##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    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 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
(State or other jurisdiction of 
incorporation or organization)
    
    66-0312162
(I.R.S. employer
identification number)
 1451 F.D. Roosevelt Avenue, 
San Juan, Puerto Rico
(Address of principal executive offices)
    
    00920-2717
(Zip Code)
 
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting company o
 o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Statements of Financial Condition (Unaudited) as of September 30,
2008 and December 31, 2007
    
    
    3Consolidated Statements of Loss (Unaudited)  Quarters ended September 30,
2008 and September 30, 2007 and nine month periods ended September
30, 2008 and September 30, 2007
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Nine month
periods ended September 30, 2008 and September 30, 2007
    
    
    5Consolidated
Statements of Comprehensive (Loss) Income (Unaudited)  Quarters ended
September 30, 2008 and September 30, 2007 and nine month periods ended
September 30, 2008 and September 30, 2007
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Nine month periods ended
September 30, 2008 and September 30, 2007
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    37Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    73Item 4  Controls and Procedures
    
    
    73PART II  OTHER INFORMATION
    
    
    74Item 1  Legal Proceedings
    
    
    74Item 1A  Risk Factors
    
    
    74Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    76Item 3  Defaults Upon Senior Securities
    
    
    76Item 4  Submission of Matters to a Vote of Security Holders
    
    
    76Item 5  Other Information
    
    
    76Item 6  Exhibits
    
    
    77SIGNATURES
    
    
    78EX-12.1EX-12.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (UNAUDITED
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands, except for share information)
    
    2008
    
    
    2007ASSETSCash and due from banks
    
    $
    62,822
    
    
    $
    67,884Money market investments:Money market investments with creditors right to repledge
    
    
    
    
    
    
    199,795Other money market investments
    
    
    201,827
    
    
    
    317,490Total money market investments
    
    
    201,827
    
    
    
    517,285Securities purchased under agreements to resell
    
    
    
    
    
    
    204,000Pledged investment securities that can be repledged:Securities held for trading, at fair value
    
    
    62,388
    
    
    
    14,070Securities available for sale, at fair value
    
    
    1,318,158
    
    
    
    891,961Total pledged investment securities that can be repledged
    
    
    1,380,546
    
    
    
    906,031Other investment securities:Securities held for trading, at fair value
    
    
    167,280
    
    
    
    262,392Securities available for sale, at fair value
    
    
    1,549,323
    
    
    
    1,029,979Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    114,563
    
    
    
    73,867Total other investment securities
    
    
    1,831,166
    
    
    
    1,366,238Total investment securities
    
    
    3,211,712
    
    
    
    2,272,269Loans:Loans held for sale, at lower of cost or market
    
    
    379,461
    
    
    
    418,556Loans receivable
    
    
    5,274,365
    
    
    
    5,054,709Less: Allowance for loan and lease losses
    
    
    (123,143
    )
    
    
    (124,733
    )Less: Unearned income
    
    
    (19,430
    )
    
    
    (3,776
    )Total loans Receivable
    
    
    5,131,792
    
    
    
    4,926,200Total loans
    
    
    5,511,253
    
    
    
    5,344,756Receivables and mortgage-servicing advances
    
    
    108,450
    
    
    
    62,098Accrued interest receivable
    
    
    44,353
    
    
    
    42,434Servicing assets, net
    
    
    139,507
    
    
    
    150,238Premises and equipment, net
    
    
    107,929
    
    
    
    106,317Real estate held for sale, net
    
    
    57,583
    
    
    
    38,154Assets to be disposed of by sale
    
    
    1,939
    
    
    
    8,970Deferred tax asset, net
    
    
    413,177
    
    
    
    392,860Other assets
    
    
    129,356
    
    
    
    97,113Total assets
    
    $
    9,989,908
    
    
    $
    9,304,378LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    249,784
    
    
    $
    242,821Interest-bearing deposits
    
    
    4,052,013
    
    
    
    4,025,203Total Deposits
    
    
    4,301,797
    
    
    
    4,268,024Securities sold under agreements to repurchase
    
    
    1,876,199
    
    
    
    1,444,363Advances from FHLB
    
    
    1,723,400
    
    
    
    1,234,000Loans payable
    
    
    373,044
    
    
    
    402,701Notes payable
    
    
    278,521
    
    
    
    282,458Accrued expenses and other liabilities
    
    
    279,845
    
    
    
    326,125Total liabilities
    
    
    8,832,806
    
    
    
    7,957,671STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares
issued and outstanding, at aggregate liquidation preference value:Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $0.01 par value; 97,500,000 shares authorized; 53,810,110 shares
issued and outstanding
    
    
    538
    
    
    
    538Additional paid-in capital
    
    
    849,120
    
    
    
    849,081Legal surplus
    
    
    23,596
    
    
    
    23,596Accumulated deficit
    
    
    (93,996
    )
    
    
    (66,610
    )Accumulated
other comprehensive loss, net of income tax benefit of $24,838
and $6,440 in 2008 and 2007, respectively
    
    
    (195,406
    )
    
    
    (33,148
    )Total stockholders equity
    
    
    1,157,102
    
    
    
    1,346,707Total liabilities and stockholders equity
    
    $
    9,989,908
    
    
    $
    9,304,378
  3




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF LOSS
 (UNAUDITED)
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands, except for share information)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Loans
    
    $
    87,055
    
    
    $
    86,285
    
    
    $
    258,347
    
    
    $
    262,604Mortgage-backed securities
    
    
    28,336
    
    
    
    13,495
    
    
    
    77,374
    
    
    
    56,820Interest-only strips (IOs)
    
    
    1,975
    
    
    
    1,650
    
    
    
    5,405
    
    
    
    4,539Investment securities
    
    
    12,723
    
    
    
    21,612
    
    
    
    41,401
    
    
    
    76,498Other interest-earning assets
    
    
    2,727
    
    
    
    11,819
    
    
    
    14,043
    
    
    
    44,891Total interest income
    
    
    132,816
    
    
    
    134,861
    
    
    
    396,570
    
    
    
    445,352Interest expense:Deposits
    
    
    36,197
    
    
    
    39,147
    
    
    
    116,113
    
    
    
    126,040Securities sold under agreements to repurchase
    
    
    22,097
    
    
    
    28,007
    
    
    
    62,501
    
    
    
    106,319Advances from FHLB
    
    
    17,934
    
    
    
    13,477
    
    
    
    52,741
    
    
    
    40,121Loans payable
    
    
    4,263
    
    
    
    7,190
    
    
    
    14,340
    
    
    
    22,124Notes payable
    
    
    5,285
    
    
    
    7,605
    
    
    
    15,936
    
    
    
    38,520Total interest expense
    
    
    85,776
    
    
    
    95,426
    
    
    
    261,631
    
    
    
    333,124Net interest income
    
    
    47,040
    
    
    
    39,435
    
    
    
    134,939
    
    
    
    112,228Provision for loan and lease losses
    
    
    7,209
    
    
    
    5,062
    
    
    
    22,678
    
    
    
    30,373Net interest income after provision for loan and lease losses
    
    
    39,831
    
    
    
    34,373
    
    
    
    112,261
    
    
    
    81,855Non-interest
income (loss):Net gain on mortgage loan sales and fees
    
    
    3,918
    
    
    
    201
    
    
    
    10,144
    
    
    
    1,185Net gain (loss) on securities held for trading, including gains
and losses on the fair value of IOs
    
    
    1,898
    
    
    
    (23,905
    )
    
    
    1,650
    
    
    
    (19,992
    )Net loss on investment securities
    
    
    (5,093
    )
    
    
    (95,488
    )
    
    
    (4,899
    )
    
    
    (95,830
    )Net loss on extinguishment of liabilities
    
    
    
    
    
    
    (14,806
    )
    
    
    
    
    
    
    (14,806
    )Servicing income (net of mark-to-market adjustment)
    
    
    625
    
    
    
    8,026
    
    
    
    10,348
    
    
    
    23,409Commissions, fees and other income
    
    
    10,573
    
    
    
    6,882
    
    
    
    36,952
    
    
    
    23,469Net premium on deposits sold
    
    
    
    
    
    
    9,521
    
    
    
    
    
    
    
    9,521Total
non-interest income (loss)
    
    
    11,921
    
    
    
    (109,569
    )
    
    
    54,195
    
    
    
    (73,044
    )Non-interest expenses:Compensation and benefits
    
    
    17,542
    
    
    
    31,375
    
    
    
    53,677
    
    
    
    88,578Taxes, other than payroll and income taxes
    
    
    2,550
    
    
    
    2,565
    
    
    
    7,351
    
    
    
    8,849Advertising
    
    
    2,752
    
    
    
    2,397
    
    
    
    7,257
    
    
    
    6,327Professional services
    
    
    6,686
    
    
    
    10,986
    
    
    
    20,696
    
    
    
    47,987Communication and information systems
    
    
    7,107
    
    
    
    4,271
    
    
    
    18,228
    
    
    
    13,589Occupancy and other office expenses
    
    
    6,607
    
    
    
    5,039
    
    
    
    18,256
    
    
    
    17,789Depreciation and amortization
    
    
    4,170
    
    
    
    4,129
    
    
    
    12,297
    
    
    
    13,607Other
    
    
    5,034
    
    
    
    12,456
    
    
    
    24,875
    
    
    
    28,329Total non-interest expenses
    
    
    52,448
    
    
    
    73,218
    
    
    
    162,637
    
    
    
    225,055(Loss) income before income taxes
    
    
    (696
    )
    
    
    (148,414
    )
    
    
    3,819
    
    
    
    (216,244
    )Income tax expense (benefit)
    
    
    1,060
    
    
    
    (86,266
    )
    
    
    6,231
    
    
    
    (79,309
    )Net loss
    
    $
    (1,756
    )
    
    $
    (62,148
    )
    
    $
    (2,412
    )
    
    $
    (136,935
    )Net loss attributable to common shareholders
    
    $
    (10,080
    )
    
    $
    (70,472
    )
    
    $
    (27,386
    )
    
    $
    (161,909
    )Net loss per common share(1)
    
    $
    (0.19
    )
    
    $
    (1.59
    )
    
    $
    (0.51
    )
    
    $
    (8.74
    )
 
 (1)
    
    For the quarters and nine month periods ended September 30, 2008 and 2007, net loss per common shares represents the basic and
diluted loss per common share, respectively, for each of the periods presented.  4




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (UNAUDITED)
 NINE MONTH PERIODSENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK:Balance at beginning of period
    
    
    538
    
    
    
    107,948Change in par value $1 to $0.01
    
    
    
    
    
    
    (106,869
    )Issuance of common stock
    
    
    
    
    
    
    9,683Shares reduced as result of 1-for-20 reverse stock split
    
    
    
    
    
    
    (10,224
    )Balance at end of period
    
    
    538
    
    
    
    538ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    849,081
    
    
    
