35. Stock Option and Other Incentive Plans

Since 2003, Doral Financial has been expensing the fair value of stock options granted to employees using the “modified prospective” method. Using this method, the Company has expensed the fair value of all employee stock options and restricted stock granted after January 1, 2003, as well as the unvested portions of previously granted stock options. The Company estimates the pre-vesting forfeiture rate, for grants that are forfeited prior to vesting, beginning on the grant date and to true-up forfeiture estimates through the vesting date so that compensation expense is recognized only for grants that vest. When unvested grants are forfeited, any compensation expense previously recognized on the forfeited grants is reversed in the period of the forfeiture. Accordingly, periodic compensation expense will include adjustments for actual and estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate. The Company did not change its adjustment for actual and estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate during the year ended December 31, 2013.

On April 8, 2008, the Company's Board of Directors approved the 2008 Stock Incentive Plan (the “Plan”) subject to shareholder approval, which was obtained at the annual shareholders' meeting held on May 7, 2008. The Plan replaced the 2004 Omnibus Incentive Plan. Stock options granted are expensed over the stock option vesting period based on fair value which is determined using the Black-Scholes option-pricing model at the date the options are granted.

The aggregate number of shares of common stock which the Company may issue under the Plan is limited to 337,500, as adjusted for the Reverse Stock Split. No options were granted by the Company for the years ended December 31, 2013 and 2012.

On July 22, 2008, four independent directors were each granted 100 shares of restricted stock and stock options, as adjusted for the Reverse Stock Split, to purchase 1,000 shares of common stock at an exercise price equal to the closing price of the stock on the grant date. The restricted stock became 100% vested during the third quarter of 2009. The stock options vested ratably over a five year period commencing with the grant date.

On February 11, 2009, another independent director was appointed to the Company's board of directors. In accordance with the Plan, this director had the right to receive 100 shares of restricted stock, as adjusted for the Reverse Stock Split, for his service to the Board. The Plan stated that the shares would vest and the restriction would lapse with respect to the shares after a one year period. On November 3, 2011, the Company issued to this Director 100 shares of restricted common stock.

On June 25, 2010, the board of directors of Doral Financial Corporation approved and adopted a retention program for six of the Company's officers (the “Retention Program”). Pursuant to the Retention Program, the Company granted 150,000 shares of the Company's common stock, as adjusted for the Reverse Stock Split, as restricted stock to such officers. The restricted stock will vest in installments as long as at the time of vesting the employee has been continuously employed by the Company from the date of grant, as follows: 33% will vest 12 calendar months after the grant date, an additional 33% will vest 24 calendar months after the grant date, and the remaining 33% will vest 36 calendar months after the grant date. Notwithstanding the foregoing, 100% of the restricted stock will vest (i) upon the occurrence of a change of control of the Company; (ii) if the Company terminates the employee's employment without cause or the employee terminates his or her employment for good reason (as defined in the agreement); or (iii) upon such employee's death.

Effective on January 21, 2011, the Company approved an amended compensation policy for its outside directors. The amendments were approved taking into consideration the fact that the Company is no longer a “controlled company” under the applicable rules of the New York Stock Exchange. The principal terms of the amended compensation policy for its outside directors are as follows:

(a) Annual retainer of $50,000 for each director;

(b) Additional annual retainers of (i) $25,000 each for the Lead Independent Director, the Chairman of the Audit Committee and the Chairman of the Risk Policy Committee, and (ii) $12,500 each for the Chairman of the Nominating and Corporate Governance Committee and the Chairman of the Compensation Committee;

(c) Meeting attendance fees as follows: (i) $5,000 for regular board and committee meetings when said meetings are held on the same date or consecutive dates; (ii) $1,500 for special board meetings or Audit Committee meetings held via teleconference; (iii) $1,000 for special Risk Policy Committee meetings held via teleconference; (iv) $750 for other committee meetings held via teleconference; and (v) $3,500 for any other on-site special committee or board meeting; provided, however, that in the event that the Company has scheduled board and committee meetings on site the same date or consecutive dates, the directors shall receive $5,000 irrespective of the number of meetings attended; and

