulation techniques forecast net interest income and expense under various rate scenarios in order to measure the interest rate risk exposures of the Company. The primary scenarios considered include instantaneous parallel and non-parallel rate shocks. Net interest income sensitivity is measured for time horizons ranging from 12 to 60 months and, therefore, serves as a measure of short to medium-term earnings risk. The basic underlying assumptions used in net interest income simulations include: (i) the Company maintains a static balance sheet; (ii) full reinvestment of funds in similar product/instruments with similar maturity and re-pricing characteristics are made; (iii) a constant spread; (iv) prepayment rates on mortgages and mortgage related securities are modeled using a multi-factor prepayment model; (v) non-maturity deposit decay and price elasticity assumptions are incorporated, and (vi) the evaluation of embedded options is taken into consideration. To complement and broaden the analysis of earnings risk, the Company also performs earnings simulations for longer time horizons.

• MVE Sensitivity. MVE sensitivity is used to capture and measure the risks associated with longer-term maturity and re-pricing mismatches. The Company uses value simulation techniques for all financial components of the consolidated statement of financial condition. Valuation techniques include static cash flow analysis, 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 MVE to changes in interest rates. Duration measures

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the linear change in MVE caused by changes in interest rates, while, convexity measures the asymmetric changes in MVE caused by changes in interest rates due to the presence of options. The duration and convexity analysis combined provide a better understanding of the sensitivity of the MVE 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 the Company’s economic capital. The measure summarizes the net sensitivity of assets and liabilities, adjusted for off-balance sheet positions.

Interest Rate Risk Management Strategy

The Company’s current interest rate risk management strategy is implemented by the ALCO and is focused on reducing the volatility of the Company’s earnings and to protect the MVE. While the current strategy uses a combination of derivatives and balance sheet management, more emphasis is placed on the balance sheet management side of the strategy.

Net Interest Income Risk. In order to protect net interest income against interest rate risk, the ALCO employs a number of tactics which are evaluated and adjusted in relation to prevailing market conditions. Internal balance sheet management practices are designed to reduce the re-pricing gaps of the Company’s assets and liabilities. However, the Company will use derivatives, mainly interest rate swaps and interest rate caps, as part of its interest rate risk management activities as well. Interest rate swaps represent a mutual agreement to exchange interest rate payments, in which one party pays fixed rate and the counterparty pays a floating rate. For net interest income protection, the Company typically enters into fixed-rate payer/floating-rate receiver swaps to eliminate the variability of cash flows associated with its floating rate debt obligations.

MVE Hedging Strategies. Due to the composition of the Company’s financial assets and liabilities, its earnings are exposed to rising interest rates. The Company measures the market value of all rate sensitive assets, liabilities and off-balance sheet positions, and the difference between assets and liabilities, adjusted for off-balance sheet positions, is termed MVE. The Company measures how MVE fluctuates with different rate scenarios to measure the risk exposure to MVE. Management uses duration matching strategies to manage the fluctuations in the market value of equity, within the long-term targets established by the Board of Directors of the Company.

Duration Risk. Duration is a measure of the impact (in magnitude and direction) of changes in interest rates on the economic value of financial instruments. In order to bring duration risk within the thresholds established by Company policy, management may use a combination of internal liability management techniques and derivative instruments, such as interest rate swaps, Treasury futures, Eurodollar futures, and forward contracts.

Convexity Risk. Convexity is a measure of how much duration changes as interest rates change. For the Company, convexity risk primarily results from mortgage prepayment risk. As part of managing convexity risk, management may use a combination of balance sheet management techniques or derivative instruments, including swaptions, caps, floors, and put or call options on interest rate indexes or related fixed income underlying securities (i.e. Eurodollar or Treasury notes).

Hedging related to Mortgage Banking Activities. As part of the Company’s strategy for managing interest rate risk related to its mortgage banking activities, such as secondary market and servicing assets, the Company may enter into forward agreements to buy or sell MBSs to protect against changes in interest rates that may impact the economic value of servicing assets or the pricing of marketable loan productions.

Hedging the various sources of interest rate risk related to mortgage banking activities is a complex process that requires sophisticated modeling, continuous monitoring and active management. While the Company balances and manages the various aspects related to mortgage activities, there are potential risks to associated earnings. Some of the potential risks include:

• A change in the value of MSRs are recorded in earnings within the accounting period in which the changes occur, whereas the impact of changes in interest rates are reflected in originations with a time lag that affects servicing fee income over time. Thus, even if mortgage activities can be protected from adverse changes in interest rates over a period of time (on a cumulative basis), they may display large variations in earnings from period to period.

• The degree to which the “natural hedge” associated with mortgage banking (i.e. originating and servicing) effectively offsets changes in servicing asset valuations, as their effectiveness 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) against other rate benchmarks, and rate volatility, among others. The interrelation of all these factors is hard to predict and, as such, the ability to perfectly hedge their effects is limited.

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Doral Financial’s Risk Profile

The Company’s goal is to manage market and interest rate risk within targeted levels established and periodically reviewed by the Board of Directors. Interest rate sensitivity represents the relationship between market interest rates and net interest income due to existing maturity and re-pricing imbalances between interest-earning assets and interest-bearing liabilities. Interest rate sensitivity is also defined as the relationship between market interest rates and MVE. The interest risk profile of the Company is measured in the context of net interest income, MVE, maturity/re-pricing gaps and the effective duration of equity.

The risk profile of the Company is managed by use of natural offsets generated by the different components of the balance sheet as a result of the normal course of business operations and through active hedging activities by means of both on-balance sheet and off-balance sheet transactions (i.e. derivative instruments) to achieve targeted risk levels.

The Company’s interest rate risk exposure may be asymmetric due to the presence of embedded options in products and transactions which allow clients and counterparties to modify the maturity of loans, securities, deposits and/or borrowings. Examples of embedded options include the ability of a mortgagee to prepay his/her mortgage or a counterparty exercising its option on a structured funding transaction. Assets and liabilities with embedded options are evaluated taking into consideration the presence of options to estimate their economic price elasticity and also the effect of options in assessing maturity/repricing characteristics of the Company’s balance sheet. The embedded optionality is primarily managed by purchasing or selling options or by other active risk management strategies involving the use of derivatives, including the forward sale of MBSs.

The Company measures interest rate risk and has specific targets for various market rate scenarios. General assumptions for the measurement of interest income sensitivity include: (i) rate shifts are parallel and instantaneous throughout all benchmark yield curves and rate indexes; (ii) behavioral assumptions are driven by simulated market rates under each scenario (i.e. prepayments and/or re-pricing of certain liabilities); and (iii) a static balance sheet is assumed with cash flows reinvested into similar instruments at forecasted market rates (i.e. forward curve and/or static spreads). For net interest income, the Company monitors exposures and has established limits for time horizons ranging from one to three years, although for risk management purposes earning exposures are forecasted for longer time horizons.

The tables below present the risk profile of Doral Financial (taking into account the derivatives) given a 100-basis point parallel and instantaneous increase or decrease in interest rates, as of June 30, 2013 and December 31, 2012.

Table O - Risk Profile

As of June 30, 2013	Market Value of Equity Risk			Net Interest Income  Risk (1)
+ 100 BPS		(5.8	)%		2.4	%
- 100 BPS		7.0	%		(0.8	)%
As of December 31, 2012	Market Value of Equity Risk			Net Interest Income Risk (1)
+ 100 BPS		(6.4	)%		0.7	%
- 100 BPS		6.5	%		(0.1	)%

(1) Based on a change in net interest income over a 12-month horizon.

The net interest income sensitivity measure, adjusted for a 100 basis point parallel and instantaneous rate increase over a 12-month horizon, changed from 0.7% to 2.4% when comparing December 31, 2012 to June 30, 2013.

As of June 30, 2013 the MVE showed lower sensitivity to rising interest rates when compared to December 31, 2012. MVE sensitivity to an increase of 100 basis points in market rates changed from (6.4)% to (5.8)%. The Company continues to actively manage the balance sheet mismatches to maintain the interest rate risk profile in line with targets, mainly through on-balance sheet strategies.

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The following table presents the Company’s investment portfolio’s sensitivity to changes in interest rates. The table below assumes parallel and instantaneous increases and decreases of interest rates as of June 30, 2013 and December 31, 2012.

Table P - Investment Portfolio Sensitivity

(In thousands)
	Change in Fair Value of Available for Sale Investment  Securities
Change in Interest Rates (Basis Points)	June 30, 2013			December 31, 2012
+100	$	(20,035	)	$	(12,974	)
Base		—			—
-100		17,804			6,844

Derivatives

As described above, the Company uses derivatives to manage its exposure to the interest rate risk caused by changes in market interest rates. Derivatives are generally either privately negotiated over-the-counter contracts or standard contracts transacted through regulated exchanges. OTC contracts generally include swaps, caps and collars, forwards and options. Exchange-traded derivatives include futures and options. However, the Company has also designated its interest-rate lock commitments with borrowers as derivatives, in accordance with the applicable accounting guidance.

Freestanding Derivatives

The Company uses derivatives to manage interest-rate risk and generally accounts for such instruments on a mark-to-market basis, with gains or losses charged to earnings as part of net gain (loss) on trading assets and derivatives in the period they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities, after the application of netting arrangements. The fair values of derivatives entered into via regulated exchanges are determined by market prices. The fair values of derivatives purchased in the OTC market are determined by valuation models and validated with prices provided by external sources. The interest-rate lock commitments into which the Company enters with borrowers are also deemed freestanding derivatives, with their fair values based on market prices for similar loans, adjusted for unobservable inputs. The notional amounts of freestanding derivatives totaled $89.5 million and $125.0 million as of June 30, 2013 and December 31, 2012, respectively. Notional amounts indicate the volume of derivative activity, but do not represent the Company’s exposure to market or credit risk.

Doral enters into forward TBA contracts to create an economic hedge on its marketable mortgage inventory and on its MSRs. A forward contract is a transaction in which delivery of the underlying instrument is deferred until after the contract has been made. A TBA is a contract used by the Company when selling mortgage backed securities, whereby the seller agrees to deliver the securities but does not announce how many securities will actually be delivered. Although the delivery is made in the future, the price is determined on the initial trade date. As of June 30, 2013, the Company had a total notional amount of $65.0 million on forward contracts hedging its marketable mortgage inventory. For the six months ended June 30, 2013, Doral recorded gains of approximately $2.5 million on forward contracts.

Derivatives - Hedge Accounting.

The Company designates derivatives under hedge accounting guidelines when it can clearly identify an asset or liability that can be hedged pursuant to the hedge accounting guidelines. As of June 30, 2013 and December 31, 2012, the Company did not have any derivatives designated as hedges under hedge accounting guidelines.