    166,495Change in par value $1 to $0.01
    
    
    
    
    
    
    106,869Issuance of common stock
    
    
    
    
    
    
    600,317Cost of issuance
    
    
    
    
    
    
    (39,790
    )Shares converted as result of 1-for-20 reverse stock split
    
    
    
    
    
    
    10,224Stock-based compensation recognized
    
    
    39
    
    
    
    4,483Balance at end of period
    
    
    849,120
    
    
    
    848,598LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596(ACCUMULATED DEFICIT) RETAINED EARNINGS:Balance at beginning of period
    
    
    (66,610
    )
    
    
    139,051Net loss
    
    
    (2,412
    )
    
    
    (136,935
    )Cumulative effect of accounting change (adoption of SFAS
No. 156)
    
    
    
    
    
    
    926Cumulative effect of accounting change (adoption of FIN 48)
    
    
    
    
    
    
    (2,380
    )Cash dividends declared on preferred stock
    
    
    (24,974
    )
    
    
    (24,974
    )Balance at end of period
    
    
    (93,996
    )
    
    
    (24,312
    )ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (33,148
    )
    
    
    (106,936
    )Other comprehensive (loss) income, net of deferred tax
    
    
    (162,258
    )
    
    
    105,829Balance at end of period
    
    
    (195,406
    )
    
    
    (1,107
    )Total stockholders equity
    
    $
    1,157,102
    
    
    $
    1,420,563
  5




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (UNAUDITED)
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,756
    )
    
    $
    (62,148
    )
    
    $
    (2,412
    )
    
    $
    (136,935
    )Other comprehensive (loss) income, before tax:Unrealized (losses) gains on securities arising during the period
    
    
    (78,102
    )
    
    
    17,176
    
    
    
    (191,491
    )
    
    
    (8,240
    )Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    33Reclassification of realized losses included in net loss
    
    
    4,173
    
    
    
    114,830
    
    
    
    3,979
    
    
    
    115,172Other comprehensive (loss) income, before tax
    
    
    (73,929
    )
    
    
    132,017
    
    
    
    (187,512
    )
    
    
    106,965Income tax benefit (expense) related to investment securities
    
    
    11,193
    
    
    
    (1,302
    )
    
    
    25,106
    
    
    
    (1,136
    )Other comprehensive (loss) income on investment securities, net of
tax
    
    
    (62,736
    )
    
    
    130,715
    
    
    
    (162,406
    )
    
    
    105,829Other comprehensive income on cash flow hedges, net of tax
    
    
    662
    
    
    
    
    
    
    
    418
    
    
    
    Other comprehensive (loss) income, net of tax
    
    
    (62,074
    )
    
    
    130,715
    
    
    
    (161,988
    )
    
    
    105,829Comprehensive (loss) income, net of tax
    
    $
    (63,830
    )
    
    $
    68,567
    
    
    $
    (164,400
    )
    
    $
    (31,106
    )Accumulated other comprehensive loss, net of taxOther comprehensive loss on investment securities
    
    $
    (195,253
    )
    
    $
    (1,107
    )
    
    $
    (195,253
    )
    
    $
    (1,107
    )Other comprehensive loss on cash flow hedge
    
    
    (153
    )
    
    
    
    
    
    
    (153
    )
    
    
    Total accumulated other comprehensive loss, net of tax
    
    $
    (195,406
    )
    
    $
    (1,107
    )
    
    $
    (195,406
    )
    
    $
    (1,107
    )
  6




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##### Table of Contents



DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 NINE MONTH PERIODSENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (2,412
    )
    
    $
    (136,935
    )Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:Stock-based compensation
    
    
    39
    
    
    
    4,483Depreciation and amortization
    
    
    12,297
    
    
    
    13,607Mark-to-market adjustment of servicing assets
    
    
    15,448
    
    
    
    8,213Deferred tax
provision (benefit)
    
    
    3,378
    
    
    
    (82,915
    )Provision for loan and lease losses
    
    
    22,678
    
    
    
    30,373Net gain on sale of assets to be disposed of by sale
    
    
    (348
    )
    
    
    Net premium on deposit sold
    
    
    
    
    
    
    (9,521
    )Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    (17,367
    )
    
    
    5,681Unrealized loss on loans held for sale
    
    
    
    
    
    
    2,068Net increase in loans held for sale
    
    
    (152,908
    )
    
    
    (138,508
    )Loss on securities
    
    
    1,710
    
    
    
    102,868Unrealized loss on trading securities
    
    
    663
    
    
    
    25,973Decrease in securities held for trading
    
    
    233,795
    
    
    
    173,344Amortization
and net gain (loss) in the fair value of IOs
    
    
    4,184
    
    
    
    (1,701
    )(Increase) decrease in derivative instruments
    
    
    (525
    )
    
    
    20,505(Increase) decrease in receivables and mortgage servicing advances
    
    
    (1,991
    )
    
    
    1,829(Increase) decrease in accrued interest receivable
    
    
    (5,141
    )
    
    
    22,649Increase in other assets
    
    
    (27,632
    )
    
    
    (58,936
    )Decrease in accrued expenses and other liabilities
    
    
    (55,199
    )
    
    
    (117,454
    )Total adjustments
    
    
    33,081
    
    
    
    2,558Net cash
provided by (used in) operating activities
    
    
    30,669
    
    
    
    (134,377
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (2,349,698
    )
    
    
    (46,741
    )Principal repayment and sales of securities available for sale
    
    
    745,059
    
    
    
    2,305,985Principal repayment and maturities of securities held to maturity
    
    
    
    
    
    
    158,631Increase in FHLB stock
    
    
    (40,696
    )
    
    
    (4,999
    )Net (increase) decrease of loans receivable
    
    
    (317,505
    )
    
    
    28,177Purchases of premises and equipment
    
    
    (8,632
    )
    
    
    (6,789
    )Proceeds from sale of servicing assets
    
    
    
    
    
    
    7,000Proceeds from assets to be disposed by sale
    
    
    1,018
    
    
    
    Proceeds from sales of real estate held for sale
    
    
    15,021
    
    
    
    3,987Payment in connection with the sale of certain assets and liabilities of Doral Bank NY, including
cash delivered
    
    
    
    
    
    
    (121,824
    )Net cash (used in) provided by investing activities
    
    
    (1,955,433
    )
    
    
    2,323,427Cash flows from financing activities:Increase in deposits
    
    
    33,773
    
    
    
    222,449Increase
(decrease) in securities sold under agreements to repurchase
    
    
    935,864
    
    
    
    (2,392,878
    )Proceeds from advances from FHLB
    
    
    1,544,400
    
    
    
    790,790Repayment of advances from FHLB
    
    
    (1,055,000
    )
    
    
    (440,000
    )Repayment of secured borrowings
    
    
    (29,657
    )
    
    
    (28,164
    )Repayment of notes payable
    
    
    (4,162
    )
    
    
    (640,358
    )Issuance of common stock, net
    
    
    
    
    
    
    610,000Dividends paid
    
    
    (24,974
    )
    
    
    (24,974
    )Net cash provided by (used in) financing activities
    
    
    1,400,244
    
    
    
    (1,903,135
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (524,520
    )
    
    $
    285,915Cash and cash equivalents at beginning of period
    
    
    789,169
    
    
    
    1,145,861Cash and cash equivalents at the end of period
    
    $
    264,649
    
    
    $
    1,431,776Cash and cash equivalents includes:Cash and due from banks
    
    $
    62,822
    
    
    $
    85,343Money market investments
    
    
    201,827
    
    
    
    1,346,433$
    264,649
    
    
    $
    1,431,776Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    259,216
    
    
    $
    164,401Reclassification of securities from the held for trading portfolio to the available for sale portfolio
    
    $
    68,520
    
    
    $
    Reclassification of securities held to maturity to held for trading in connection with the agreement
to sell certain assets of Doral Bank NY
    
    $
    
    
    
    $
    91,045Reclassification of loans receivable to loans held for sale in connection with the agreement to sell
certain assets of Doral Bank NY
    
    $
    
    
    
    $
    205,629Reclassification
of premises and equipment to assets to be disposed of by sale
    
    $
    
    
    
    $
    22,457Reclassification
of assets to be disposed of by sale to premises and equipment(1)
    
    $
    5,277
    
    
    $
    Loans foreclosed
    
    $
    35,125
    
    
    $
    14,141Reclassification of loans held for sale to loans receivable
    
    $
    48,185
    
    
    $
    1,382,734Capitalization of servicing assets
    
    $
    5,304
    
    
    $
    3,765Remeasurement of income taxes payable upon adoption of FIN 48
    
    $
    
    
    
    $
    2,380Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax
    
    $
    
    
    
    $
    926Supplemental information for cash flows:Cash used to pay interest
    
    $
    286,684
    
    
    $
    349,343Cash used to
pay income taxes(2)
    
    $
    24,578
    
    
    $
    3,202
   Assets:Securities
    
    $
    549,884Account receivable and servicing advances
    
    
    (43,276
    )Accrued interest receivable
    
    
    3,222Total assets reduction
    
    $
    509,830Liabilities:Securities sold under agreement to repurchase
    
    $
    504,028Accrued interest payable
    
    
    5,192Other liabilities
    
    
    610Total liabilities reduction
    
    $
    509,830
   Assets:Loans
    
    $
    206,074Securities
    
    
    155,264Property,
leasehold improvements and equipment
    
    
    9,400Other assets
    
    
    2,321Total assets
sold
    
    $
    373,059Liabilities:Securities sold under agreement to repurchase
    
    
    9,950Deposits
    
    
    377,491Advances from FHLB
    
    
    114,290Other liabilities
    
    
    2,673Total
liabilities sold
    
    $
    504,404Excess of
liabilities over assets sold
    
    
    (131,345
    )Net premium
on Deposits Sold
    
    
    9,521Payment in
connection with the sale of certain assets and liabilities of Doral
Bank NY, including cash delivered
    
    $
    (121,824
    )
 
 (1)
    
    Related to assets currently used by the Company and not
longer available for sale.(2)
    
    Includes $23.5 million related to an income tax credit
granted by the P.R. Government as an incentive for new and existing hosing projects that was
recorded as a receivable in the Companys Statement of Financial Condition.  7




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##### Table of Contents



DORAL
FINANCIAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 a.
    
