Overview -- Doral Bank is required to maintain higher regulatory capital ratios because of its consent order with the Federal Deposit Insurance Corp., and its total risk-based capital ratio is only 80 basis points above the requirement. -- We believe the bank is at risk of breaching the required regulatory levels given its very high nonperforming assets. -- We are lowering our issuer credit rating on Doral Financial Corp. to 'CCC-' from 'CCC+'. -- The negative rating outlook on Doral reflects our view of the loan portfolio's weak credit quality, the bank's restrained core profitability, the poor economic conditions in Puerto Rico, and the bank's regulatory capital, which is narrowly higher than regulatory minimums. Rating Action On Dec. 17, 2012, Standard & Poor's Ratings Services lowered its issuer credit rating on Doral Financial Corp. to 'CCC-' from 'CCC+'. The outlook is negative. Rationale Our two-notch downgrade of Doral reflects the institution's weakened capital position and very high nonperforming assets. We view Doral's capital and earnings as "weak" (as our criteria define the term), and we believe that the bank is at risk of breaching its regulatory requirements in case of plausible adverse developments, including higher credit losses and further weakening of the Puerto Rican economy. Our revision of Doral's capital and earnings score to "weak" from "moderate" is responsible for one notch of the two-notch downgrade. We also believe that Doral's asset quality compares unfavorably with its Puerto Rican peers', which led us to lower the rating by another notch. On Sept. 11, 2012, Doral Financial entered into a written agreement with the Federal Reserve Bank of New York, which replaces and supersedes the cease and desist order that Doral entered into with the Board of Governors of the Federal Reserve System in 2006. The written agreement requires the company to take numerous actions, including supporting Doral Bank (not rated) to ensure it complies with any supervisory actions that the federal and state regulators take. Doral Bank entered into a consent order with the Federal Deposit Insurance Corp. on Aug. 8, 2012. In our opinion, these regulatory actions and the associated costs could hurt Doral's already weak earnings capacity. Doral is required to keep higher capital levels because of the consent order. As of Sept. 30, 2012, the bank's total risk-based capital ratio is 80 basis points higher than the minimum requirement of 12%. At this level, we believe the bank is at risk of breaching its regulatory requirements in case of plausible adverse developments, which, in our view, could eventually trigger regulatory intervention. Doral's risk position is "weak," in our opinion. We believe the bank's credit deterioration mainly results from Puerto Rico's high unemployment rates and economic challenges, and we believe there will be very little to no improvement over the next two years. Residential real estate mortgages make up more than half of Doral's total loans and the majority of its nonperforming assets. Nearly all of the mortgage loans are secured by single-family residences in Puerto Rico. Doral's nonperforming assets (including restructured loans and loans that are 90 or more days past due) represented about 22.1% of total loans as of Sept. 30, 2012. Although this ratio has declined over the past few years, it remains much higher than its peers'. The bank charged off $111.6 million of loans in the first nine months of 2012, which translated to a higher net charge-off ratio of 2.32% of average loans, compared with 1.41% one year ago. Furthermore, the bank took higher loss provisions of $154.8 million to build reserves against future losses. Outlook The negative rating outlook on Doral reflects our view of the loan portfolio's weak credit quality, the bank's restrained core profitability, the poor local economic conditions, and its capital that is only slightly higher than the regulatory minimum. If nonperforming assets and net charge-offs continue to climb, or if Doral's regulatory capital levels don't meet the required minimums, we could lower the rating. However, if the local economy stabilizes, and we believe that the bank will be able to maintain profitability, improve its asset quality, and increase its regulatory capital levels, we could revise the outlook to stable. Ratings Score Snapshot To From Issuer Credit Rating CCC-/Negative/-- CCC+/Negative/-- SACP b- b Anchor bbb+ bbb+ Business Position Weak (-3) Weak (-3) Capital and Earnings Weak (-2) Moderate (-1) Risk Position Weak (-2) Weak (-2) Funding and Liquidity Below Average Below Average and Adequate (-1) and Adequate (-1) Support 0 0 GRE Support 0 0 Group Support 0 0 Sovereign Support 0 0 Additional Factors -1 0 Related Criteria And Research Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Ratings List Downgraded To From Doral Financial Corp. Issuer Credit Rating CCC-/Negative/-- CCC+/Negative/-- Senior Unsecured CCC- CCC+ Ratings Affirmed Doral Financial Corp. Preferred Stock C Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.