Periodically, the Company enters into various interest-rate swap agreements to manage its interest rate exposure. Interest-rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying principal. The Company typically uses interest rate swaps to convert floating rate advances from FHLB to fixed-rate advances by entering into pay fixed receive floating swaps. In these cases, the Company matches all of the terms in the advance from the FHLB to the floating leg of the interest rate swap. Since both transactions are symmetrically opposite, the effectiveness of the hedging relationship is high. Non-performance by the counterparty exposes the Company to interest rate risk. The Company did not have interest rate swaps outstanding at June 30, 2013.

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 defaulting on their contractual obligations. To manage this credit risk, the Company deals with counterparties of good credit standing. In the case of a ratings downgrade affecting the Company, counterparties may increase the applicable margin requirements under derivative contracts, or may require the Company to terminate the agreements.

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For additional information regarding the Company’s derivatives, refer to note 27 of the accompanying consolidated financial statements and the Risk Management section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 13, 2013.

Credit Risk

Doral 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 available for sale, refer to note 8 of the accompanying consolidated financial statements.

Loans receivable are loans that the Company holds for investment purposes and, therefore, the Company is exposed to the risk of credit losses over the term of the loans. Because many of the Company’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, as well as natural hazards, such as hurricanes, that may affect Puerto Rico. Puerto Rico has experienced depression-level economic conditions since 2006. This island-wide depression has affected borrowers’ disposable incomes and their ability to make payments when due, causing an increase in delinquency and foreclosure rates. While the rate of economic contraction has slowed substantially, the Company believes that these conditions will continue to affect the credit quality of its loans receivable portfolio. In addition, there is evidence that property values have declined from their peak. This has reduced borrowers’ capacity to refinance and increased the Company’s exposure to loss upon default. The decline in property values and increase in expected defaults are incorporated into the loss rates used for calculating the Company’s allowance for loan and lease losses. There has been significantly less fade in residential real estate values in homes under $250,000 in Puerto Rico, which is the price point for the preponderance of the Company’s residential mortgage loan portfolio, than for higher priced homes.

With respect to mortgage loans originated for sale as part of its mortgage banking business, the Company 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 an MBS. With respect to FHA loans, the Company is fully insured by the FHA for the principal against any 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 its ordinary course of business. As part of such transactions, the Company committed to make payments to investors to remedy loan defaults or to repurchase defaulted loans. Refer to “Off-balance sheet activities” within the “Liquidity and Capital Resources” section of the MD&A for additional information regarding recourse obligations. During 2005, the Company discontinued the practice of selling mortgage loans with recourse, except for recourse related to early payment defaults.

The Company’s residential mortgage loan portfolio does not include a significant amount of adjustable interest rate, negative amortization, or other exotic credit features that are common in other parts of the U.S. However, the Company does have a notable portfolio of residential balloon loans. As part of its loss mitigation programs, the Company has granted certain concessions to borrowers in financial difficulties that have proven payment capacity, which may include interest-only periods or temporary interest rate reductions. The payments for these loans will reset at the former payment amount, unless the loan is restructured again or the restructured terms are extended. Substantially all residential mortgage loans are conventional 30-year and 15-year amortizing fixed-rate loans at origination.

The residential mortgage portfolio includes loans that, at some point, were repurchased pursuant to recourse obligations. Repurchases of delinquent loans from recourse obligations totaled $4.7 million and $11.1 million for the three and six months ended June 30, 2013, respectively. When repurchased due to recourse obligations, loans are recorded at their market value, which includes a discount for poor credit performance. Of the residential mortgage loan receivable portfolio (excluding FHA/VA loans) of $3.0 billion as of June 30, 2013, $1.0 billion were reported as impaired, net of prior charge-offs of $77.9 million.

Historically, the Company had provided land acquisition, development, and construction financing to developers of residential housing projects. Construction loans extended to developers are typically adjustable rate loans, indexed to the prime interest rate, with terms generally ranging from 12 to 36 months. The Company principally targeted developers of residential construction for single-family primary-home occupancy. As a result of the negative outlook for the Puerto Rico economy at the time, and its adverse effect on the construction industry, the Company ceased financing new housing projects in Puerto Rico during 2007. Loans collateralized by land in Puerto Rico totaled $107.0 million as of June 30, 2013. Of the Puerto Rico land loans, $80.9 million are reported as impaired, net of prior charge-offs of $69.0 million. Doral also has reserves of $0.2 million allocated to impaired land loans as of June 30, 2013. The Company’s charge-offs and reserves are based upon the delinquency of the loan, expectation as to future recoveries, and external estimates of net realizable value.

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The recorded balance for Puerto Rico residential housing construction loans has decreased from $43.0 million as of December 31, 2012, to $34.4 million as of June 30, 2013. Of these loans, $33.9 million were reported as impaired, net of prior charge-offs of $9.2 million. Management expects the Puerto Rico construction & land portfolio to continue to decrease in future periods.

The Company also originated commercial & industrial and commercial real estate loans in Puerto Rico prior to 2009. Of the $569.2 million of these loans outstanding as of June 30, 2013, $280.4 million were reported as impaired, net of prior charge-offs of $82.9 million.

The Company continues to grow its U.S. loan portfolio, primarily comprised of commercial & industrial loans and commercial real estate loans. During the three months ended June 30, 2013, gross loan receivables of the U.S. operations increased $191.9 million when compared to December 31, 2012. This increase was mainly related to increases in construction & land loans of $146.7 million and in commercial real estate loans of $58.9 million. These increases were partially offset by a decrease of $12.5 million in commercial & industrial loans. Refer to note 11 for more information regarding U.S. loans receivable. The performance of such loans is subject to the continued strength of the New York City and U.S. economies.

Management took aggressive actions during the first three months of 2013 to mitigate the risk in the Puerto Rico loan portfolio, including a reorganization to segregate the problem assets from other areas of the business and significantly expanding the internal professional resources to manage the portfolio. Further actions to develop the organization (including additional resources) will be taken as Doral evaluates sales of its impaired loans. As part of its actions, Doral established a new unit, Doral Recovery, to optimize specific non-core commercial and residential assets within Doral. Non-core assets include virtually all commercial loans and leases, residential mortgage TDRs, residential mortgage loans that are delinquent for more than two years as well as residential and commercial OREO.

The following table presents the Company’s loans past due 30-89 days, excluding non-performing and held-for-sale loans, for the periods indicated.

Table Q - Loans past due 30-89 days

	June 30, 2013						December 31, 2012
(In thousands)	PR		US		Total		PR		US		Total
Consumer
Residential mortgage	$	143,369	$	—	$	143,369	$	127,265	$	—	$	127,265
FHA/VA Loans		4,242		—		4,242		3,934		—		3,934
Other consumer		405		—		405		506		—		506
Total past-due consumer		148,016		—		148,016		131,705		—		131,705
Commercial
Commercial real estate		17,029		—		17,029		43,653		—		43,653
Commercial and industrial		215		—		215		110		—		110
Construction and land		165		—		165		4,257		—		4,257
Total past-due commercial		17,409		—		17,409		48,020		—		48,020
Total past-due loans (1)	$	165,425	$	—	$	165,425	$	179,725	$	—	$	179,725

⁽¹⁾  In accordance with regulatory guidance, the Company defines 30 days past due as when the borrower is delinquent two payments. The Company defines 90 days past due based upon the actual number of days past due, except for residential mortgage loans which are considered 90 days past due when the loan is four payments in arrears.

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The following table sets forth information with respect to the Company’s loans receivable that are past due 90 days and still accruing as of the dates indicated. Loans included in this table are 90 days or more past due as to interest or principal, but still accruing as they are well-secured and in the process of collection.

Table R - Loans past due 90 days and still accruing

	June 30, 2013						December 31, 2012
(In thousands)	PR		US		Total		PR		US		Total
Consumer loans past due 90 days and still accruing
FHA/VA	$	4,000		—	$	4,000	$	6,129	$	—	$	6,129
Credit cards		371		—		371		455		—		455
Other consumer		552		—		552		663		—		663
Total consumer loans past due 90 days and still accruing		4,923		—		4,923		7,247		—		7,247
Commercial loans past due 90 days and still accruing
Commercial and industrial		656		—		656		413		—		413
Total loans past due 90 days and still accruing	$	5,579	$	—	$	5,579	$	7,660	$	—	$	7,660

Non-performing Loans

Doral recognizes interest income on loans receivable on an accrual basis, unless it is determined that collection of all contractual principal or interest is unlikely. In most cases, the Company discontinues recognition of interest income when a loan receivable is 90 days delinquent on principal or interest. Regarding residential mortgage loans, the Company discontinues recognition of interest income when the loan is four payments in arrears, except for mortgage loans insured by the FHA/VA, which are placed in non-accrual status when the loan is ten payments in arrears. Loans determined to be well collateralized, so that ultimate collection of principal and interest is not in question (for example, when the outstanding principal and interest as a percentage of current collateral value is less than 60%), are not placed in non-accrual status, and the Company continues to recognize interest income. When a loan is placed in non-accrual status, all interest accrued and not collected is reversed against interest income in that period. Loans are returned to accrual status when principal and interest are current, if the loan has been restructured and complies with specified criteria (see the Critical Accounting Policies in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2013), or when the loan is well-secured, is in the process of collection, and collectability is no longer doubtful. The Company also places in non-accrual status all construction loans for residential properties classified as substandard, whose sole source of payment is interest reserves funded by the Company.

The Company continues to report TDR loans as non-accrual unless the Company expects to collect all contractual principal and interest and the borrowers have proven repayment capacity for a sufficient amount of time. Previously reversed or un-accrued interest is credited to income in the period of collection when the ultimate collection of principal is no longer in doubt (cash basis). For the three months and six months ended June 30, 2013, the Company would have recognized $13.0 million and $23.4 million, respectively, in additional interest income had all delinquent loans been accounted for on an accrual basis, compared to $14.5 million and $24.4 million for the corresponding 2012 periods. This amount includes interest reversed on loans placed on non-accrual status during the period.

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The following table sets forth information with respect to Doral’s non-performing loans (excluding loans held for sale), OREO and other NPAs as of the dates indicated:

Table S - Non-Performing Assets

	June 30, 2013							December 31, 2012
(In thousands)	PR		US		Total			PR		US		Total
Non-performing consumer, excluding FHA/VA (1)
Residential mortgage	$	408,745	$	870	$	409,615		$	432,157	$	554	$	432,711
Other consumer (2)		98		—		98			428		—		428
Total non-performing consumer, excluding FHA/VA		408,843		870		409,713			432,585		554		433,139
Non-performing commercial
Commercial real estate		190,926		646		191,572			189,200		646		189,846
Commercial and industrial		4,673		—		4,673			6,106		—		6,106
Construction and land		104,737		2,697		107,434			109,306		4,382		113,688
Total non-performing commercial		300,336		3,343		303,679			304,612		5,028		309,640
Total non-performing loans, excluding FHA/VA		709,179		4,213		713,392			737,197		5,582		742,779
OREO and repossessed units
Residential mortgage		82,734		—		82,734			61,648		—		61,648
Commercial real estate		19,144		—		19,144			22,148		—		22,148
Construction and land		27,132		477		27,609			27,650		477		28,127
Total OREO and repossessed units		129,010		477		129,487			111,446		477		111,923
Non-performing FHA/VA guaranteed residential(1)(3)		34,630		—		34,630			40,177		—		40,177
Total non-performing assets (4)	$	872,819	$	4,690	$	877,509		$	888,820	$	6,059	$	894,879
Total NPAs as a percentage of the net loans receivable portfolio, and OREO						14.14	%						14.55	%
Total NPAs as a percentage of consolidated total assets						10.30	%						10.56	%
Total NPLs (excluding FHA/VA guaranteed loans) to gross loans receivable (excluding FHA/VA guaranteed loans)						11.63	%						12.15	%
ALLL to NPLs (excluding held-for-sale and FHA/VA guaranteed loans)						16.41	%						18.22	%

⁽¹⁾  FHA/VA delinquent loans are excluded from those 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⁾  Includes delinquencies related to personal, revolving lines of credit and other consumer loans.