    The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial
Corporation, Doral Mortgage LLC (Doral Mortgage), Doral Securities, Inc. (Doral
Securities), Doral Bank (Doral Bank PR), Doral Bank, FSB (Doral Bank NY), Doral Money,
Inc. (Doral Money), Doral International, Inc. (Doral International), Doral Properties,
Inc. (Doral Properties), Doral Insurance Agency, Inc. (Doral Agency) and CB, LLC. On July
18, 2007, Sana Mortgage Corporation (Sana) was merged with and into Doral Mortgage, and
Centro Hipotecario de Puerto Rico (Centro Hipotecario) was merged with and into Doral
Financial. On July 1, 2008, the Companys international banking entity was merged with and
into Doral Bank PR, Doral Internationals parent company, with Doral Bank PR being the
surviving corporation, as a tax free reorganization. References herein to Doral Financial or
the Company shall be deemed to refer to the Company and its consolidated subsidiaries,
unless otherwise provided. All significant intercompany accounts and transactions have been
eliminated in consolidation. The 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, 2007, except for the implementation of Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157) detailed in notes c
and y below. Certain information and note disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles in the United
States of America (GAAP) has been condensed or omitted from these statements pursuant to the
rules and regulations of the Securities and Exchange Commission (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, 2007, included in the
Companys 2007 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
presentation of the statement of financial position, results of operations and cash flows for
the interim periods have been reflected.b.
    
    The results of operations for the quarter and nine month period ended September 30, 2008 are
not necessarily indicative of the results to be expected for the full year.c.
    
    The Company adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 defines fair value,
establishes a consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. This statement defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. SFAS No. 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable inputs when
measuring fair value. The standard describes three levels of inputs that are used to measure
fair value:
 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.
 The Company applied the fair value framework established by SFAS No. 157 to the following
financial assets and liabilities: securities available for sale, securities held for
trading, loans held for sale, loans held for investment, mortgage servicing rights (MSRs)
and derivatives. Please refer to note y for further information.On February 12, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position 157-2 (FSP 157-2), Effective Date of FASB Statement No. 157. This statement
delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. Therefore, we have
elected to delay application of SFAS No. 157 for nonfinancial long-lived assets measured at
fair value for an impairment assessment under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, goodwill and other real estate owned.
 8




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##### Table of Contents



d.
    
    At September 30, 2008, escrow funds and custodial accounts included approximately $84.9
million deposited with Doral Bank PR. These funds are included in the Companys consolidated
financial statements. Escrow funds and custodial accounts also included approximately $18.4
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 $17.5 million
and $17.0 million, respectively, as of September 30, 2008.e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarters Ended
    
    
    Nine Month Periods EndedSeptember 30,
    
    
    September 30,(In thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net Loss:Net loss
    
    $
    (1,756
    )
    
    $
    (62,148
    )
    
    $
    (2,412
    )
    
    $
    (136,935
    )Convertible preferred stock dividend
    
    
    (4,096
    )
    
    
    (4,096
    )
    
    
    (12,290
    )
    
    
    (12,290
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (12,684
    )
    
    
    (12,684
    )Net loss attributable to common shareholders
    
    $
    (10,080
    )
    
    $
    (70,472
    )
    
    $
    (27,386
    )
    
    $
    (161,909
    )Weighted-Average Shares(1):Basic weighted-average number of common
shares outstanding(2)
    
    
    53,810,110
    
    
    
    44,338,061
    
    
    
    53,810,110
    
    
    
    18,520,268Diluted weighted-average number of common
shares outstanding(2)(3)
    
    
    53,810,110
    
    
    
    44,338,061
    
    
    
    53,810,110
    
    
    
    18,520,268Net Loss per Common Share:Basic
    
    $
    (0.19
    )
    
    $
    (1.59
    )
    
    $
    (0.51
    )
    
    $
    (8.74
    )Diluted
    
    $
    (0.19
    )
    
    $
    (1.59
    )
    
    $
    (0.51
    )
    
    $
    (8.74
    )
 
 (1)
    
    For the quarters and nine month periods ended September 30, 2008 and 2007, there were 1,380,000 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. Each share of convertible preferred stock is currently convertible into 0.31428 shares of
common stock, subject to adjustment under specific conditions. 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
$795.47, or $954.56); (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 $795.47, or $1,031.41) 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.(2)
    
    Excludes unvested shares of restricted stock.(3)
    
    Potential 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 September 30, 2008,
there were 80,000 and 8,000 outstanding stock options and shares of restricted stock, respectively, that were excluded from the
computation of diluted earnings per common share for the quarter and nine month period ended September 30, 2008 because the Company
reported a net loss for such periods. f.
    
    Employee costs and other expenses are shown in the Consolidated Statements of Income
net of direct loan origination costs which, pursuant to Statement of Financial Accounting
Standard (SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91), are
capitalized as part of the carrying cost of loans and are offset against net gains on loan
sales and fees when the loans are sold or amortized as yield adjustment in the case of
loans receivable.
 9




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##### Table of Contents



Quarters Ended
    
    
    Nine Month Periods EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Employee costs, gross
    
    $
    19,664
    
    
    $
    34,192
    
    
    $
    60,432
    
    
    $
    94,830Deferred costs
pursuant to SFAS 91
    
    
    (2,122
    )
    
    
    (2,817
    )
    
    
    (6,755
    )
    
    
    (6,252
    )Employee cost, net
    
    $
    17,542
    
    
    $
    31,375
    
    
    $
    53,677
    
    
    $
    88,578Other expenses, gross
    
    $
    5,215
    
    
    $
    13,375
    
    
    $
    25,355
    
    
    $
    30,583Deferred costs
pursuant to SFAS 91
    
    
    (181
    )
    
    
    (919
    )
    
    
    (480
    )
    
    
    (2,254
    )Other expenses, net
    
    $
    5,034
    
    
    $
    12,456
    
    
    $
    24,875
    
    
    $
    28,329
 As of September 30, 2008, the Company had a net deferred origination cost on loans held for
sale amounting to approximately $0.6 million, compared to a net deferred origination fee of
approximately $0.9 million as of December 31, 2007. Net deferred origination fees on loans
receivable amounted to approximately $16.9 million as of September 30, 2008, compared to
$10.9 million as of December 31, 2007.g.
    
    Segment informationThe Company operates in four reportable segments: mortgage banking activities, banking (including thrift operations),
institutional securities operations and insurance agency activities. The Companys
segment reporting is organized by legal entity
and aggregated by line of business. Legal entities that do not meet the threshold
for separate disclosure are aggregated with other
legal entities with similar lines of business. Management made this determination
based on operating decisions particular to each
business line and because each one targets different customers and requires different
strategies. The majority of the Companys
operations are conducted in Puerto Rico. The Company also operates in the mainland United States, principally in the New York City metropolitan area.During 2006, the Company reduced the operations of Doral Securities and sold substantially all of Doral Securities investment
securities. During the third quarter of 2007, Doral Securities voluntarily withdrew its license as broker dealer with the SEC and its
membership with the Financial Industry Regulatory Authority (FINRA). As a result, Doral Securities operations are currently
limited to acting as a co-investment manager to a local fixed-income investment company. The Company intends to assign its
contract to Doral Bank PR.During 2007, in connection with the recapitalization transaction, Doral Financial transferred the Companys mortgage origination
platform and servicing portfolio, subject to certain exceptions, to Doral Bank PR. Following the transfer, Doral Financials
mortgage origination business is conducted by Doral Mortgage, as a wholly owned subsidiary of Doral Bank PR, and Doral
 Financials servicing business is operated from Doral Bank PR. Management determined that it was impracticable to change the
composition of reportable segments for earlier periods. Therefore, we have presented below segment information for the quarters
and nine month periods ended September 30, 2008 and 2007, with the new reportable segment structure as well as comparative
segment information for the quarters and nine month periods ended September 30, 2008 and 2007, using the old reportable
segment structure. In establishing the old reportable segment structure for the quarters and nine month periods ended September
30, 2008 and 2007, the servicing asset and the related income and expenses that were transferred during the third quarter of 2007
to Doral Bank PR have been reclassified to the mortgage banking segment.The accounting policies followed by the segments are the same as those described in the Summary of Significant Accounting Policies.The following tables present net interest income (loss), non-interest income (loss), net income (loss) and identifiable assets
for each of the Companys reportable segments for the periods presented using the old reportable segment structure.
 10




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##### Table of Contents



Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    Intersegment(In thousands)
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    

Eliminations(1)
    
    TotalsQUARTER ENDED SEPTEMBER
30, 2008Net interest income
    
    $
    4,080
    
    
    
    42,458
    
    
    
    
    
    
    
    
    
    
    
    502
    
    
    $
    47,040Non-interest income
    
    $
    11,176
    
    
    
    4,394
    
    
    
    
    
    
    
    3,139
    
    
    
    (6,788
    )
    
    $
    11,921Net income (loss)
    
    $
    4,914
    
    
    
    (4,270
    )
    
    
    (33
    )
    
    
    1,609
    
    
    
    (3,976
    )
    
    $
    (1,756
    )Identifiable assets
    
    $
    1,908,707
    
    
    
    8,652,024
    
    
    
    2,081
    
    
    
    25,984
    
    
    
    (598,888
    )
    
    $
    9,989,908QUARTER ENDED SEPTEMBER
30, 2007Net interest income
    
    $
    2,279
    
    
    
    38,205
    
    
    
    
    
    
    
    
    
    
    
    (1,049
    )
    
    $
    39,435Non-interest
income (loss)
    
    $
    17,673
    
    
    
    (115,957
    )
    
    
    228
    
    
    
    2,015
    
    
    
    (13,528
    )
    
    $
    (109,569
    )Net income (loss)
    
    $
    65,686
    
    
    
    (115,162
    )
    
    
    268
    
    
    
    96
    
    
    
    (13,036
    )
    
    $
    (62,148
    )Identifiable assets
    
    $
    2,165,557
    
    
    
    7,631,882
    
    
    
    2,728
    
    
    
    20,384
    
    
    
    (314,985
    )
    
    $
    9,505,566(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008Net interest income
    
    $
    13,857
    
    
    
    119,811
    
    
    
    
    
    
    
    
    
    
    
    1,271
    
    
    $
    134,939Non-interest income
    
    $
    39,941
    
    
    
    25,013
    
    
    
    144
    
    
    
    9,688
    
    
    
    (20,591
    )
    
    $
    54,195Net income (loss)
    
    $
    18,358
    
    
    
    (12,608
    )
    
    
    (47
    )
    
    
    4,645
    
    
    
    (12,760
    )
    
    $
    (2,412
    )Identifiable assets
    
    $
    1,908,707
    
    
    
    8,652,024
    
    
    
    2,081
    
    
    
    25,984
    
    
    
    (598,888
    )
    
    $
    9,989,908NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2007Net interest (loss) income
    
    $
    (8,028
    )
    
    
    118,679
    
    
    
    
    
    
    
    
    
    
    
    1,577
    
    
    $
    112,228Non-interest income (loss)
    
    $
    45,280
    
    
    
    (108,466
    )
    
    
    516
    
    
    
    7,127
    
    
    
    (17,501
    )
    
    $
    (73,044
    )Net (loss)
income
    
    $
    (23,496
    )
    
    
    (102,650
    )
    
    
    371
    
    
    
    2,388
    
    
    
    (13,548
    )
    
    $
    (136,935
    )Identifiable assets
    
    $
    2,165,557
    
    
    