(d) A one-time grant of 1,250 restricted shares, as adjusted for the Reverse Stock Split, of the Company's common stock. The shares of restricted stock to be awarded will be issued pursuant to the terms and conditions of the Company's 2008 Stock Incentive Plan. The shares of restricted stock will be issued without cost to the recipients, and will vest in installments so long as at the time of vesting the director has been continuously a director of the Company from the date of grant, as follows: fifty percent (50%) of the shares of restricted stock shall vest twelve (12) months after the grant date and the remaining fifty percent (50%) of the shares of restricted stock shall vest twenty-four (24) months after the grant date. In addition, one hundred percent (100%) of the unvested shares of restricted stock shall vest (i) in the event of the death of the director during the vesting term, or (ii) upon the occurrence of a Change in Control (as such term is defined in the Restricted Stock Award Agreements between the Company and each Director).

In April 2011, five officers were granted a total of 59,636 shares of restricted stock, as adjusted for the Reverse Stock Split, with similar conditions as those granted in June 2010 with a vesting period of (12) months after the grant date.

On October 19, 2011, the Company filed a Post-Effective Amendment to the Registration Statement on Form S-8, which constituted Post-Effective Amendment No. 1 to the Registration Statement on Form S-8, filed with the Securities and Exchange Commission on July 22, 2008. The Post-Effective Amendment was filed solely for the purpose of permitting the resale of control securities of the Company pursuant to the reoffer prospectus that forms a part of the Post-Effective Amendment by the selling stockholders, which includes the shares that were awarded to the Company's officers and vested on June 25, 2011, pursuant to the Retention Program.

In April 2012, eleven officers were granted a total of 75,000 shares of restricted stock, as adjusted for the Reverse Stock Split, with similar conditions as those previously granted and vesting period of (12) months after the grant date.

On December 26, 2012, the Company and certain executive officers of the Company entered into an amendment to their respective employment agreements (the “Executive Officer Employment Agreements”) with the Company (the “Amendments”). The purpose of entering into the Amendments was to modify the Executive Officer Employment Agreements to ensure that, in the event that severance payments were triggered in the future, the timing of severance payments thereunder comply with Section 409A of the Internal Revenue Code of 1986, as amended, in order to avoid excise taxes payable by such officers. The Amendments did not increase the amounts to which any of the officers are entitled under the respective Executive Officer Employment Agreements but did adjust the timing of certain severance payments that may be made to such officers under the Executive Officer Employment Agreements.

In March 2013, eight officers were granted a total of 46,250 shares of restricted stock, as adjusted for the Reverse Stock Split, with similar conditions as those previously granted and vesting period of (12) months after the grant date.

During 2013 and 2012, the Company issued a total of 120,832 shares and 112,876 shares, respectively, of restricted common stock, as adjusted for the Reverse Stock Split, that had vested.

Expected volatility is based on the historical volatility of the Company's common stock over a ten-year period. The Company uses empirical research data to estimate option exercise and employee termination rates within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on management's expectation that the Company will not resume dividend payments on its Common Stock for the foreseeable future.

During the year ended December 31, 2013, Doral granted 46,250 shares of restricted, as stock adjusted for the Reverse Stock Split, to the Company's executive officers and directors.

During the year ended December 31, 2013, the Company issued to certain officers a total of 120,832 shares of restricted stock, as adjusted for the Reverse Stock Split, that were granted during 2010 and 2012 and had vested.

During 2013, 2012 and 2011, no stock options were exercised.

As of December 31, 2013, the total amount of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan was approximately $0.2 million related to restricted stock granted. That cost is expected to be recognized over a period of one year for the stock options and the restricted stock. As of December 31, 2013, the total fair value of shares and restricted stock was $1.0 million.