⁽³⁾  FHA/VA loans are considered non-performing when the loan is ten payments in arrears, since the principal balance of these loans is insured or guaranteed under the applicable FHA/VA program and interest is, in most cases, fully recovered in foreclosure proceedings.

⁽⁴⁾  Excludes FHA and VA claims amounting to $14.9 million and $17.6 million as of June 30, 2013 and December 31, 2012, respectively.

Currently, Doral Recovery is the segment designated to optimize specific non-core commercial and residential assets within the Company. Non-core assets include virtually all commercial loans and leases, residential mortgage TDRs, residential mortgage loans that are delinquent for more than two years, as well as residential and commercial OREO.

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The following tables provide the non-performing loans activity by portfolio (considering only loans receivable) for the periods indicated.

Table T - Non-Performing Loans Activity

	Three months ended June 30, 2013
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial and  Industrial			Construction and Land			Total Commercial			Total
Balance at beginning of period	$	436,625		$	108		$	436,733		$	223,277		$	5,292		$	109,245		$	337,814		$	774,547
Additions		41,446			66			41,512			10,621			960			294			11,875			53,387
Repurchases		3,059			—			3,059			82			—			—			82			3,141
Remediated/Cured		(37,560	)		(17	)		(37,577	)		(10,459	)		(75	)		(364	)		(10,898	)		(48,475	)
Foreclosed		(15,181	)		—			(15,181	)		—			—			(167	)		(167	)		(15,348	)
Write-downs		(18,774	)		(59	)		(18,833	)		(31,949	)		(1,504	)		(1,574	)		(35,027	)		(53,860	)
Balance at end of period	$	409,615		$	98		$	409,713		$	191,572		$	4,673		$	107,434		$	303,679		$	713,392

	Three months ended June 30, 2012
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial and Industrial			Construction and Land			Total Commercial			Total
Balance at beginning of period	$	401,760		$	274		$	402,034		$	188,824		$	2,634		$	120,255		$	311,713		$	713,747
Additions		74,257			82			74,339			26,710			493			7,793			34,996			109,335
Repurchases		—			—			—			—			—			—			—			—
Remediated/Cure		(70,163	)		(108	)		(70,271	)		(19,329	)		(68	)		(1,836	)		(21,233	)		(91,504	)
Foreclosed		(5,433	)		—			(5,433	)		(2,784	)		—			—			(2,784	)		(8,217	)
Write-downs		(8,007	)		—			(8,007	)		(1,861	)		(84	)		(7,965	)		(9,910	)		(17,917	)
Balance at end of period	$	392,414		$	248		$	392,662		$	191,560		$	2,975		$	118,247		$	312,782		$	705,444

	Six months ended June 30, 2013
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial and Industrial			Construction and Land			Total Commercial			Total
Balance at beginning of period	$	432,711		$	428		$	433,139		$	189,846		$	6,106		$	113,688		$	309,640		$	742,779
Additions		78,411			72			78,483			35,606			3,861			302			39,769			118,252
Repurchases		5,621			—			5,621			82			—			—			82			5,703
Remediated/Cure		(54,270	)		(201	)		(54,471	)		(17,564	)		(72	)		(320	)		(17,956	)		(72,427	)
Foreclosed		(24,945	)		—			(24,945	)		(1,832	)		—			(440	)		(2,272	)		(27,217	)
Write-downs		(27,913	)		(201	)		(28,114	)		(14,566	)		(5,222	)		(5,796	)		(25,584	)		(53,698	)
Balance at end of period	$	409,615		$	98		$	409,713		$	191,572		$	4,673		$	107,434		$	303,679		$	713,392

	Six months ended June 30, 2012
(In thousands)	Non-FHA/VA Residential			Other Consumer			Total Consumer			Commercial Real Estate			Commercial and Industrial			Construction and Land			Total Commercial			Total
Balance at beginning of period	$	299,011		$	352		$	299,363		$	169,255		$	2,836		$	98,147		$	270,238		$	569,601
Additions		251,669			264			251,933			61,584			578			33,180			95,342			347,275
Repurchases		3,156			—			3,156			—			—			—			—			3,156
Remediated/Cure		(113,996	)		(368	)		(114,364	)		(24,639	)		(270	)		(2,691	)		(27,600	)		(141,964	)
Foreclosed		(15,687	)		—			(15,687	)		(6,793	)		(72	)		(144	)		(7,009	)		(22,696	)
Write-downs		(31,739	)		—			(31,739	)		(7,847	)		(97	)		(10,245	)		(18,189	)		(49,928	)
Balance at end of period	$	392,414		$	248		$	392,662		$	191,560		$	2,975		$	118,247		$	312,782		$	705,444

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Non-performing assets decreased by $17.4 million, or 1.9%, to $877.5 million as of June 30, 2013, compared to $894.9 million as of December 31, 2012. This is primarily attributed to a $23.1 million decrease in residential mortgage NPLs, a $6.3 million decrease in construction & land NPLs, a $5.5 million decrease in FHA/VA NPLs, and a $3.0 million decrease in commercial real estate OREO. These decreases were partially offset by a $21.1 million increase in residential mortgage OREO.

Total NPLs, excluding FHA/VA guaranteed residential loans, decreased $29.4 million, or 4.0%, to $713.4 million as of June 30, 2013, compared to $742.8 million as of December 31, 2012. This is primarily attributed to the aforementioned $23.1 million decrease in residential mortgage NPLs and $6.3 million decrease in construction & land NPLs. The $5.5 million decrease in FHA/VA NPLs during the six months ended June 30, 2013 was primarily due to loss mitigation and front-end collection efforts.

OREO and repossessed units increased by $17.6 million, or 15.7%, to $129.5 million as of June 30, 2013, compared to $111.9 million as of December 31, 2012. This was primarily attributed to the aforementioned $21.1 million increase in residential mortgage OREO, offset by a $3.0 million and $0.5 million decrease in commercial real estate and construction and land OREO, respectively.

Composition of Residential Mortgage NPLs

The following table presents the composition of residential mortgage NPLs according to their actual loan-to-value, and whether they are covered by mortgage insurance. For purposes of this disclosure, actual loan-to-value ratios are calculated based on current unpaid balances and the most recent appraisals available.

Table U - Composition of mortgage NPLs (excluding loans held for sale), according to LTV and mortgage insurance.

	As of June 30, 2013
Collateral Type	Loan To Value			Distribution
FHA/VA loans		n/a			23.2	%
Loans with private mortgage insurance		n/a			5.8	%
Loans with no mortgage insurance		< 60	%		10.7	%
		61-80	%		21.6	%
		81-90	%		12.6	%
		91	% +		26.1	%
Total loans					100.0	%

Loan-to-value ratios are considered when establishing the levels of general reserves for the residential mortgage portfolio. The assumed loss severity fluctuates, depending on the size of the unpaid principal balance and the loan-to-value level of individual loans. The original property appraisal obtained at the time of the loan was used to calculate the loan-to-value for 4% of the loans presented in the table above, with a more recent appraisal used for the other 96% of loans presented.

Construction & Land Loans

Construction & land loans include NPLs of $107.4 million as of June 30, 2013, or 14.4% of total NPLs, excluding FHA/VA NPLs (97.5% of which are in Puerto Rico). As of June 30, 2013, 23.9% of the loans within the construction & land portfolio were considered NPLs. The Company’s construction & land loan portfolio reflected a decrease of $6.3 million in NPLs during the six months ended June 30, 2013, due primarily to foreclosures and write-downs totaling $6.2 million.

Although the Company continues to take steps to mitigate the credit risk underlying its construction loans, the ultimate performance of these loans will be affected by each borrower’s ability to complete the project, maintain the pricing level of the housing units within the project, and sell the inventory of units within a reasonable timeframe.

During the three months ended June 30, 2013, the Company did not enter into any commitments to fund new construction loans for residential housing projects in Puerto Rico.

Other Real Estate Owned

The Company’s OREO portfolio is presented at the estimated fair value, net of disposition costs. The fair value of an OREO is generally determined on the basis of internal and external appraisals and physical inspections. A charge to the allowance for loan

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and lease losses is recognized for any initial write-down to fair value, less costs to sell. Any losses in the carrying value of the properties arising from periodic appraisals are charged to expense in the period incurred. Holding costs, property taxes, maintenance and other similar expenses are charged to expense in the period incurred.

Foreclosures have increased in recent periods as the volume of the NPLs has increased. The number of OREO sales increased in 2013 when compared to 2012, due to the Company’s strategic decision to more aggressively market the OREO portfolio in order to accelerate sales.

During the six months ended June 30, 2013, the Company sold 197 OREO properties, representing $19.3 million in carrying value, compared to 84 OREO properties representing $14.2 million in carrying value, during the six months ended June 30, 2012. Gains and losses on sales of OREO are recognized within other expenses in the Company’s consolidated statements of operations.

Loan Modifications and Troubled Debt Restructurings

As a result of weakening economic conditions in Puerto Rico, many borrowers have temporarily lost their means to pay their contractual loan principal and interest obligations. As a result of their economic hardships, a number of borrowers have defaulted on their debt obligations, including residential mortgage loans. The lower level of income and economic activity has also led to fewer newly constructed residential home sales, increased commercial real estate vacancy, and lower business revenues, which has led to increased defaults on commercial, commercial real estate, construction and land loans. Management has concluded that it is in the Company’s best interest, and in the best interest of the Puerto Rican economy and citizenry, if certain defaulted loans are restructured in a manner that keeps borrowers in their homes, or businesses operating, rather than foreclosing on the loan collateral, if it is concluded that the borrower’s payment difficulties are temporary and the Company will, in time, collect the agreed upon loan principal and interest.