    7,631,882
    
    
    
    2,728
    
    
    
    20,384
    
    
    
    (314,985
    )
    
    $
    9,505,566(1)     The intersegment eliminations in the above table include servicing fees paid by
the banking subsidiaries to the mortgage banking subsidiaries recognized as a reduction of the
net interest income, direct intersegment loan origination costs amortized as yield adjustment
or offset against net gains on mortgage loan sales and fees (mainly related with origination
costs paid by the banking segment to the mortgage banking segment) and other income derived
from intercompany transactions, related principally to rental income
paid to Doral Properties,
the Companys subsidiary that owns the corporate headquarter facilities. Assets include
internal funding and investments in subsidiaries accounted for at
cost.The following tables present net interest income (loss), non-interest income
(loss), net income (loss) and identifiable assets for each of the Companys
reportable segments for the periods presented using the new reportable segment
structure. The new reportable segment structure includes the servicing assets and
related income and expenses that were transferred during the third quarter of
2007 to Doral Bank PR as part of the banking segment.Mortgage
    
    
    
    
    
    Insurance
    
    
    
    
    
    Intersegment(In thousands)
    
    Banking
    
    Banking
    
    Agency
    
    Other
    

Eliminations
    
    TotalsQUARTER ENDED SEPTEMBER 30, 2008Net interest income
    
    $
    4,080
    
    
    
    42,458
    
    
    
    
    
    
    
    
    
    
    
    502
    
    
    $
    47,040Non-interest income
    
    $
    7,824
    
    
    
    7,746
    
    
    
    
    
    
    
    3,139
    
    
    
    (6,788
    )
    
    $
    11,921Net income (loss)
    
    $
    2,475
    
    
    
    (1,831
    )
    
    
    (33
    )
    
    
    1,609
    
    
    
    (3,976
    )
    
    $
    (1,756
    )Identifiable assets
    
    $
    1,908,707
    
    
    
    8,817,671
    
    
    
    2,081
    
    
    
    25,984
    
    
    
    (764,535
    )
    
    $
    9,989,908QUARTER ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    2,279
    
    
    
    38,205
    
    
    
    
    
    
    
    
    
    
    
    (1,049
    )
    
    $
    39,435Non-interest income
(loss)
    
    $
    165,245
    
    
    
    (108,529
    )
    
    
    228
    
    
    
    2,015
    
    
    
    (168,528
    )
    
    $
    (109,569
    )Net income (loss)
    
    $
    221,165
    
    
    
    (115,640
    )
    
    
    268
    
    
    
    96
    
    
    
    (168,037
    )
    
    $
    (62,148
    )Identifiable assets
    
    $
    2,165,557
    
    
    
    7,820,193
    
    
    
    2,728
    
    
    
    20,384
    
    
    
    (503,296
    )
    
    $
    9,505,566(In
thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008Net interest income
    
    $
    13,857
    
    
    
    119,811
    
    
    
    
    
    
    
    
    
    
    
    1,271
    
    
    $
    134,939Non-interest income
    
    $
    22,901
    
    
    
    42,053
    
    
    
    144
    
    
    
    9,688
    
    
    
    (20,591
    )
    
    $
    54,195Net income (loss)
    
    $
    4,273
    
    
    
    1,477
    
    
    
    (47
    )
    
    
    4,645
    
    
    
    (12,760
    )
    
    $
    (2,412
    )Identifiable assets
    
    $
    1,908,707
    
    
    
    8,817,671
    
    
    
    2,081
    
    
    
    25,984
    
    
    
    (764,535
    )
    
    $
    9,989,908NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007Net interest (loss)
income
    
    $
    (8,028
    )
    
    
    118,679
    
    
    
    
    
    
    
    
    
    
    
    1,577
    
    
    $
    112,228Non-interest income
(loss)
    
    $
    192,852
    
    
    
    (101,038
    )
    
    
    516
    
    
    
    7,127
    
    
    
    (172,501
    )
    
    $
    (73,044
    )Net income (loss)
    
    $
    131,984
    
    
    
    (103,129
    )
    
    
    371
    
    
    
    2,388
    
    
    
    (168,549
    )
    
    $
    (136,935
    )Identifiable assets
    
    $
    2,165,557
    
    
    
    7,820,193
    
    
    
    2,728
    
    
    
    20,384
    
    
    
    (503,296
    )
    
    $
    9,505,566
 11




---



##### Table of Contents



(In
thousands)
    
    Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsQUARTER ENDED SEPTEMBER 30, 2008Net interest income
    
    $
    43,988
    
    
    
    3,014
    
    
    
    38
    
    
    $
    47,040Non-interest income
    
    $
    11,478
    
    
    
    532
    
    
    
    (89
    )
    
    $
    11,921Net (loss) income
    
    $
    (2,734
    )
    
    
    977
    
    
    
    1
    
    
    $
    (1,756
    )Identifiable assets
    
    $
    9,920,667
    
    
    
    238,566
    
    
    
    (169,325
    )
    
    $
    9,989,908QUARTER ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    36,559
    
    
    
    2,890
    
    
    
    (14
    )
    
    $
    39,435Non-interest (loss) income
    
    $
    (115,230
    )
    
    
    5,727
    
    
    
    (66
    )
    
    $
    (109,569
    )Net (loss) income
    
    $
    (64,891
    )
    
    
    2,766
    
    
    
    (23
    )
    
    $
    (62,148
    )Identifiable assets
    
    $
    9,463,474
    
    
    
    144,594
    
    
    
    (102,502
    )
    
    $
    9,505,566(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008Net interest income
    
    $
    128,587
    
    
    
    6,214
    
    
    
    138
    
    
    $
    134,939Non-interest income
    
    $
    52,531
    
    
    
    1,958
    
    
    
    (294
    )
    
    $
    54,195Net (loss) income
    
    $
    (4,022
    )
    
    
    1,598
    
    
    
    12
    
    
    $
    (2,412
    )Identifiable assets
    
    $
    9,920,667
    
    
    
    238,566
    
    
    
    (169,325
    )
    
    $
    9,989,908NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    99,553
    
    
    
    12,627
    
    
    
    48
    
    
    $
    112,228Non-interest loss
    
    $
    (69,900
    )
    
    
    (2,883
    )
    
    
    (261
    )
    
    $
    (73,044
    )Net loss
    
    $
    (136,135
    )
    
    
    (780
    )
    
    
    (20
    )
    
    $
    (136,935
    )Identifiable assets
    
    $
    9,463,474
    
    
    
    144,594
    
    
    
    (102,502
    )
    
    $
    9,505,566
 h.
    
    The Companys bank subsidiaries are required by federal and state regulatory agencies
to maintain average reserve balances with the Federal Reserve Bank or other banks. Those
required average reserve balances amounted to $131.6 million and
$178.0 million as of
September 30, 2008 and December 31, 2007, respectively.i.
    
    The fair value of the Companys securities held for trading and the fair value and
carrying value of its securities classified as available for sale are shown below by
category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of September 30, 2008 and December 31, 2007.
 SECURITIES HELD FOR TRADING
    
    SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Mortgage-Backed Securities:GNMA Exempt
    
    $
    2,594
    
    
    $
    33,678GNMA Taxable
    
    
    
    
    
    
    11,928CMO Government Sponsored Agencies
    
    
    
    
    
    
    287CMO Private Label
    
    
    1,235
    
    
    
    15,777FHLMC and FNMA
    
    
    
    
    
    
    8,693Variable Interest-Only Strips
    
    
    47,100
    
    
    
    51,074Fixed Interest-Only Strips
    
    
    644
    
    
    
    854U.S. Treasury Notes
    
    
    176,094
    
    
    
    152,695Derivatives(1)
    
    
    2,001
    
    
    
    1,476Total
    
    $
    229,668
    
    
    $
    276,462
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure
to interest rate risk caused by changes in interest rates. Derivatives
include interest rate caps and forward contracts. Derivatives not
accounted as hedges in a net asset position are recorded as securities
held for trading and derivatives in a net liability position as
liabilities. The gross notional amount of derivatives recorded as held
for trading totaled $315.0 million as of September 30, 2008 and $414.0
million as of December 31, 2007. Notional amounts indicate the volume of
derivatives activity, but do not represent Doral Financials exposure to
market or credit risk. In January 2008, the Company transferred $68.5 million from the held for trading
portfolio to the available for sale portfolio as a result of a reassessment of the
intention to trade these securities or to sell them in the short term. This transfer
was the final part of the Companys reassessment of its investment portfolio as a
result of the Companys Recapitalization. The Recapitalization significantly changed
Doral Financials liquidity position which resulted in the Companys decision to
include these assets as core medium to long term investments.
 2.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities available for sale as of September 30, 2008 and December 31, 2007.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.
 12




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##### Table of Contents



SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 2008
 GROSS
    
    
    GROSS
    
    
    
    
    

    
    WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue within one year
    
    $
    64
    
    
    $
    2
    
    
    $
    
    
    
    $
    66
    
    
    
    5.87
    %Due from one to five years
    
    
    811
    
    
    
    9
    
    
    
    16
    
    
    
    804
    
    
    
    4.88
    %Due from five to ten years
    
    
    669
    
    
    
    21
    
    
    
    
    
    
    
    690
    
    
    
    6.56
    %Due over ten years
    
    
    64,247
    
    
    
    141
    
    
    
    1,479
    
    
    
    62,909
    
    
    
    5.37
    %FHLMC and FNMADue from five to ten years
    
    
    45,878
    
    
    
    1
    
    
    
    1,114
    
    
    
    44,765
    
    
    
    5.54
    %Due over ten years
    
    
    982,893
    
    
    
    3,194
    
    
    
    7,915
    
    
    
    978,172
    
    
    
    5.12
    %CMO Government Sponsored AgenciesDue over ten years
    
    
    1,138,726
    
    
    
    1,974
    
    
    
    8,977
    
    
    
    1,131,723
    
    
    
    3.78
    %CMO Private LabelDue over ten years
    
    
    503,237
    
    
    
    
    
    
    
    206,197
    
    
    
    297,040
    
    
    
    6.49
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    2,061
    
    
    
    33
    
    
    
    
    
    
    
    2,094
    
    
    
    4.16
    %Due from five to ten years
    
    
    63,470
    
    
    
    
    
    
    
    1,509
    
    
    
    61,961
    
    
    
    5.01
    %Due over ten years
    
    
    105,000
    
    
    
    
    
    
    
    3,855
    
    
    
    101,145
    
    
    
    5.26
    %FNMA NotesDue within one year
    
    
    43,741
    
    
    
    8
    
    
    
    
    
    
    
    43,749
    
    
    
    4.19
    %Due from one to five years
    
    
    3,184
    
    
    
    19
    
    
    
    
    
    
    
    3,203
    
    
    
    3.37
    %Due over ten years
    
    
    49,990
    
    
    
    
    
    
    
    791
    
    
    
    49,199
    
    
    
    6.00
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    
    
    
    
    329
    
    
    
    49,671
    
    
    
    5.50
    %P.R. Housing BankDue from five to ten years
    
    
    3,595
    
    
    
    
    
    
    
    80
    
    
    
    3,515
    
    
    
    4.92
    %Due over ten years
    
    
    3,695
    
    
    
    
    
    
    
    125
    
    
    
    3,570
    
    
    
    5.47
    %OtherDue within one year
    
    
    11,158
    
    
    
    166
    
    
    
    
    
    
    
    11,324
    
    
    
    4.64
    %Due from one to five years
    
    
    14,278
    
    
    
    169
    
    
    
    
    
    
    
    14,447
    
    
    
    4.29
    %Due over ten years
    
    
    8,000
    
    
    
    94
    
    
    
    660
    
    
    
    7,434
    
    
    
    5.61
    %$
    3,094,697
    
    
    $
    5,831
    
    
    $
    233,047
    
    
    $
    2,867,481
    
    
    
    4.87
    %
 13




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##### Table of Contents



SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2007
 GROSS
    
    
    GROSS
    
    
    
    
    
    
    WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    374
    
    
    $
    9
    
    
    $
    
    
    
    $
    383
    
    
    
    6.39
    %Due over ten years
    
    
    3,694
    
    
    
    145
    
    
    
    3
    
    
    
    3,836
    
    
    
    6.91
    %FNMADue over ten years
    
    
    260,143
    
    
    
    4,297
    
    
    
    558
    
    
    
    263,882
    
    
    
    6.05
    %CMO Government Sponsored AgenciesDue over ten years
    
    
    7,000
    
    
    
    
    
    
    
    659
    
    
    
    6,341
    
    
    
    6.10
    %CMO Private LabelDue over ten years
    
    
    530,997
    
    
    
    
    
    
    
    28,285
    
    
    
    502,712
    
    
    
    6.22
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    100,458
    
    
    
    1,165
    
    
    
    
    
    
    
    101,623
    
    
    
    4.16
    %Due over ten years
    
    
    273,595
    
    
    
    
    
    
    
    3,376
    
    
    
    270,219
    
    
    
    5.10
    %FNMA NotesDue within one year
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    46,000
    
    
    
    4.60
    %Due over ten years
    
    
    49,990
    
    
    
    
    
    
    
    43
    
    
    
    49,947
    
    
    
    6.00
    %FHLB Zero CouponDue over ten years
    
    
    137,131
    
    
    
    
    
    
    
    2,688
    
    
    
    134,443
    
    
    
    6.01
    %FHLMC Zero CouponDue over ten years
    
    
    242,281
    
    
    
    155
    
    
    
    162
    
    
    
    242,274
    
    
    
    5.83
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    12
    
    
    
    
    
    
    
    50,012
    
    
    
    5.50
    %P.R. Housing BankDue over ten years
    
    
    4,635
    
    
    
    9
    
    
    
    
    
    
    
    4,644
    
    
    
    5.50
    %U.S. Treasury BondsDue over ten years
    
    
    234,361
    
    
    
    
    
    
    
    8,768
    
    
    
    225,593
    
    
    
    4.21
    %OtherDue within one year
    
    
    6,899
    
    
    
    11
    
    
    
    20
    
    
    
    6,890
    
    
    
    3.98
    %Due from one to five years
    
    
    5,025
    
    
    
    21
    
    
    
    
    
    
    
    5,046
    
    
    
    5.15
    %Due over ten years
    
    
    8,001
    
    
    
    231
    
    
    
    137
    
    
    
    8,095
    
    
    
    5.61
    %$
    1,960,584
    
    
    $
    6,055
    
    
    $
    44,699
    
    
    $
    1,921,940
    
    
    
    5.56
    %
 The Company had counterparty exposure to Lehman Brothers, Inc. (LBI) in connection with
repurchase financing agreements. LBI was placed in a Securities Investor Protection
Corporation (SIPC) liquidation proceeding after the filing for bankruptcy of its parent
Lehman Brothers Holdings Inc. The filing of the SIPC liquidation proceeding was an event of
default under the repurchase agreements resulting in their termination as of September 19,
2008. This termination resulted in a reduction of $549.3 million in positions held as
available for sale securities as of September 30, 2008. Please refer to note x for further
information.j.
    
    The following tables show Doral Financials gross unrealized losses and fair value for
available for sale investments, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at September 30,
2008 and December 31, 2007.
 14




---



##### Table of Contents



SECURITIES AVAILABLE FOR SALE
 As of September 30, 2008Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-BackedSecuritiesGNMA
    
    
    94
    
    
    $
    54,513
    
    
    $
    1,495
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    94
    
    
    $
    54,513
    
    
    $
    1,495FNMA/ FHLMC
    
    
    46
    
    
    
    806,162
    
    
    
    9,005
    
    
    
    2
    
    
    
    1,558
    
    
    
    24
    
    
    
    48
    
    
    
    807,720
    
    
    
    9,029CMO Government
Sponsored
Agencies
    
    
    16
    
    
    
    623,262
    
    
    
    8,536
    
    
    
    2
    
    
    
    5,886
    
    
    
    441
    
    
    
    18
    
    
    
    629,148
    
    
    
    8,977CMO Private Label
    
    
    12
    
    
    
    265,438
    
    
    
    177,939
    
    
    
    1
    
    
    
    31,602
    
    
    
    28,258
    
    
    
    13
    
    
    
    297,040
    
    
    
    206,197Debt SecuritiesFHLB Notes
    
    
    3
    
    
    
    111,247
    
    
    
    2,223
    
    
    
    1
    
    
    
    51,858
    
    
    
    3,141
    
    
    
    4
    
    
    
    163,105
    
    
    
    5,364FHLMC Notes
    
    
    1
    
    
    
    49,671
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    49,671
    
    
    
    329FNMA Notes
    
    
    2
    
    
    
    49,199
    
    
    
    791
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    49,199
    
    
    
    791P.R. Housing Bank
    
    
    4
    
    
    
    7,085
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    7,085
    
    
    
    205Other
    
    
    1
    
    
    
    25
    
    
    
    
    
    
    
    1
    
    
    
    2,340
    
    
    
    660
    
    
    
    2
    
    
    
    2,365
    
    
    
    660179
    
    
    $
    1,966,602
    
    
    $
    200,523
    
    
    
    7
    
    
    $
    93,244
    
    
    $
    32,524
    
    
    
    186
    
    
    $
    2,059,846
    
    
    $
    233,047
 SECURITIES AVAILABLE FOR SALE
 As of December 31, 2007Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-BackedSecuritiesGNMA
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    1
    
    
    $
    165
    
    
    $
    3
    
    
    
    1
    
    
    $
    165
    
    
    $
    3FNMA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    32,556
    
    
    
    558
    
    
    
    1
    
    
    
    32,556
    
    
    
    558CMO Government
Sponsored
Agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    6,341
    
    
    
    659
    
    
    
    4
    
    
    
    6,341
    
    
    
    659CMO Private Label
    
    
    9
    
    
    
    502,712
    
    
    
    28,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    502,712
    
    
    
    28,285Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    95,947
    
    
    
    43
    
    
    
    4
    
    
    
    95,947
    
    
    
    43FHLB Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    270,219
    
    
    
    3,376
    
    
    
    5
    
    
    
    270,219
    
    
    
    3,376FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    134,443
    
    
    
    2,688
    
    
    
    2
    
    
    
    134,443
    
    
    
    2,688FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    158,229
    
    
    
    162
    
    
    
    2
    
    
    
    158,229
    
    
    
    162U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    225,593
    
    
    
    8,768
    
    
    
    2
    
    
    
    225,593
    
    
    
    8,768Other
    
    
    1
    
    
    
    2,863
    
    
    
    137
    
    
    
    1
    
    
    
    3,880
    
    
    
    20
    
    
    
    2
    
    
    
    6,743
    
    
    
    15710
    
    
    $
    505,575
    
    
    $
    28,422
    
    
    
    22
    
    
    $
    927,373
    
    
    $
    16,277
    
    
    
    32
    
    
    $
    1,432,948
    
    
    $
    44,699
 The securities held by the Company are principally
mortgage-backed securities or securities backed by a U.S.
government sponsored entity and therefore, principal and interest on the securities are
deemed recoverable. Doral Financials investment portfolio is mostly composed of debt
securities with AAA rating. The Company has the ability and intent to hold such securities
until maturity or until the unrealized losses are recovered.As of September 30, 2008, the U.S. Private Label CMOs that were purchased during the fourth
quarter of 2007 as part of the Companys asset purchase program were showing significant unrealized
losses. The price movement on these securities has been adversely affected by the conditions of the
U.S. financial markets, specifically the non-agency mortgage market. Management believes these
price changes are not driven by the deal specific fundamentals like structure and credit
performance, but rather by a lack of liquidity in the market place, which has caused a downward
spiral in prices. The collateral underlying these bonds can be split into two categories: Hybrid
ARMs amounting to $124.4 million and Pay Option ARMs amounting to $162.0 million. Hybrid ARM
collateral has been less impacted by the recent market turmoil principally due to the fact the
underlying characteristics of the collateral provide for more stable cash flows and the
delinquencies of the underlying deals has been less than that of the Pay Option ARM backed deals.
Price performance and delinquency trends of the Pay Option ARM backed deals have been worse than
that of the Hybrid ARM deals. All of the bonds are first or second tier AAA super senior or senior
mezzanine tranches which means they are at the top of the capital structure. These bonds have an
average subordination of 33% and a range of subordination of from 28.1 % to 47.9%, beneath them.
Management has evaluated different frequency and severity of loss assumptions and expects to
receive all principal on or before maturity of securities. Management has also compared the
subordination on these bonds to Standard & Poors current loss estimates and loss estimates are below the
current subordination level with a reasonable margin existing between the two. As a result of the
characteristics of both, the Option ARMs and Hybrid ARMs, the level of subordination, and the
evaluation of possible loss scenarios, management concluded it would not incur losses. Management
therefore expects these securities to recover value and intends and has the ability to hold them
until value is recovered.
 15




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##### Table of Contents



Private Label CMOs also include P.R. Private Label CMOs amounting to $10.7 million that are
comprised of subordinate tranches of 2006 securitizations using Doral originated collateral
consisting primarily of 2003 and 2004 vintage loans. Doral purchased the CMOs at a discounted
price of 61 percent of par value, anticipating a partial loss of principal and interest value.
During the first quarter of 2008, the Company transferred these securities from held for trading to
available for sale at a price of 41 percent of par value. Recent price performance of these bonds
has generated unrealized losses, driven primarily by liquidity events in the U.S. mortgage market.
The delinquency trend of the underlying collateral has deteriorated from original expectations,
although performance has been considerably better than that of similar U.S. mortgage backed assets.
Furthermore, home prices in Puerto Rico have not experienced the significant deterioration in
value as those in mainland U.S. As of September 30, 2008, as part of its impairment testing, the
Company recognized an other-than-temporary-impairment of
approximately $0.8 million on one security
from this portfolio due to the probability of higher principal and interest losses. However, for
the other two securities, expected losses have not increased, and management believes they are not
other than temporarily impaired. However, it is possible that future loss assumptions could change
and cause future other-than-temporary-impairment changes. For example, if actual losses were to double current expectations,
all securities would be impaired at an estimated level of unrealized loss (or
other-than-temporary-impairment) of $4.9 million.The Company will continue to monitor all its portfolio and
will perform quarterly impairment tests. If
other-than-temporary-impairment losses are identified, they will be
recorded in current earnings.The effects of the conditions in the financial markets and the economy will likely last
beyond 2008, but management expects that the Company will receive principal and interest due
from these positions in a timely fashion. The Company has the ability and intent to hold
these positions until maturity or until the unrealized losses are recovered. Furthermore,
Doral Financial is able to finance these positions with Advances from FHLB therefore
providing the capacity to hold the positions until value is recovered. Doral Financial also
has excess funding capacity should it be required.
 k.
    