The Company has created a number of loan modification programs to help borrowers stay in their homes and operate their businesses, which also optimizes borrower performance and returns to the Company. In some cases, the restructure or loan modification fits the definition of a “Troubled Debt Restructuring” as defined by current accounting guidance. These modification programs are designed to provide temporary relief and, if necessary, longer term financial relief to the borrower. The Company’s consumer loan loss mitigation program (including consumer loan products and residential mortgage loans) grants a concession for economic or legal reasons related to the borrowers’ financial difficulties that it would not otherwise consider. The Company’s loss mitigation programs can provide for one or more of the following: (i) movement of unpaid principal and interest to the end of the loan; (ii) extension of the loan term for up to ten years; (iii) deferral of principal payments for a period of time; or (iv) a reduction of interest rates for a period of up to five years or, in some cases, permanently. Currently, none of the programs adopted by the Company provide for the forgiveness of contractually due principal or interest. Deferred principal and uncollected interest are added to the end of the loan term at the time of the restructuring and uncollected interest is not recognized as income until collected when the loan is paid off. It is the Company’s intention to make these programs available to those borrowers who have defaulted, or are likely to default permanently, on their loan and would lose their homes in foreclosure action absent a lender concession. However, the Company will move properties into foreclosure if the Company is not reasonably assured that the borrower will be able to repay all contractual principal or interest.

Modified loans (including mortgage loans which have reset) continue to be accounted for as TDRs, but are removed from amounts reported as TDRs, if: (a) they were modified in a prior calendar year, (b) the borrower has made at least six consecutive payments in accordance with their modified terms, and (c) the new effective yield was at least equal to the market rate for similar loans at the time of modification. In addition to the aforementioned criteria, the loan must not have a payment reset pending.

Regarding its commercial loan loss mitigation programs (including commercial real estate, commercial, land and construction loan portfolios), the Company makes the determination on a loan-by-loan basis at the time of restructuring as to whether a concession was made for economic or legal reasons relating to the borrower’s financial difficulty. Concessions made for commercial loans may include reductions in interest rates, extensions of maturity, waiving of borrower covenants, debt or interest forgiveness, or other contract changes that could be considered concessions. The Company mitigates losses from loan defaults within its commercial loan portfolio through its loan workout function. The function’s objectives are to minimize losses / maximize recoveries upon default of large and small credit relationships alike. The function uses Company embedded relationship officers, loan workout specialists, collection specialists, attorneys, as well as third party service providers, to supplement the Company’s internal resources. In the case of construction and development loans for residential projects, the workout function monitors project specifics, such as project management and marketing, among other things.

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Loan modifications, on the loans receivable portfolio, that are considered troubled debt restructurings completed as of June 30, 2013 and December 31, 2012, were as follows:

Table V - Loan modifications considered TDRs (excluding loans held for sale)

	June 30, 2013				December 31, 2012
(In thousands)	Total TDRs		Non-Performing TDRs		Total TDRs		Non-Performing TDRs
Consumer modifications
Residential mortgage	$	576,889	$	296,428	$	627,803	$	302,215
FHA/VA guaranteed residential		13,498		9,506		14,521		10,497
Other consumer		1,073		71		1,098		56
Total consumer		591,460		306,005		643,422		312,768
Commercial modifications
Commercial real estate		126,499		62,689		114,144		65,814
Commercial and industrial		3,258		952		6,996		3,666
Construction and land		59,898		42,697		64,045		46,492
Total commercial		189,655		106,338		185,185		115,972
Total TDRs	$	781,115	$	412,343	$	828,607	$	428,740

Residential mortgage TDRs including FHA/VA guaranteed residential mortgage loans, consist of $594.3 million, or 75.7% of total TDRs, as of June 30, 2013. Of the residential mortgage TDRs, $250.7 million, or 43.2% were restructured at effective interest rates lower than the market interest rate at the time of modification. As of June 30, 2013, $233.0 million of residential mortgage TDRs had an effective rate equal to or higher than the market interest rate, and 70.6% of those loans were currently making payments complying with the new terms. It is expected that not all loans eligible to be excluded from TDR reporting will meet the performance criteria for exclusion, and that new loans will be restructured and meet the requirements to be reported as a TDR, so the total TDR balance is not expected to decline by the amount described.

Commercial & industrial and commercial real estate TDRs consist of $129.8 million, or 16.5% of total TDRs, as of June 30, 2013. Of the commercial & industrial and commercial real estate TDRs, $24.6 million, or 19.0%, were restructured at effective interest rates lower than the market interest rate at the time of modification. As of June 30, 2013, $62.9 million of commercial & industrial and commercial real estate TDRs had an effective rate equal to or higher than the market interest rate, and 79.7% of those loans were currently making payments complying with the new terms. It is expected that not all loans eligible to be excluded from TDR reporting will meet the performance criteria for exclusion, and that new loans will be restructured and meet the requirements to be reported as a TDR, so the total TDR balance is not expected to decline by the amount described.

The table below illustrates total restructured loans, as well as those that are contractually non-performing, as of June 30, 2013, by year of restructure.

Table W - Total and contractually non-performing TDR residential mortgage loans by restructure year

(Dollars in thousands)	Total TDR Balance (1)		Contractually non- performing as of June 30, 2013 (2)		Percentage of contractually non-performing
Year restructured
2009 and prior	$	100,720	$	22,172		22.0	%
2010		175,098		103,214		58.9	%
2011		90,710		47,580		51.5	%
2012		112,186		29,451		25.8	%
2013		111,673		1,931		1.7	%
	$	590,387	$	204,348		34.4	%

⁽¹⁾  Loans are included in the period of most recent restructure, if subject to more than one restructure.

⁽²⁾  Using bank regulatory definition of four or more payments past due.

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The following table presents the Company’s TDR activity (excluding loans held for sale) for the six months ended June 30, 2013.

Table X - TDRs Activity

(In thousands)	Six months ended June 30, 2013
Beginning balance	$	828,607
Loans entering TDR status		151,413
Loans leaving TDR status		148,265
Principal amortization		25,409
Loans paid off and write-downs		14,088
Loans transferred to real estate held for sale		11,143
Ending balance	$	781,115

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Allowance for Loan and Lease Losses

The following table presents the Company’s provision, charge-offs and recoveries for the ALLL and provides allocation of the ALLL to the various loan products for the periods indicated.

Table Y - Allowance for Loan and Lease Losses by loan type and geographical location

	Three months ended June 30,
	2013									2012
(Dollars in thousands)	PR			US			Total			PR			US			Total
Balance at beginning of period	$	113,020		$	12,270		$	125,290		$	157,214		$	9,576		$	166,790
Provision/(Reversal) for loans and lease losses:
Non-FHA/VA residential mortgage		4,520			(73	)		4,447			2,548			(18	)		2,530
Other consumer		265			—			265			448			—			448
Total consumer		4,785			(73	)		4,712			2,996			(18	)		2,978
Commercial real estate		286			(675	)		(389	)		3,392			456			3,848
Commercial and industrial		(87	)		59			(28	)		(1,561	)		664			(897	)
Construction and land		(28	)		1,269			1,241			(650	)		(70	)		(720	)
Total commercial		171			653			824			1,181			1,050			2,231
Total provision for loan and lease losses		4,956			580			5,536			4,177			1,032			5,209
Charge-offs:
Non-FHA/VA residential mortgage		(15,404	)		—			(15,404	)		(12,742	)		—			(12,742	)
Other Consumer		(552	)		—			(552	)		(1,085	)		—			(1,085	)
Total consumer		(15,956	)		—			(15,956	)		(13,827	)		—			(13,827	)
Commercial real estate		(3,615	)		—			(3,615	)		(4,260	)		—			(4,260	)
Commercial and industrial		(598	)		(14	)		(612	)		(159	)		—			(159	)
Construction and land		(99	)		—			(99	)		(2,517	)		—			(2,517	)
Total commercial		(4,312	)		(14	)		(4,326	)		(6,936	)		—			(6,936	)
Total charge-offs		(20,268	)		(14	)		(20,282	)		(20,763	)		—			(20,763	)
Recoveries:
Non-FHA/VA residential mortgage		870			—			870			574			—			574
Other consumer		214			—			214			318			—			318
Total consumer		1,084			—			1,084			892			—			892
Commercial real estate		458			250			708			526			—			526
Commercial and industrial		94			—			94			35			—			35
Construction and land		37			—			37			—			—			—
Total commercial		589			250			839			561			—			561
Total recoveries		1,673			250			1,923			1,453			—			1,453
Net charge-offs		(18,595	)		236			(18,359	)		(19,310	)		—			(19,310	)
Balance at end of period	$	99,381		$	13,086		$	112,467		$	142,081		$	10,608		$	152,689
ALLL to period-end loans receivable								1.82	%								2.49	%
ALLL to period-end loans receivable (excluding FHA/VA guaranteed loans and loans on savings deposits)								1.83	%								2.52	%
Provision for loan and lease losses to net charge-offs								30.15	%								26.98	%
Net annualized charge-offs to average loans outstanding								0.30	%								0.32	%
ALLL to net charge-offs on an annualized basis								153.15	%								196.60	%

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Table - Z - Allowance for Loan and Lease Losses Activity by loan type and geographical location

	Six months ended June 30,
	2013									2012
(Dollars in thousands)	PR			US			Total			PR			US			Total
Balance at beginning of period	$	121,768		$	13,575		$	135,343		$	94,400		$	8,209		$	102,609
Provision/(Reversal) for loans and lease losses:
Non-FHA/VA residential mortgage		13,824			(73	)		13,751			71,459			—			71,459
Other consumer		360			—			360			49			—			49
Total consumer		14,184			(73	)		14,111			71,508			—			71,508
Commercial real estate		4,293			(845	)		3,448			21,997			1,337			23,334
Commercial and industrial		3,733			59			3,792			(1,424	)		1,085			(339	)
Construction and land		1,639			1,269			2,908			25,910			(23	)		25,887
Total commercial		9,665			483			10,148			46,483			2,399			48,882
Total provision for loan and lease losses		23,849			410			24,259			117,991			2,399			120,390
Charge-offs:
Non-FHA/VA residential mortgage		(29,396	)		—			(29,396	)		(45,073	)		—			(45,073	)
Other Consumer		(1,100	)		—			(1,100	)		(2,404	)		—			(2,404	)
Total consumer		(30,496	)		—			(30,496	)		(47,477	)		—			(47,477	)
Commercial real estate		(13,213	)		—			(13,213	)		(10,604	)		—			(10,604	)
Commercial and industrial		(4,495	)		(14	)		(4,509	)		(186	)		—			(186	)
Construction and land		(1,767	)		(1,185	)		(2,952	)		(13,951	)		—			(13,951	)
Total commercial		(19,475	)		(1,199	)		(20,674	)		(24,741	)		—			(24,741	)
Total charge-offs		(49,971	)		(1,199	)		(51,170	)		(72,218	)		—			(72,218	)
Recoveries:
Non-FHA/VA residential mortgage		2,389			—			2,389			690			—			690
Other consumer		401			—			401			586			—			586
Total consumer		2,790			—			2,790			1,276			—			1,276
Commercial real estate		807			300			1,107			596			—			596
Commercial and industrial		101			—			101			36			—			36
Construction and land		37			—			37			—			—			—
Total commercial		945			300			1,245			632			—			632
Total recoveries		3,735			300			4,035			1,908			—			1,908
Net charge-offs		(46,236	)		(899	)		(47,135	)		(70,310	)		—			(70,310	)
Balance at end of period	$	99,381		$	13,086		$	112,467		$	142,081		$	10,608		$	152,689
ALLL to period-end loans receivable								1.82	%								2.49	%
ALLL to period-end loans receivable (excluding FHA/VA guaranteed loans and loans on savings deposits)								1.83	%								2.52	%
Provision for loan and lease losses to net charge-offs								51.47	%								171.23	%
Net annualized charge-offs to average loans outstanding								1.53	%								2.30	%
ALLL to net charge-offs on an annualized basis								119.30	%								108.58	%

Refer to the Provision for Loan and Lease Losses in Item 2 of this Current Report on Form 10-Q for additional information regarding the provision for loan losses.