    The following table sets forth certain information regarding Doral Financials loans
held for sale as of the dates indicated:
 LOANS HELD FOR SALE
 (In thousands)
    
    SEPTEMBER 30, 2008
    
    
    DECEMBER 31, 2007Conventional single family residential loans
    
    $
    157,977
    
    
    $
    189,995FHA/VA loans
    
    
    181,078
    
    
    
    141,601Construction and commercial real estate loans
    
    
    40,406
    
    
    
    86,960Total loans held for sale (1)
    
    $
    379,461
    
    
    $
    418,556
 
 (1)
    
    At September 30, 2008 and December 31, 2007, the loans held for sale portfolio included
$1.1 million and $41.8 million, respectively, related to interest-only loans.    16




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##### Table of Contents



l.
    
    The following table sets forth certain information regarding Doral Financials loans
receivable as of the dates indicated:
 LOANS RECEIVABLE, NET
 SEPTEMBER 30, 2008
    
    
    DECEMBER 31, 2007(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    529,698
    
    
    
    10
    %
    
    $
    588,175
    
    
    
    12
    %Residential mortgage loans
    
    
    3,605,391
    
    
    
    68
    %
    
    
    3,340,162
    
    
    
    66
    %Commercial  secured by real estate
    
    
    771,867
    
    
    
    15
    %
    
    
    767,441
    
    
    
    15
    %Consumer  other:Personal loans
    
    
    40,712
    
    
    
    1
    %
    
    
    44,810
    
    
    
    1
    %Auto loans
    
    
    138
    
    
    
    0
    %
    
    
    195
    
    
    
    0
    %Credit cards
    
    
    25,864
    
    
    
    0
    %
    
    
    19,047
    
    
    
    0
    %Overdrawn checking accounts
    
    
    1,396
    
    
    
    0
    %
    
    
    164
    
    
    
    0
    %Revolving lines of credit
    
    
    25,541
    
    
    
    1
    %
    
    
    26,941
    
    
    
    1
    %Lease financing receivables
    
    
    25,378
    
    
    
    1
    %
    
    
    33,457
    
    
    
    1
    %Commercial non-real estate
    
    
    136,728
    
    
    
    2
    %
    
    
    126,484
    
    
    
    2
    %Loans on savings deposits
    
    
    6,027
    
    
    
    0
    %
    
    
    11,037
    
    
    
    0
    %Land secured
    
    
    121,754
    
    
    
    2
    %
    
    
    119,232
    
    
    
    2
    %Loans receivable, gross(2)
    
    
    5,290,494
    
    
    
    100
    %
    
    
    5,077,145
    
    
    
    100
    %Less:Discount on loans transferred(3)
    
    
    (16,129
    )
    
    
    
    
    
    
    (17,615
    )Unearned interest and deferred
loan fees, net
    
    
    (19,430
    )
    
    
    
    
    
    
    (8,597
    )Allowance for loan and lease losses
    
    
    (123,143
    )
    
    
    
    
    
    
    (124,733
    )(158,702
    )
    
    
    
    
    
    
    (150,945
    )Loans receivable, net
    
    $
    5,131,792
    
    
    
    
    
    
    $
    4,926,200
 
 (1)
    
    Includes $437.6 million and $422.4 million of construction loans for residential housing
projects as of September 30, 2008 and December 31, 2007, respectively. Also includes $92.1 million and $165.8
million of construction loans for commercial, condominiums and multifamily projects as of September 30, 2008
and December 31, 2007, respectively.(2)
    
    Includes $317.2 million and $99.3 million of
interest-only loans principally related to the construction loan portfolio, as of September 30, 2008 and
December 31, 2007, respectively.(3)
    
    Relates to $1.4 billion of loans transferred during the second and third quarters of 2007,
from the loans held for sale portfolio to the loans receivable portfolio.  Accounting by Creditors for Impairment of a Loan
  Accounting for Contingencies
 17




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##### Table of Contents



Accounting by Debtors and Creditors of
Troubled Debt Restructurings
  ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    122,099
    
    
    $
    85,875
    
    
    $
    124,733
    
    
    $
    67,233Provision for loan and lease losses
    
    
    7,209
    
    
    
    5,062
    
    
    
    22,678
    
    
    
    30,373Losses charged to the allowance
    
    
    (6,320
    )
    
    
    (3,963
    )
    
    
    (25,165
    )
    
    
    (10,405
    )Recoveries
    
    
    155
    
    
    
    169
    
    
    
    897
    
    
    
    415Other(1)
    
    
    
    
    
    
    473
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    123,143
    
    
    $
    87,616
    
    
    $
    123,143
    
    
    $
    87,616
 
 (1)
    
    Represents the portion of allowance for loans transferred during the first quarter
of 2007 from the loans receivable portfolio to the loans held for sale portfolio, in connection
with the sale of certain assets of Doral Bank NY, completed during the third quarter of 2007. m.
    
    Doral Financial is the guarantor of various unregistered serial and term bonds issued
by Doral Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial,
Tourist, Educational, Medical and Environmental Control Facilities Financing Authority
(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 September 30,
2008, the outstanding principal balance of the bonds was $48.4 million with fixed interest
rates, ranging from 6.25% to 6.90%, and maturities ranging from December 2008 to December
2029. Certain series of the bonds are secured by a mortgage on the building and underlying
real property.n.
    
    The Company routinely originates, securitizes and sells mortgage loans into the
secondary market. As a result of this process, the Company typically retains the servicing
rights and, in the past, also retained interest-only strips. The Companys interests that
continue to be held (retained interests) are subject to prepayment and interest rate
risks.Effective January 1, 2007, under SFAS No. 156, Accounting for Servicing of Financial
Assets, Doral Financial elected to apply fair value accounting to its mortgage servicing
rights (MSRs). The Company engages third party specialists to assist with its valuation of
the entire servicing portfolio (governmental, conforming and non-conforming portfolios). The
fair value of the MSRs is determined based on a combination of market information on trading
activity (MSRs trades and broker valuations), benchmarking of servicing assets (valuation
surveys) and cash flow modeling. The valuation of the Companys MSRs incorporate two sets of
assumptions: (1) market derived assumptions for discount rates, servicing costs, escrow
earnings rate, float earnings rate and cost of funds and (2) 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. Also, the
valuation of the Companys MSR is impacted by changes in laws and regulations, such as the
recent amendment to the Puerto Rico Notarial Law that is expected to
lead to an increase of
the closing costs and fees payable by persons involved in real estate purchase and mortgage
loan transactions in Puerto Rico, which in turn may lead to a reduction in the number of
real estate purchase and mortgage loan transactions in Puerto Rico.The changes in servicing assets measured using the fair value method for the quarters and
nine month periods ended September 30, 2008 and 2007 are shown below:
 18




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##### Table of Contents



QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    145,527
    
    
    $
    164,569
    
    
    $
    150,238
    
    
    $
    177,884Sales of servicing asset(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,581
    )Adjustment to MSR fair value for
loans repurchased(2)
    
    
    
    
    
    
    
    
    
    
    (587
    )
    
    
    Capitalization of servicing assets
    
    
    2,329
    
    
    
    1,219
    
    
    
    5,304
    
    
    
    3,765Change in fair value
    
    
    (8,349
    )
    
    
    (1,934
    )
    
    
    (15,448
    )
    
    
    (8,214
    )Balance at end of period(3)
    
    $
    139,507
    
    
    $
    163,854
    
    
    $
    139,507
    
    
    $
    163,854
 
 (1)
    
    Amount represents MSRs sales related to $693.9 million in principal balance of mortgage loans.(2)
    
    Amount represents the adjustment of MSR fair value related to the repurchase of $26.7 million in principal balance of mortgage loans
serviced for others.(3)
    
    Outstanding balance of loans serviced for third parties amounted to $9.6 billion and $10.5 billion as of September 30, 2008 and 2007,
respectively.   QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    49,160
    
    
    $
    49,755
    
    
    $
    51,928
    
    
    $
    49,926Amortization
    
    
    (1,456
    )
    
    
    (1,142
    )
    
    
    (4,195
    )
    
    
    (5,072
    )Gain on the IO value
    
    
    40
    
    
    
    3,014
    
    
    
    11
    
    
    
    6,773Balance at end of period
    
    $
    47,744
    
    
    $
    51,627
    
    
    $
    47,744
    
    
    $
    51,627
     19




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##### Table of Contents



(Dollars in
thousands)
 Servicing
    
    Interest-OnlyAssets
    
    StripsCarrying amount of retained interest
    
    $
    139,507
    
    
    $
    47,744Weighted-average expected life (in years)
    
    
    7.9
    
    
    
    5.9Constant prepayment rate (weighted-average annual rate)
    
    
    9.47
    %
    
    
    8.98
    %Decrease in fair value due to 10% adverse change
    
    $
    (4,643
    )
    
    $
    (1,495
    )Decrease in fair value due to 20% adverse change
    
    $
    (8,988
    )
    
    $
    (2,896
    )Cash flow discount rate (weighted-average annual rate)
    
    
    11.41
    %
    
    
    13.34
    %Decrease in fair value due to 10% adverse change
    
    $
    (5,552
    )
    
    $
    (1,636
    )Decrease in fair value due to 20% adverse change
    
    $
    (10,690
    )
    
    $
    (3,160
    )
   (Dollars
in thousands)
 Change in Interest
    
    
    
    
    
    Weighted-Average Expected Life
    
    Change in Fair
    
    PercentageRates (basis points)
    
    Constant Prepayment Rate
    
    (Years)
    
    Value of IOs
    
    Change+200
    
    
    5.29
    %
    
    
    7.4
    
    
    $
    (2,537
    )
    
    
    (5.3
    )%+100
    
    
    6.38
    %
    
    
    7.0
    
    
    
    (213
    )
    
    
    (0.4
    )%+50
    
    
    7.59
    %
    
    
    6.4
    
    
    
    (37
    )
    
    
    (0.1
    )%Base
    
    
    8.98
    %
    
    
    5.9
    
    
    
    
    
    
    
    0
    %-50
    
    
    10.80
    %
    
    
    5.2
    
    
    
    (367
    )
    
    
    (0.8
    )%-100
    
    
    12.72
    %
    
    
    4.7
    
    
    
    (414
    )
    
    
    (0.9
    )%-200
    
    
    14.57
    %
    
    
    4.3
    
    
    
    3,983
    
    
    
    8.3
    %
 o.
    