As of June 30, 2013, the Company’s allowance for loan and lease losses was $112.5 million, a decrease of $22.9 million, or 16.9%, from $135.3 million as of December 31, 2012. This decrease resulted from charge-offs totaling $51.2 million, partially offset by recoveries of $4.0 million and a provision of $24.3 million.

The following table sets forth information concerning the internal allocation of Doral Financial’s allowance for loan and lease losses by category and the percentage of loans in each category to total loans as of the dates indicated:

Table AA - Allocation of the Allowance for Loan and Lease Losses

	June 30, 2013					December 31, 2012
(Dollars in thousands)	Total		Percentage			Total		Percentage
Consumer:
Residential mortgage	$	80,843		72	%	$	94,099		69	%
Other consumer		2,229		2	%		2,568		2	%
Total consumer		83,072		74	%		96,667		71	%
Commercial:
Commercial real estate		13,693		12	%		22,351		17	%
Commercial and industrial		9,176		8	%		9,792		7	%
Construction and land		6,526		6	%		6,533		5	%
Total commercial		29,395		26	%		38,676		29	%
Total	$	112,467		100	%	$	135,343		100	%

Adjusted Coverage Ratios

As of June 30, 2013, Doral Financial’s allowance for loan and lease loss coverage ratios for the portfolio (1.82%) and for non-performing loans (15.77%) incorporates the credit risks and inherent losses of this portfolio; however, Doral believes adding back partial charge-offs to the reported allowance for loan and lease losses and other related discounts that reduce credit losses when a property is foreclosed, provides more meaningful and comparable information as to the level to which Doral has recognized the credit losses in its portfolio. The following table provides information regarding Doral Financial’s recognition of credit losses absorbed by the allowance for loan and lease losses, previous partial charge-offs, and other credit related discounts:

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Table BB - Adjusted Coverage Ratios

As of June 30, 2013	Loans Receivable
(Dollars in thousands)	UPB		Recorded Investment		ALLL		Partial Charge-offs, Net Deferred Fees and Credit Related Discounts		ALLL plus Partial Charge-offs and Credit Discounts		Adjusted Coverage Ratio
Consumer
Residential mortgage	$	3,103,791	$	2,997,420	$	80,843	$	106,371	$	187,214		6.03	%
FHA/VA guaranteed residential mortgage		52,932		52,735		—		197		198		0.37	%
Consumer Loans		21,622		21,377		2,229		245		2,473		11.44	%
Total consumer		3,178,345		3,071,532		83,072		106,813		189,885		5.97	%
Commercial
Commercial real estate		1,195,472		1,138,553		13,693		56,919		70,612		5.91	%
Commercial and industrial		1,533,701		1,529,558		9,176		4,143		13,319		0.87	%
Construction and land		531,960		449,002		6,526		82,958		89,484		16.82	%
Total commercial		3,261,133		3,117,113		29,395		144,020		173,415		5.32	%
Total	$	6,439,478	$	6,188,645	$	112,467	$	250,833	$	363,300		5.64	%

	Non-Performing Loans
(Dollars in thousands)	UPB		Recorded Investment		ALLL		Partial Charge-offs, Net Deferred Fees and Credit Related Discounts		ALLL plus Partial Charge-offs and Credit Discounts		Adjusted Coverage Ratio
Consumer
Residential mortgage	$	478,376	$	409,615	$	80,843	$	68,761	$	149,604		31.27	%
FHA/VA guaranteed residential mortgage		34,811		34,630		—		181		181		0.52	%
Consumer Loans		286		98		2,229		188		2,417		845.10	%
Total consumer		513,473		444,343		83,072		69,130		152,202		29.64	%
Commercial
Commercial real estate		245,382		191,572		13,693		53,810		67,503		27.51	%
Commercial and industrial		5,396		4,673		9,176		723		9,899		183.46	%
Construction and land		184,763		107,434		6,526		77,329		83,855		45.39	%
Total commercial		435,541		303,679		29,395		131,862		161,257		37.02	%
Total	$	949,014	$	748,022	$	112,467	$	200,992	$	313,459		33.03	%

As of December 31, 2012	Loans Receivable
(Dollars in thousands)	UPB		Recorded Investment		ALLL		Partial Charge-offs, Net Deferred Fees and Credit Related Discounts		ALLL plus Partial Charge-offs and Credit Discounts		Adjusted Coverage Ratio
Consumer
Residential mortgage	$	3,211,419	$	3,119,966	$	94,099	$	91,453	$	185,552		5.78	%
FHA/VA guaranteed residential mortgage		59,714		59,699		—		15		15		0.03	%
Consumer Loans		24,949		24,713		2,568		236		2,804		11.24	%
Total consumer		3,296,082		3,204,378		96,667		91,704		188,371		5.71	%
Commercial
Commercial real estate		1,157,809		1,111,064		22,351		46,745		69,096		5.97	%
Commercial and industrial		1,560,143		1,551,722		9,792		8,421		18,213		1.17	%
Construction and land		387,220		307,646		6,533		79,574		86,107		22.24	%
Total commercial		3,105,172		2,970,432		38,676		134,740		173,416		5.58	%
Total	$	6,401,254	$	6,174,810	$	135,343	$	226,444	$	361,787		5.65	%

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	Non-Performing Loans
(Dollars in thousands)	UPB		Recorded Investment		ALLL		Partial Charge-offs, Net Deferred Fees and Credit Related Discounts		ALLL plus Partial Charge-offs and Credit Discounts		Adjusted Coverage Ratio
Consumer
Residential mortgage	$	497,813	$	432,711	$	94,099	$	65,102	$	159,201		31.98	%
FHA/VA guaranteed residential mortgage		40,198		40,177		—		21		21		0.05	%
Consumer Loans		616		428		2,568		188		2,756		447.40	%
Total consumer		538,627		473,316		96,667		65,311		161,978		30.07	%
Commercial
Commercial real estate		240,549		189,846		22,351		50,703		73,054		30.37	%
Commercial and industrial		6,428		6,106		9,792		322		10,114		157.34	%
Construction and land		189,489		113,688		6,533		75,801		82,334		43.45	%
Total commercial		436,466		309,640		38,676		126,826		165,502		37.92	%
Total	$	975,093	$	782,956	$	135,343	$	192,137	$	327,480		33.58	%

Considering the effect of partial charge-offs, credit related discounts and deferred fees, net, the Company’s coverage ratio was 5.64% as of June 30, 2013 and 5.65% as of December 31, 2012. The slight decrease in this coverage ratio was largely due to a release of approximately $4.6 million in allowance for loan losses related to the correction of $6.2 million in overstated forbearance balances on residential mortgage loans modified between January 1, 2011 and June 30, 2013. This was partially offset by an increase of approximately $21.7 million and $2.7 million in partial charge-offs and credit related discounts and deferred fees, net, respectively. The ALLL plus partial charge-offs and credit discounts to non-performing loans coverage ratio reflected a slight decrease, from 33.58% at December 31, 2012 to 33.03% at June 30, 2013 mostly related to the decrease in the ALLL balance.

The following table presents the Company’s recorded investment in impaired loans and the related ALLL.

Table CC - Impaired loans and related allowance

(In thousands)	June 30, 2013		December 31, 2012
Impaired loans with allowance	$	952,024	$	1,135,759
Impaired loans without allowance		490,850		258,630
Total impaired loans	$	1,442,874	$	1,394,389
Related allowance	$	61,008	$	73,615
Average impaired loan portfolio (for the six months ended June 30, 2013)	$	1,425,541	$	1,344,427

Impaired loans without an allowance includes impaired loans for which a partial charge-off, equal to the estimated loss, has been recorded and further reserves are not considered necessary as of the report date.

Counterparty Risk

The Company has exposure to many different counterparties, and it routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and other institutional clients. Loans, derivatives, investments, repurchase agreements, other borrowings, and receivables, among others, expose the Company to counterparty risk. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. In addition, the Company’s credit risk may be impacted when the collateral held by it cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the Company. Any such losses could have a material and adverse effect on the Company’s results of operations.

The Company has procedures in place to mitigate the impact of default among its counterparties. The Company requests collateral for most credit exposures with other financial institutions and monitors these on a regular basis. Nevertheless, market volatility could impact the valuation of collateral held by the Company and result in losses.

Operational Risk

Operational risk includes the potential for financial losses resulting from failed or inadequate controls. Operational risk is inherent in every aspect of business operations, and can result from a range of factors including human judgment, process or system

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failures, business interruptions, or attacks, damage or unauthorized access to our networks, systems, computers and data. Operational risk is present in all of Doral Financial’s business processes, including financial reporting. The Company has adopted a policy governing the requirements for operational risk management activities. This policy defines the roles and responsibilities for identifying key risks, key risks indicators, estimation of probabilities and magnitudes of potential losses and monitoring trends.

Overview of Operational Risk Management

Doral Financial has a corporate-wide Chief Risk Officer, who is responsible for implementing the process of managing the risks faced by the Company. The Chief Risk Officer is responsible for coordinating operational risk identification and monitoring throughout Doral Financial with the Company’s Internal Audit group. In addition, the Internal Audit function provides support to facilitate compliance with Doral Financial’s system of policies and controls and to ensure that adequate attention is given to correct issues identified.

Internal Control Over Financial Reporting

For a detailed discussion of the Management’s Report on Internal Control Over Financial Reporting as of December 31, 2012, please refer to Part II, Item 9A. Controls and Procedures, of the Company’s 2012 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2013.

Liquidity Risk

For a discussion of the risks associated with Doral Financial’s ongoing need for capital to finance its lending, servicing and investing activities, please refer to “Liquidity and Capital Resources” above.

General Business, Economic and Political Conditions; Puerto Rico Economy and Fiscal Condition

The Company’s business and financial results are sensitive to general business and economic conditions in Puerto Rico and the United States. Significant business and economic conditions include short-term and long-term interest rates, inflation and the strength or weakness of the Puerto Rico and United States economies and housing markets. If any of these conditions deteriorate, the Company’s business and financial results could be adversely affected. For example, business and economic conditions that negatively impact household income could decrease the demand for residential mortgage loans and increase the number of customers who become delinquent or default on their loans; or, a dramatically rising interest rate environment could decrease the demand for loans and negatively affect the value of the Company’s investments and loans.

Inflation also generally results in increases in general and administrative expenses. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Please refer to “Risk Management” above for a discussion of the effects of changes of interest rates on the Company’s operations.

Given that almost all of our business is in Puerto Rico and the United States and given the degree of interrelation between Puerto Rico’s economy and that of the United States, we are particularly exposed to downturns in the United States economy. Dramatic declines in the Puerto Rico and United States housing markets over the past few years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions.

The United States and other countries recently faced a severe economic crisis, including a major recession. These adverse economic conditions have negatively affected, and are likely to continue to negatively affect for some time, the Company’s assets, including its loans and securities portfolios, capital levels, results of operations and financial condition. In response to the economic crisis, the United States and other governments established a variety of programs and policies designed to mitigate the effects of the crisis. These programs and policies appear to have stabilized the severe financial crisis that occurred in the second half of 2008, but the extent to which these programs and policies will assist in a continued economic recovery or may lead to adverse consequences, whether anticipated or unanticipated, is still unclear.

In addition, economic uncertainty that may result from the downgrading of the United States long-term debt, from fiscal imbalances in federal, state and local municipal finances combined with the political difficulties in resolving these imbalances, and from debt and other economic problems of several European countries, may directly or indirectly adversely impact economic conditions faced by the Company and its customers. Any increase in the severity or duration of adverse economic conditions, including a double-dip recession in the United States, would adversely affect the Company’s financial condition and results of operations.

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The Company’s business activities and credit exposure are concentrated in Puerto Rico. Consequently, its financial condition and results of operations are highly dependent on economic conditions in Puerto Rico.

Puerto Rico’s economy entered into a recession that began in the fourth quarter of the fiscal year that ended June 30, 2006, a fiscal year in which the real gross national product grew by only 0.5%. For fiscal years 2007, 2008, 2009, 2010 and 2011, Puerto Rico’s real gross national product decreased by 1.2%, 2.9%, 3.8%, 3.6% and 1.6%, respectively. According to the latest information and projections issued by the Puerto Rico Planning Board in April 2013, real gross national product for fiscal year 2012 increased by only 0.1%, real gross national product for fiscal year 2013 is projected to decrease 0.4%, and real gross national product for fiscal year 2014 is projected to increase 0.2%.

The long recession in Puerto Rico has resulted in, among other things, a reduction in lending activity and an increase in the rate of default in commercial loans, commercial real estate loans, construction loans, consumer loans and residential mortgage loans. We have also experienced significant losses on our Puerto Rico loan portfolio due to such higher levels of loan defaults. The prolonged recessionary economic environment in Puerto Rico has also accelerated the devaluation of properties and increased loan portfolio delinquency when compared to previous periods.

Since 2000, the Puerto Rico government has faced a number of fiscal challenges, including an imbalance between its General Fund total revenues and expenditures. The imbalance reached its highest level in fiscal year 2009, when the deficit was approximately $3.3 billion. Since that time, the Puerto Rico government has been reducing its budget deficits through expenditure reductions and revenue raising measures. Puerto Rico’s ability to continue reducing the deficit will depend in part on its ability to continue increasing revenues and reducing expenditures, which in turn depends on a number of factors, including improvements in general economic conditions.

One of the challenges every Puerto Rico administration has faced during the past twenty years is how to address the growing unfunded pension obligations and funding shortfalls of the three government retirements systems that are funded principally with budget appropriations from the Commonwealth’s General Fund. As of June 30, 2011, the date of the latest actuarial valuations of the three retirement systems, the unfunded actuarial accrued liability (including basic and system administered benefits) for the Employees Retirement System, the Teachers Retirement System and Judiciary Retirement System were $23.7 billion, $9.1 billion and $319 million, respectively, and the funded ratios were 6.8%, 20.8% and 16.7%, respectively.

Based on employer and member contributions to the retirement systems, the unfunded actuarial accrued liabilities were projected to continue to increase significantly, with a corresponding decrease in their funded ratios, since the annual contributions were not sufficient to fund pension benefits, and thus, were also insufficient to amortize the unfunded actuarial accrued liabilities. Because annual benefit payments and administrative expenses of the retirement systems have been significantly larger than annual employer and member contributions, the retirement systems have been forced to use investment income, borrowings and sale of investment portfolio assets to cover funding shortfalls. The funding shortfall (basic system benefits, administrative expenses and debt service in excess of contributions) for fiscal year 2011 for the Employees Retirement System, the Teachers Retirement System and Judiciary Retirement System were approximately $693 million, $268 million and $6.5 million, respectively. For fiscal year 2012, the funding shortfalls were estimated to be $741 million, $287 million and $8.5 million, respectively.

In April 2013, the Puerto Rico administration enacted Act No. 3 of April 4, 2013, which provides for a comprehensive reform to the Employees Retirement System to address its unfunded status and annual funding shortfalls. Among the major changes introduced by Act No. 3 are: (i) granting and accrual of future benefits to current employees under a defined contribution plan (rather than a defined benefit plan) to be paid through a lifetime annuity, (ii) gradual increase of the retirement age for various groups of participants, (iii) increase of the employee contribution to the Employees Retirement System to 10% from 8.275%, and (iv) elimination or reduction of various retirement benefits previously granted by special laws.

The current state of the Puerto Rico economy and continued uncertainty in the public and private sectors has had an adverse effect on the credit quality of our loan portfolios. The continuation of the economic slowdown would cause those adverse effects to continue, as delinquency rates may continue to increase in the short term, until sustainable growth of the Puerto Rico economy resumes. Also, potential reduction in consumer spending as a result of continued recessionary conditions may also impact growth in our other interest and non-interest revenue sources. Additional economic weakness in Puerto Rico and the United States could further pressure residential property values, loan delinquencies, foreclosures and the cost of repossessing and disposing of real estate collateral.

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Future growth of the Puerto Rico economy will depend on several factors including the condition of the United States economy, the relative stability of the price of oil imports, the exchange value of the United States dollar, the level of interest rates, the effectiveness of the recently approved changes to local tax and other legislation, and the continuing economic uncertainty generated by the Puerto Rico government’s fiscal condition and the funding deficiencies of the Puerto Rico government retirement systems described above.

For additional information relating to the fiscal situation and challenges of the Commonwealth of Puerto Rico, refer to the sections titled “Fiscal Imbalance,” “Economic Reconstruction Plan,” “Economic Development Plan,” “Unfunded Pension Benefit Obligations and Funding Shortfalls of the Retirement System,” and “Ratings of the Commonwealth General Obligation Bonds” under “Business-The Commonwealth” in Part I, Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 13, 2013. The Commonwealth’s general obligation debt is currently rated “Baa3” with a negative outlook by Moody’s, “BBB-” with a negative outlook by Fitch, and “BBB-” with a negative outlook by S&P.

The Company cannot predict at this time the impact that the current fiscal situation of the Commonwealth of Puerto Rico and the various legislative and other measures adopted and to be adopted by the Puerto Rico government in response to such fiscal situation will have on the Puerto Rico economy and on the Company’s financial condition and results of operations.

The Company operates in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. The Company faces competition in such areas as mortgage and banking product offerings, rates and fees, and customer service. In addition, technological advances and increased e-commerce activities have, generally, increased accessibility to products and services for customers which has intensified competition among banking and non-banking companies in the offering of financial products and services, with or without the need for a physical presence.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding market risk to which the Company is exposed, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Control and Procedures

Doral Financial’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2013. Disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, Doral Financial’s Chief Executive Officer and its Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Doral Financial and its subsidiaries are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business, including employment related matters. Management believes, based on the opinion of legal counsel, that the aggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition or results of operations of Doral Financial.

Legal Matters

Since 2005, Doral Financial became a party to various legal proceedings, including regulatory and judicial investigations and civil litigation, arising as a result of the Company’s restatement.

On August 24, 2005, the U.S. Attorney’s Office for the Southern District of New York served Doral Financial with a grand jury subpoena seeking the production of certain documents relating to issues arising from the restatement, including financial statements and corporate, auditing and accounting records prepared during the period from January 1, 2000 to the date of the subpoena. On February 18, 2010, a superseding criminal indictment was filed in the U.S. District Court for the Southern District of New York charging Mario S. Levis, the former Treasurer of Doral, with various counts of securities and wire fraud. Doral Financial was not charged in the indictment. Mr. Levis was subsequently convicted and sentenced for one count of securities fraud and two counts of wire fraud. Mr. Levis’ conviction as to one count of wire fraud was later vacated by the U.S. Court of Appeals for the Second Circuit and remanded for further proceedings. On April 29, 2013, the United States Supreme Court denied Mr. Levis’ petition for a writ of certiorari. The case is currently pending in the U.S. District Court for the Southern District of New York. Doral Financial has been cooperating with the U.S. Attorney’s Office since the outset of this matter. The U.S. Attorney’s Office has not notified Doral Financial that it intends to bring criminal or civil charges against Doral Financial relating to this matter.

Mario S. Levis sued the Company for alleged breach of its obligation to advance expenses, including attorneys’ fees corresponding to his representation and defense of investigations conducted by federal agencies commencing in 2005 that ultimately concluded in his indictment by a federal grand jury that charged him with four (4) counts of wire fraud and one (1) count of securities fraud. On November 16, 2011, after a jury found Mr. Levis guilty of the one (1) count of securities fraud and two (2) of the four (4) counts of wire fraud that had been leveled against him, the U.S. District Court for the District of Southern New York sentenced Mr. Levis to concurrent terms of sixty (60) months imprisonment on each of the charges that he was found guilty of, two (2) subsequent years of supervised release and restitution to the Company of approximately $1.9 million. While the criminal prosecution of Mr. Levis was ongoing, due to the large amounts of money being disbursed for his defense and in order to determine whether such advances were reasonable, Doral requested Mr. Levis to provide more detail concerning the services that were being rendered by his attorneys. Controversy arose concerning the Company’s request mainly as the result of Mr. Levis’ refusal to provide more detail. As a result of Mr. Levis refusal, Doral stopped advancing payments for his defense. Mr. Levis then filed a civil action before the Supreme Court of New York on August 13, 2009 seeking to obtain a mandatory injunction to force the Company into continuing to advance the costs of his representation, including the appeal of his conviction to the U.S. Court of Appeals for the Second Circuit, plus the costs and fees of the civil action. Subsequently, and after substantial litigation before the Supreme Court of New York, on April 12, 2012, Mr. Levis voluntarily dismissed his civil action without prejudice, opting instead to immediately thereafter file a new civil action before the Superior Court of Puerto Rico Civil seeking relief identical to that sought before the New York state court, i.e., a mandatory injunction against the Company to force it to advance expenses including attorney’s fees, without having to establish the reasonableness of the invoices. On April 19, 2013, the Superior Court of Puerto Rico entered judgment dismissing Mr. Levis’ complaint against the Company. Mr. Levis has since appealed the dismissal of his civil action to the Puerto Rico Court of Appeals. The Company has filed its brief in opposition to Mr. Levis’ appeal. The resolution of the appeal is pending before the Puerto Rico Court of Appeals.