    Stock Option and Other Incentive Plans.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 replaces the 2004 Omnibus Incentive Plan.The aggregate number of shares of common stock which the Company may issue under the Plan is
limited to 6,750,000. As
of September 30, 2008, employee options had not been granted.
 20




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##### Table of Contents



On July 22, 2008, after filing of the Form S-8 with the SEC, independent directors were
granted 2,000 shares of restricted stock and stock options to purchase 20,000 shares of
common stock at an exercise price equal to the closing price of the stock on the grant date.
The restricted stock shall become 100% vested and non-forfeitable on the first anniversary
of the grant date. The stock options vest ratably over a five year period commencing with
the grant date.For the nine month period ended September 30, 2008, the Company granted 80,000 options at a
weighted-average exercise price of $13.70.The Plan is accounted for following the provision of SFAS No. 123R, Share-Based Payment,
as amended. Stock options granted are expensed over the stock option vesting period based on
fair value which is determined using the Black-Scholes option-pricing method at the date the
options are granted.Stock-based compensation recognized at September 30, 2008 is as follows:
 QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDED(In thousands)
    
    SEPTEMBER 30, 2008
    
    
    SEPTEMBER 30, 2008Stock-based compensation recognized
    
    $
    39
    
    
    $
    39Stock-based compensation reversed due
to pre-vesting forfeitures
    
    
    
    
    
    
    Stock-based compensation recognized, net
    
    $
    39
    
    
    $
    39Stock-based compensation recognized on
termination of option plan
    
    $
    
    
    
    $
    Unrecognized
at end of period
    
    $
    540
    
    
    $
    540
  2008Weighted-average exercise price
    
    $
    13.70Stock option estimated fair value
    
    $
    5.88Expected stock option term (years)
    
    
    6.5Expected volatility
    
    
    39
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    3.49
    %
   21




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##### Table of Contents



p.
    
    The following table summarizes deposit balances:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Certificates of deposit
    
    $
    3,066,535
    
    
    $
    2,998,684Regular savings
    
    
    342,051
    
    
    
    317,436NOW and other transaction accounts
    
    
    353,057
    
    
    
    389,330Other interest-bearing deposits
    
    
    274
    
    
    
    152Money markets accounts
    
    
    290,096
    
    
    
    319,601Total interest-bearing
    
    
    4,052,013
    
    
    
    4,025,203Non interest-bearing deposits
    
    
    249,784
    
    
    
    242,821Total deposits
    
    $
    4,301,797
    
    
    $
    4,268,024
 q.
    
    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 according to the provisions of SFAS No. 140. Accordingly, the
amounts received under these agreements represent borrowings, and the securities underlying
the agreements remain in the Companys asset accounts. 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. Those securities are presented in the Consolidated Statements of
Financial Condition as part of pledged investment securities. Securities sold under
agreements to repurchase consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Non-callable repurchase agreements
with maturities less than or equal to
90 days, at various fixed rates
averaging 2.32% and 5.56% at
September 30, 2008 and December 31,
2007, respectively.
    
    $
    617,199
    
    
    $
    17,035Non-callable repurchase agreements
with maturities ranging from February
2009 to February 2014 (2007 - May
2010 to June 2010), at various fixed
rates averaging 3.64% and 4.15% at
September 30, 2008 and December 31,
2007, respectively.
    
    
    1,080,500
    
    
    
    550,000Non-callable repurchase agreement
with a maturity of January 2008, tied
to 3-month LIBOR adjustable
quarterly, at a rate of 5.15% at
December 31, 2007.
    
    
    
    
    
    
    94,800Callable repurchase agreements with
maturities ranging from September
2009 to August 2010 (2007  August
2009 to February 2014), at various
fixed rates averaging 5.95% and 5.50%
at September 30, 2008 and December
31, 2007, respectively.
    
    
    178,500
    
    
    
    782,528$
    1,876,199
    
    
    $
    1,444,363
  22




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##### Table of Contents



r.
    
    Advances from FHLB consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Non-callable advances with maturities
ranging from October 2008 to May 2013
(2007  March 2008 to October 2012),
at various fixed rates averaging
3.84% and 4.60% at September 30, 2008
and December 31, 2007, respectively.
    
    $
    1,039,400
    
    
    $
    535,000Non-callable advance due on July 6,
2010, tied to 3-month LIBOR
adjustable quarterly, at a rate of
2.76% and 5.21% at September 30, 2008
and December 31, 2007, respectively.
    
    
    200,000
    
    
    
    200,000Non-callable advances with maturities
ranging from October 2008 to November
2012 (2007  September 2008 to
November 2012), tied to 1-month LIBOR
adjustable monthly, at a rate of
3.67% and 4.88% at September 30, 2008
and December 31, 2007, respectively.
    
    
    180,000
    
    
    
    195,000Callable advances with maturities
ranging from July 2009 to March 2012,
at various fixed rates averaging
5.40% at September 30, 2008 and
December 31, 2007, respectively,
callable at various dates beginning
in October 2008 (2007 - January
2008).
    
    
    304,000
    
    
    
    304,000$
    1,723,400
    
    
    $
    1,234,000
  s.
    
    At September 30, 2008 and December 31, 2007, loans payable consisted of financing
agreements with local financial institutions secured by mortgage loans.Outstanding loans payable consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Secured borrowings with local
financial institution, collateralized
by real estate mortgage loans, at
variable interest rates tied to
3-month LIBOR averaging 4.28% and
6.85% at September 30, 2008 and
December 31, 2007, respectively.
    
    $
    350,105
    
    
    $
    377,487Secured borrowings with local
financial institutions,
collateralized by real estate
mortgage loans at fixed interest
rates averaging 7.42% and 7.43% at
September 30, 2008 and December 31,
2007, respectively.
    
    
    22,939
    
    
    
    25,214$
    373,044
    
    
    $
    402,701
  t.
    
    Notes payable consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007$100 million notes, net of discount,
bearing interest at 7.65%, due on
March 26, 2016, paying interest
monthly.
    
    $
    98,420
    
    
    $
    98,307$30 million notes, net of discount,
bearing interest at 7.00%, due on
April 26, 2012, paying interest
monthly.
    
    
    29,689
    
    
    
    29,634$40 million notes, net of discount,
bearing interest at 7.10%, due on
April 26, 2017, paying interest
monthly.
    
    
    39,361
    
    
    
    39,322$30 million notes, net of discount,
bearing interest at 7.15%, due on
April 26, 2022, paying interest
monthly.
    
    
    29,440
    
    
    
    29,423
 23




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##### Table of Contents



SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Bonds payable secured by mortgage on
building at fixed rates ranging from
6.35% to 6.90%, with maturities
ranging from December 2008 to
December 2029 (2007 - June 2008 to
December 2029), paying interest
monthly.
    
    
    40,770
    
    
    
    41,190Bonds payable at a fixed rate of
6.25%, with maturities ranging from
December 2010 to December 2029,
paying interest monthly.
    
    
    7,600
    
    
    
    7,600Note payable with a local financial
institution, collateralized by IOs at
a fixed rate of 7.75%, due on
December 25, 2013, paying interest
monthly.
    
    
    33,241
    
    
    
    36,982$
    278,521
    
    
    $
    282,458
 u.
    
    Income TaxesIncome taxes include Puerto Rico income taxes as well as applicable federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are
generally required to pay federal 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 tax is creditable, with
certain limitations, against Puerto Rico income taxes. Except for the operations of Doral
Bank NY and Doral Money, substantially all of the Companys operations are conducted through
subsidiaries in Puerto Rico. Doral Bank NY and Doral Money are U.S. corporations and are
subject to U.S. income-tax on their income derived from all sources. For the quarter and
nine month period ended September 30, 2008, the income tax expense for the Companys U.S.
subsidiaries amounted to $0.9 million and $2.0 million, respectively, compared to an income
tax expense of $3.0 million and an income tax benefit of $89,000, respectively, for the
comparable 2007 periods.The maximum statutory corporate income tax rate in Puerto Rico is 39.0%.Doral Financial enjoys income tax exemption on interest income derived from FHA and VA
mortgage loans financing the original acquisition of newly constructed housing in Puerto
Rico and securities backed by such mortgage loans. Doral Financial also invests in U.S.
Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject
to federal income taxation because of the portfolio interest deduction to which Doral
Financial is entitled as a foreign corporation. On July 1, 2008, the Company transferred
substantially all of the assets previously held at the international banking entity to Doral
Bank PR to increase the level of its interest earning assets. Previously, Doral Financial
used its international banking entity subsidiary to invest in various U.S. securities and
U.S. mortgage-backed securities, which interest income and gain on sale, if any, is exempt
from Puerto Rico income taxation and excluded from federal income taxation on the basis of
the portfolio interest deduction in the case of interest, and in the case of capital gains,
because the gains are sourced outside the United States.For the quarter and nine month period ended September 30, 2008, Doral Financial recognized
an income tax expense of $1.1 million and $6.2 million, respectively, compared to an income
tax benefit of $86.3 million and $79.3 million, respectively, for the comparable 2007
periods.During 2006, the Company entered into two agreements with the Puerto Rico Treasury
Department regarding the Companys deferred tax assets related to prior intercompany
transfers of IOs (the IO Tax Asset). The first agreement, executed during the first
quarter, confirmed the previously established tax basis of all the IO transfers within the
Doral Financial corporate group. The second agreement, executed during the third quarter,
clarified that for Puerto Rico income tax purposes, the IO Tax Asset is a stand-alone
intangible asset subject to a straight-line amortization based on a useful life of 15 years.
Furthermore, the agreement provided that the IO Tax Asset could be transferred to any entity
within Doral Financial corporate group, including the Puerto Rico banking subsidiary.During the first quarter of 2008, the Company entered into an agreement with the Puerto Rico
Treasury Department with respect to the allocation method and period (for tax purposes) of
expenses incurred by the Company related to a settlement agreement (Settlement Expenses)
that resulted from litigation related to the Companys restatement. This agreement was
effective as of December 31, 2007 and permits the total expense related to the settlement of
the lawsuit ($96.0 million) to be allocated to any entity within the Company over a period
of three years. As a result of this agreement, the Company expects to be able to realize
part of its deferred tax asset and accordingly released a portion of the valuation allowance
in 2008. However, due to the Companys lower than expected income in 2008, management
revised its tax forecast and increased its valuation allowance. The net effect of these
transactions, together with the effect of ordinary operations,
resulted in a $5.3 million
increase in the valuation allowance to $92.6 million as of September 30, 2008 from the $87.3
million valuation allowance at December 31, 2007.In assessing the realization of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company considers the expected realization of its deferred tax assets and
liabilities, projected future taxable income, the Companys ability to replace maturing
brokered deposits and other sources of working capital at market rates, and tax planning
strategies, in making this assessment.
 24