While the civil action against the Company was pending, the U.S. Court of Appeals confirmed Mr. Levis conviction on the one (1) count of securities fraud and one (1) of the two (2) counts of wire fraud he was convicted of. Mr. Levis subsequently petitioned the Supreme Court of the United States for a writ of certiorari seeking the reversal of that portion of the U.S. Court of Appeal’s decision that had confirmed his conviction on one (1) count of securities fraud and one (1) count of wire fraud. On April 29, 2013, the U.S. Supreme Court denied Mr. Levis petition. Having exhausted all of his appeal rights, Mr. Levis is presently scheduled to be resentenced by the U.S. District Court for the Southern District of New York.

On April 3, 2013, while the civil action filed in Puerto Rico was pending before the Superior Court of Puerto Rico, Mr. Levis filed a second complaint against the Company before the Superior Court of Puerto Rico. In this second complaint, which

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allegations essentially mirror those of the first, Mr. Levis included Mr. Glen R. Wakeman, President and CEO, and his wife, and Mr. Enrique R. Ubarri, Executive Vice President-General Counsel, and his wife, as additional defendants claiming that they had conspired to breach the Company’s obligation to advance the costs of his legal representation. In the second complaint Mr. Levis claims the defendants, including the Company owe Mr. Levis almost $3,000,000 in economic damages (plus interest), over $2,400,000 in legal fees and expenses, and an additional amount in damages presumably on account of mental anguish. Shortly after filing this second complaint and within the time period that defendants are allowed to respond to claims pursuant to the Puerto Rico Rules of Civil Procedure, Mr. Levis filed a motion voluntarily dismissing without prejudice his complaint against Mr. and Mrs. Wakeman and Mr. and Mrs. Ubarri. The Company has moved to dismiss this second complaint on grounds of res judicata and unduly splitting of claims. The resolution of the Company’s motion to dismiss is pending before the Superior Court of Puerto Rico.

For additional information on legal proceedings and regulatory matters, refer to note 24 to the unaudited interim consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q and Part I, Item 3 (Legal Proceedings) of the Company’s 2012 Annual Report on Form 10-K, filed with the SEC on March 13, 2013.

ITEM 1A. RISK FACTORS

Our business, financial condition, operating results and/or the market price of our common stock may be adversely affected by a number of risk factors. Readers should carefully consider, in connection with other information disclosed in this Quarterly Report on Form 10-Q, the risk factors set forth below in this Form 10-Q and the risk factors set forth in Item 1A-Risk Factors of Part I of the Company’s 2012 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2013, as updated from time to time in filings made and to be made by the Company with the SEC. The risk factor disclosure set forth below and in our Form 10-K sets forth some of the more important risk factors that could affect our business, financial condition or results of operations. These risks factors and other presently unforeseen risk factors could cause our actual results to differ materially from those stated in any forward-looking statements included in this Quarterly Report on Form 10-Q or included in our other filings with the SEC. In addition, these risk factors and other presently unforeseen risk factors could have a material adverse effect on our business, financial condition, or results of operations.

The risk factors described below and the risk factors set forth in Item 1A-Risk Factors of Part I of the Company’s 2012 Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or currently deemed by the Company to be immaterial also may materially adversely affect the Company’s business, financial condition or results of operations. Please also refer to the section titled “Forward Looking Statements” in this Quarterly Report on Form 10-Q.

Operating restrictions and conditions under the Consent Order and the Written Agreement will increase our operating costs and adversely affect our results of operations.

Doral Bank entered into the Consent Order with the FDIC and the Office of the Commissioner on August 8, 2012, and Doral Financial entered into the Written Agreement with the FRBNY on September 11, 2012. The Consent Order and the Written Agreement impose operating restrictions and conditions on Doral Bank and Doral Financial. Both the Consent Order and the Written Agreement increase our reporting obligations to our regulators.

We anticipate that we will need to continue to dedicate significant resources to our efforts to comply with the Consent Order and the Written Agreement, which are expected to increase our operational costs and adversely affect the amount of time our management has to conduct our business. The additional operating costs to comply with, and the restrictions under, the Consent Order and the Written Agreement will adversely affect our results of operations.

Under the Consent Order and the Written Agreement the FRBNY, FDIC and the Office of the Commissioner may impose conditions on Doral Financial and/or Doral Bank that one or both entities may not be able to comply with, or even if complied with may materially adversely affect Doral Financial’s and/or Doral Bank’s operations and liquidity and capital resources, as well as their ability to meet their regulatory or financial obligations. If we fail to comply with the Consent Order or the Written Agreement in the future, or if, in the opinion of the FRBNY, FDIC or the Office of the Commissioner, our financial, operating or regulatory condition has significantly deteriorated, we may become subject to additional regulatory enforcement actions up to and including the appointment of a receiver or conservator for Doral Bank.

Doral Financial and Doral Bank are subject to the supervision and regulation of various banking regulators and have entered into the Written Agreement and the Consent Order with these regulators, and these regulators could take additional actions against Doral Financial or Doral Bank.

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As a regulated financial services firm, our good standing with our regulators is of fundamental importance to the continuation and growth of our businesses. Doral Financial is subject to supervision and regulation by the FRBNY and the Office of the Commissioner, and Doral Bank is subject to supervision and regulation by the FDIC, the Office of the Commissioner and the state banking regulatory authorities of the states in which it has operations.

Federal banking regulators, in the performance of their supervisory and enforcement duties, have significant discretion and power to initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. The enforcement powers available to federal banking regulators include, among others, the ability to assess civil monetary penalties, to issue cease and desist or removal orders, to require written agreements and to initiate injunctive actions.

Doral Financial and Doral Bank have entered into the Written Agreement and the Consent Order with the FRBNY, the FDIC and the Office of the Commissioner. These banking regulators could take further actions with respect to Doral Financial or Doral Bank and, if any such further actions were taken, such actions could have a material adverse effect on us. The operating and other conditions of the Consent Order and the Written Agreement could lead to an increased risk of being subject to additional regulatory actions, as well as additional actions resulting from future regular annual safety and soundness and compliance examinations by these federal and state regulators. Our banking regulators could take additional actions to protect Doral Bank or to ensure that the holding company remains as a source of financial and managerial strength to Doral Bank, and such actions could have adverse effects on us.

Our ability to diversify our business operations in the United States is dependent upon approval of our operating plans by the FRBNY, the FDIC and/or the Office of the Commissioner. If we do not continue to receive the approval of the FRBNY, the FDIC and/or the Office of the Commissioner to develop our operations in the United States, our business and results of operations will be materially adversely affected.

Because of the weak economic conditions in Puerto Rico we are diversifying our business operations through the development of our banking operations in New York and Florida. Because Doral Financial is a party to the Written Agreement with the FRBNY and Doral Bank is a party to the Consent Order with the FDIC and the Office of the Commissioner, we may be required to seek approval to take some actions under our operating plans, including further development of our banking operations in New York and Florida. If the FRBNY, the FDIC and/or the Office of the Commissioner do not approve the continued development of our banking operations in New York and Florida, our business and results of operations will be materially adversely affected.

Doral Bank is required to obtain the approval from the FDIC prior to accepting, renewing or rolling over any brokered deposits. If the FDIC does not allow Doral Bank to accept, renew or rollover any brokered deposits, Doral Bank may not be able to meet its liquidity needs or future obligations.

Doral Bank’s liquidity relies in part upon brokered deposits. Under the Consent Order with the FDIC, Doral Bank must obtain a waiver from the FDIC prior to accepting, renewing or rolling over any brokered deposits. If the FDIC does not approve the acceptance, renewal or rollover of brokered deposits, or limits Doral Bank’s ability in any material way, Doral Bank’s liquidity, operations and ability to meet its obligations will be materially adversely affected.

Our decisions regarding credit risk and the allowance for loan and lease losses may materially and adversely affect our business and results of operations. If we need to materially increase our allowance for loan and lease losses, our business and results of operations will be materially adversely affected.

Making loans is an essential element of our business, and there is a risk that the loans will not be repaid. This default risk is affected by a number of factors, including:

• the duration of the loan;

• credit risk of a particular borrower;

• changes in economic or industry conditions; and

• in the case of a collateral loan, risks resulting from uncertainties about the future value of collateral.

We strive to maintain an appropriate allowance for loan and lease losses to provide for probable losses inherent in the loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors such as default frequency, internal risk ratings, expected future cash collections, loss recovery rates, severity experience, fair value estimates and general economic factors, among others.

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We establish a provision for loan losses, which leads to reductions in our income from operations, in order to maintain our allowance for inherent losses at a level which we deem to be appropriate based upon an assessment of the quality of our loan portfolio. The determination of the appropriate level of the allowance for loan and lease losses inherently involves a high degree of subjectivity and requires us to make significant estimates and judgments regarding credit risks and future trends, all of which may undergo substantial changes.

We believe our allowance for loan and lease losses is currently sufficient given the constant monitoring of the risk inherent in the loan portfolio. However, there is no precise method of predicting loan losses and therefore we always face the risk that charge-offs in future periods will exceed the allowance for loan and lease losses and that additional provisions to increase the allowance for loan and lease losses will be required. In addition, the FRBNY, the FDIC and/or the Office of the Commissioner may require us to establish additional reserves. Substantial additions to the allowance for loan and lease losses would materially adversely affect our results of operations and our financial condition.

Deteriorating credit quality has adversely impacted us and may continue to adversely impact us.

We have experienced a downturn in credit quality since 2006. Our credit quality has continued to be under pressure during 2013 as a result of continued recessionary conditions in Puerto Rico and the slow-down in consumer activity and economic growth in the United States that have led to, among other things, higher unemployment levels, much lower absorption rates for new residential construction projects and further declines in property values. We expect that credit conditions and the performance of our loan portfolio may continue to deteriorate in the near future.

Our business depends on the creditworthiness of our customers and counterparties and the value of the assets securing our loans or underlying our investments. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, our business, financial condition, allowance levels, asset impairments, liquidity, capital and results of operations could be adversely affected.

Changes in collateral values of properties located in distressed economies may require increased reserves.

Substantially all of our loans are located within the boundaries of the United States economy. Whether the collateral for a loan is located in Puerto Rico or the United States mainland, the performance of our loan portfolio and the collateral value backing the loan transactions are dependent upon the performance of and conditions within each specific real estate market. Puerto Rico has been in recessionary conditions since 2006. Sustained weak economic conditions that have affected Puerto Rico and the United States over the last several years have resulted in declines in collateral values.

We measure the impairment of a loan based on the fair value of the collateral, if collateral dependent, which is generally obtained from appraisals. Updated appraisals are requested when we determine that loans are impaired and are subsequently updated at least annually for residential properties and between 12 and 18 months for commercial properties. In addition, appraisals are also obtained for certain residential mortgage loans on a spot basis based on specific characteristics such as delinquency levels, age of the appraisal and loan-to-value ratios. The appraised value of the collateral may decrease or we may not be able to recover collateral at its appraised value. A significant decline in collateral valuations for collateral dependent loans may require increases in our specific provision for loan losses and an increase in the general valuation allowance. Any such increase would have an adverse effect on our future financial condition and results of operations.

Our credit quality may continue to be adversely affected by Puerto Rico’s recessionary economic conditions.

Because a majority of our business activities and credit exposure are still concentrated in Puerto Rico, our financial condition and results of operations are highly dependent on economic conditions in Puerto Rico.

The economy of Puerto Rico entered into a recession in the fourth quarter of the government’s fiscal year ended June 30, 2006. For fiscal years 2007, 2008, 2009, 2010 and 2011, Puerto Rico’s real gross national product decreased by 1.2%, 2.9%, 3.8%, 3.6% and 1.6%, respectively. According to the latest information and projections issued by the Puerto Rico Planning Board in April 2013, real gross national product for fiscal year 2012 increased by only 0.1%, real gross national product for fiscal year 2013 is projected to decrease by 0.4%, and real gross national product for fiscal year 2014 is projected to increase by 0.2%.

The long recession in Puerto Rico has resulted in, among other things, a reduction in lending activity and an increase in the rate of default in commercial loans, commercial real estate loans, construction loans, consumer loans and residential mortgages. We have also experienced significant losses on our Puerto Rico loan portfolio due to a higher level of defaults on commercial loans, commercial real estate loans, construction loans, consumer loans and residential mortgages. The prolonged recessionary economic environment in Puerto Rico accelerated the devaluation of properties and increased portfolio delinquency when compared with previous periods.

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The continuation of the economic slowdown would cause those adverse effects to continue, as delinquency rates may continue to increase in the short term, until sustainable growth of the Puerto Rico economy resumes. Also, potential reduction in consumer spending as a result of continued recessionary conditions may also impact growth in our other interest and non-interest revenue sources. Additional economic weakness in Puerto Rico and the U.S. mainland could further pressure residential property values, loan delinquencies, foreclosures and the cost of repossessing and disposing of real estate collateral.

Our business concentration in Puerto Rico imposes risks.

We conduct our operations in a geographically concentrated area, as our main market is in Puerto Rico. This imposes risks from lack of diversification in the geographical portfolio. Our financial condition and results of operations are highly dependent on the economic conditions of Puerto Rico, where adverse political, continued recessionary economic conditions or natural disasters, among other things, could affect the volume of loan originations, increase the level of non-performing assets, increase the rate of foreclosure losses and reduce the value of our loans and loan servicing portfolio. As a result, the value of our collateral as well as our ability to obtain repayment of our loans and therefore our financial condition and operating results are all highly dependent upon Puerto Rico’s economic conditions. If economic conditions in Puerto Rico do not improve, our financial condition and results of operations could be materially adversely affected.

The Dodd-Frank Wall Street Reform and Consumer Protection Act will affect our business.

On July 21, 2010, President Obama signed into law the Dodd-Frank Act. Some of the provisions of the legislation have already become effective. Other provisions will have extended implementation periods and delayed effective dates, and will be required to be implemented through regulatory action of various federal regulatory authorities. Because many of the provisions require future regulatory actions for their implementation, the ultimate impact of the legislation on the financial services industry and on our business, are not completely known at this time. The implementation of many of the provisions of the legislation will affect our business and are expected to add new regulatory risk and compliance burdens and costs on the financial services industry and us. The implementation of this legislation could result in loss of revenue, limit our ability to pursue certain business opportunities we might otherwise consider engaging in, impact the value of some of the assets we hold, require us to change certain of our business practices, impose additional costs on us, establish more stringent capital, liquidity and leverage ratio requirements, or otherwise adversely affect our business.

Implementation of BASEL III capital requirements could adversely affect our regulatory capital ratios.

During July 2013 the Federal Reserve Board and the FDIC adopted final rules to revise and replace the federal banking agencies current capital rules to align with the BASEL III capital standards and meet certain requirements of the Dodd-Frank Act. Certain requirements of the final rules would establish more restrictive requirements for instruments to qualify as capital, higher risk-weightings for certain asset classes, capital buffers and higher minimum capital ratios. In general terms, the final rules would, among other things, include implementation of a new common equity Tier 1 minimum capital requirement and apply limits on a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rules also establish more conservative standards for including an instrument in regulatory capital. The revisions set forth in the final rules are consistent with section 171 of the Dodd-Frank Act, which requires the final banking agencies to establish minimum risk-based and leverage capital requirements. The implementation of the final rules, when they become effective could adversely affect our regulatory capital ratios, and thereby could adversely and in some cases materially adversely affect our business, financial condition and results of operations.

Certain risks associated with the recently completed reverse stock split.

On June 27, 2013 Doral Financial filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the Commonwealth of Puerto Rico to effect a 20-for-1 reverse stock split of Doral Financial’s issued and outstanding common stock. In addition, the Amendment correspondingly reduced the number of shares of our authorized common stock from 300,000,000 to 15,000,000. The amendment became effective at 4:00 pm Eastern time on June 28, 2013. Commencing on July 1, 2013, trading of the Company’s common stock continued on the New York Stock Exchange under a new cusip and reverse stock split-adjusted basis. The risks associated with the reverse stock split include (but are not limited to) the following:

Our total market capitalization after the reverse stock split may be lower than before the reverse stock split

There are numerous factors and contingencies that could affect the price of our common stock following implementation of the reverse stock split, including the status of the market for our common stock at the time, our results of operations in future periods, and general economic, market and industry conditions. Accordingly, the market price of our common stock may not be sustainable at the direct arithmetic result of the reverse stock split. If the market price of our common stock declines after the reverse stock split, our total market capitalization (the aggregate value of all of our outstanding common stock at the then existing market price) after the reverse stock split will be lower than before the reverse stock split.

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The reverse stock split may result in reduced liquidity of our common stock

Following the reverse stock split we will have fewer shares of common stock that are publicly traded. As a result, the trading liquidity of our common stock may decline.

The reverse stock split may result in some shareholders owning “odd lots” that may be more difficult to sell or require greater transaction costs per share to sell

The reverse stock split may result in some shareholders owning “odd lots” of less than one hundred (100) shares of our common stock on a post-split basis. Odd lots may be more difficult to sell, or require greater transaction costs per share to sell, than shares in “round lots” of even multiples of one hundred (100) shares.

The reverse stock split may not generate additional investor interest

While we believe that a higher stock price may help generate investor interest in our common stock, there can be no assurance that the reverse stock split will result in a per share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not necessarily improve.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As previously disclosed, our board of directors announced on March 20, 2009 that it had suspended the declaration and payment of all dividends on our 7% Noncumulative Monthly Income Preferred Stock, Series A, 8.35% Noncumulative Monthly Income Preferred Stock, Series B and 7.25% Noncumulative Monthly Income Preferred Stock, Series C (collectively, the “Noncumulative Preferred Stock”) and 4.75% Perpetual Cumulative Convertible Preferred Stock (the “Convertible Preferred Stock”). The suspension of dividends for our Noncumulative Preferred Stock was effective and commenced with the dividends for the month of April 2009. The suspension of dividends for our Convertible Preferred Stock was effective and commenced with the dividends for the quarter commencing in April 2009. Accrued dividends in arrearage with respect to our Convertible Preferred Stock, through August 14, 2013, were approximately $42.6 million.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

As previously reported by the Company, on March 13, 2013, the Chief Executive Officer and the Board of Directors of the Company informed that they had engaged a search firm to identify suitable candidates for the position of Chief Financial Officer and expected to conclude the search process in the near future. As a result of said engagement, the Company has selected Mr. David Hooston to serve as Chief Financial Officer of the Company. This appointment is still subject to regulatory approvals. Until such time as the required regulatory approvals relating to his appointment are obtained, Mr. Hooston is employed by the Company in its Finance Division and Mr. Penko Ivanov continues to serve as the Company’s Interim Chief Financial Officer. The Company will file a Current Report on Form 8-K when Mr. Hooston’s appointment as Chief Financial Officer becomes effective.

Prior to becoming an employee of the Company, Mr. Hooston served as Managing Partner of Granite Bay Partners, LLC during 2013 and from 2007 to 2009. Granite Bay Partners is a financial institution consulting and private equity firm that invests in banking institutions and financial services businesses in the Western United States. From 2009 to 2012, Mr. Hooston served as Chief Financial Officer of HomeStreet, Inc. (NASDAQ: HMST) a diversified financial services company headquartered in Seattle, Washington. From 1995 to 2007, he served in various positions in Placer Sierra Bancshares, including Chief Financial Officer and President and Chief Operating Officer. Mr. Hooston obtained a BA in Business Economics from University of California - Santa Barbara and is a Certified Public Accountant.

ITEM 6. EXHIBITS.

The exhibits to this Quarterly Report on Form 10-Q are listed in the exhibit index below. Doral Financial has not filed as exhibits certain instruments defining the rights of holders of debt of the Company not exceeding 10% of the total assets of Doral Financial and its consolidated subsidiaries. Doral Financial will furnish copies of any such instruments to the Securities and Exchange Commission upon request.

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Exhibit Number	Description
3.1	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 20, 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).
3.5	Certificate of Amendment of the Certificate of Incorporation of Doral Financial dated June 26, 2013. (Incorporated herein by reference to exhibit number 3.1 of Doral Financial’s Current Report on Form 8-K filed with the Commission on June 28, 2013).
4.1	Common Stock Certificate. (Incorporated herein by reference to exhibit number 4.1 to Doral Financial’s Current Report on Form 8-K filed with the Commission on June 28, 2013).
4.8	Indenture, dated May 14, 1999, between Doral Financial and Bankers Trust Company, as trustee, pertaining to senior debt securities. (Incorporated herein by reference to exhibit 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 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 8-K filed with the Commission on September 30, 2003).
4.15	Form of Stock Certificate for Mandatorily Convertible Non-Cumulative Non-Voting Preferred Stock (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) (included in Exhibit 3.4 hereto).
12.1	Computation of Ratio of Earnings to Fixed Charges for the six month period ended June 30, 2013.
12.2	Computation of Ratio of Earnings to Fixed Charges for the years ended December 31, 2012, 2011, 2010, 2009 and 2008.
12.3	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the six month period ended June 30, 2013.
12.4	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2012, 2011, 2010, 2009 and 2008.
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101+	Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter and six month period ended June 30, 2013, formatted in XBRL: (i) the unaudited Consolidated Statements of Financial Condition, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income; (iv) the unaudited Statements of Changes in Stockholders’ Equity, (v) the unaudited Consolidated Statements of Cash Flows and (vi) the Notes to the unaudited Consolidated Financial Statements.

+ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	DORAL FINANCIAL CORPORATION
	(Registrant)
Date: August 14, 2013	/s/ Glen R. Wakeman
	Glen R. Wakeman
	Chief Executive Officer and President
Date: August 14, 2013	/s/ Penko Ivanov
	Penko Ivanov
	Interim Chief Financial Officer

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