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##### Table of Contents



The Company determined that it is more likely than
not that $92.6 million of its gross deferred tax asset, related primarily to net operating
losses, will not be realizable and maintained a valuation allowance for that amount.
Benefits recognized for net operating losses are limited by the fact that, under the PR
Code, Doral Financial is not permitted to file consolidated tax returns and, thus, is not
able to utilize losses from one subsidiary to offset gains in another subsidiary. For the
quarter and nine month period ended September 30, 2008, net
operating losses of $12.1 million and $74.1 million, respectively, were created. Based on forecasted future taxable
income, the Company will not be able to obtain the full benefit of these net operating
losses.The realization of the deferred tax asset is dependent upon the existence of, or generation
of, taxable income during the remaining 12 year period (including 2008-15 year original
amortization period) in which the amortization deduction of the IO Tax Asset is available.
In determining the valuation allowance recorded, the Company considered both the positive
and negative evidence regarding the Companys ability to generate sufficient taxable income
to realize its deferred tax assets. Positive evidence included
realization of pre-tax income for the nine month period ended September 30, 2008, projected earnings
attributable to the core business through the projection period, repayment of the $625.0
million in senior notes on July 20, 2007, as result of the recapitalization which served to
significantly reduce interest expense, and results of the leveraging plan. Further positive
evidence included the ability to isolate verifiable nonrecurring charges in historical
losses, the core earnings of the business absent these nonrecurring items and the
flexibility to move IO Tax Asset amortization and the Settlement Expenses to profitable
entities in accordance with Doral Financials agreements with the Puerto Rico Treasury
Department. During the fourth quarter of 2007, the Company implemented certain tax planning
actions in order to generate future taxable income that contributed to the reduction in its
valuation allowance. These include the increase in interest earning assets of Doral Bank PR,
through among other things, transferring certain assets from its international banking
entity to Doral Bank PR. Negative evidence included the Companys recorded losses for the
first quarter of 2008, lower than expected pre-tax income during the third quarter (and
therefore for the nine months) of 2008, and for the years ended December 31, 2007 and 2006,
and the shorter operating loss carry-forward period of 7 years, as well as uncertainty
regarding its ability to generate future taxable income and the
effect that a possible loss related to the Lehman default or an
other-than-temporary impairment on our available for sale securities portfolio would have on our tax forecast. Negative evidence also included the
Risk Factors described in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2007, and the additional Risk Factors described in Item 1A of Part II of this
quarterly report on Form 10-Q.Failure to achieve sufficient taxable income might affect the ultimate realization of the
net deferred tax asset. Factors that may affect the Companys ability to achieve sufficient
taxable income include, but are not limited to, the following: increased competition, a
decline in margins, increases in loans charged off, loss of market share, and the effects of
the economic slow-down.In weighing the positive and negative evidence above, Doral Financial considered the more
likely than not criteria contemplated in SFAS 109. Based on this analysis, Doral Financial
concluded that it was more likely than not that a portion of the Companys gross deferred
tax assets of $505.8 million would not be realized. As a result the Company recorded a
valuation allowance. At September 30, 2008, the deferred tax asset, net of its valuation
allowance of $92.6 million, amounted to approximately $413.2 million compared to $392.9
million at December 31, 2007.The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the adoption,
the Company recorded an adjustment to retained earnings of $2.4 million. As of September 30,
2008 and 2007, the Company had unrecognized tax benefits of $13.7 million and interest and
penalties of $4.8 million and $3.4 million, respectively. The Company classifies all
interest and penalties related to tax uncertainties as income tax expense. For the quarters
and nine month periods ended September 30, 2008 and 2007, the Company recognized
approximately $0.3 million and $1.0 million in interest and penalties, respectively.The amount of unrecognized tax benefits may increase or decrease in the future for various
reasons including adding amounts for current tax year positions, expiration of open income
tax returns due to the statutes of limitation, changes in managements judgment about the
level of uncertainty, status of examinations, litigation and legislative activity, and the
addition or elimination of uncertain tax positions. As of September 30, 2008, the following
years remain subject to examination: U.S. Federal jurisdictions  2003 through 2007 and
Puerto Rico  2004 through 2007.It is reasonably possible that within the next twelve months the Company will resolve
certain matters presently contemplated as unrecognized tax benefits due primarily to the
expiration of the statute of limitations. The resolution of these matters would likely
result in a reduction of the provision for income taxes and the effective tax rate in the
period of resolution of substantially all the unrecognized tax benefits.v.
    
    GuaranteesIn November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 45, (FIN 45) Guarantors Accounting and Disclosure Requirements for Guarantees. This
interpretation requires a guarantor of certain types of guarantees to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. As of September 30, 2008, the Company had outstanding $4.3 million in
commercial and financial standby letters of credit. The fair value on these commitments is
not significant.
 25




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##### Table of Contents



In the ordinary course of the business, Doral Financial makes certain representations and
warranties to purchasers and insurers of mortgage loans, and in certain circumstances, such
as in the event of early or first payment default, the Company retains credit risk exposures
on those loans. If there is a breach 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. Doral Financial works with the purchasers to review
the claims and correct alleged documentation deficiencies. For the quarter and nine month
period ended September 30, 2008, repurchases amounted to $1.1 million and $7.9 million,
respectively, compared to $1.0 million and $5.0 million,
respectively, for the corresponding 2007 periods.In the past, in relation to its asset securitization and loan sale activities, 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/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 September 30, 2008 and December 31, 2007, the outstanding principal balance of such
delinquent loans was $184.4 million and $201.7 million, respectively. The Company discontinued the practice of selling
loans under these arrangements in 2005.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 the loan if the loans
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: (1) the lapse of time (normally from four to seven years), (2)
the lapse of time combined with certain other conditions such as the unpaid principal balance of the mortgage loans falling
below a specific percentage (normally less than 80%) of the appraised value of the underlying property or (3) the amount
of loans repurchased pursuant to recourse provisions reaching a specific percentage of the original principal amount of
loans sold (generally from 10% to 15%). As of September 30, 2008, the
Companys records reflected that the outstanding
principal balance of loans sold subject to full or partial recourse
was $1.2 billion. As of such date, 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 $1.0 billion. Doral Financials contingent obligation with respect to its recourse provision is not reflected
on the Companys Consolidated Financial Statements, except for a liability for estimated losses from such recourse
agreements. The Company discontinued the practice of selling loans with recourse obligations in 2005.During 2007 and until the second quarter of 2008, the
Company had little actual history on recourse activity. The
Companys approach for estimating its liability for expected losses
from recourse obligations was based on the amount that would be
required to pay for mortgage insurance to
a third party in order to be relieved of its recourse exposure on these loans.
During the third quarter of 2008, Doral
Financial refined its estimate for determining expected losses from recourse
obligations as it began to develop more data regarding historical
losses from foreclosure and disposition of mortgage loans adjusted
for expectations of changes in portfolio behavior and market
environment. This actual data on losses showed a substantially
different experience than that used for newer loans for which
insurance quotes are published.Doral Financial reserves for its exposure to recourse and the other credit-enhanced transactions explained above amounted
to $18.4 million and $22.9 million at September 30, 2008 and December 31, 2007, respectively. The change in the
approach used to estimate the extent of the expected losses resulted
in a $0.6 million change in the underlying reserves.w.
    
    Related Party TransactionsThe following table summarizes certain information regarding Doral Financials loans
outstanding to officers, directors and 5% or more stockholders for the periods indicated.
 (In thousands)
    
    September 30, 2008
    
    
    December 31, 2007Balance at beginning of period
    
    $
    5,090
    
    
    $
    5,719New loans
    
    
    56
    
    
    
    4,164Repayments
    
    
    (80
    )
    
    
    (2,469
    )Loans sold
    
    
    (511
    )
    
    
    (2,324
    )Loans of former officers
    
    
    (1,920
    )
    
    
    Balance at end of period (1)
    
    $
    2,635
    
    
    $
    5,090
 
 (1)
    
    At September 30, 2008 and December 31, 2007, none of the loans outstanding to
officers, directors and 5% or more stockholders were delinquent.    x.
    
    Commitments and ContingenciesThe 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. At September 30, 2008, commitments
to extend credit amounted to approximately $129.3 million and commitments to sell loans at
fair value amounted to approximately $265.2 million. 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.
Generally, the Company does not enter into interest rate lock agreements with borrowers.Doral Financial and its subsidiaries are defendants in various lawsuits arising in the
ordinary course of business, including employment related matters.
Management believes, based on the opinion of legal counsel, that the
aggregate 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.
 26




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##### Table of Contents



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.
 Lawsuits
  Other Legal Matters
  Lehman
Brothers Transactions
    Banking Regulatory Matters
   27




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##### Table of Contents



y.
    
    Fair Value of Assets and LiabilitiesThe Company uses fair value measurements to record fair value adjustments to certain assets
and liabilities and to determine fair value disclosures. 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, we may be required to record at fair
value other assets on a nonrecurring basis, such as 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.Effective January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157 defines fair
value, establishes a consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. The Company adopted SFAS No. 159, The Fair Value
Option for Financing Assets and Financial Liabilities", in 2008, but chose not to apply the
fair value option to any of its financial assets or financial liabilities.Fair Value HierarchyUnder SFAS No. 157, the Company groups its assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
 
    
    Level 1  Valuation is based upon 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.
 28




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##### Table of Contents



Determination of Fair Value
    Securities held for trading: Servicing assets and interest-only strips, and Derivatives
 Securities available for sale:
 Loans held for sale:
 Loans receivable:
 Servicing assets and interest-only strips:
 29




---



##### Table of Contents



Derivatives:
 Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
  (In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    227,667
    
    
    $
    176,094
    
    
    $
    2,594
    
    
    $
    48,979
    (1)Securities
available for
sale(2)
    
    
    2,867,481
    
    
    
    1,039,448
    
    
    
    1,809,627
    
    
    
    18,406Derivatives(3)
    
    
    2,001
    
    
    
    231
    
    
    
    1,770
    
    
    
    Servicing assets
    
    
    139,507
    
    
    
    
    
    
    
    
    
    
    
    139,507$
    3,236,656
    
    
    $
    1,215,773
    
    
    $
    1,813,991
    
    
    $
    206,892Liabilities:Derivatives(4)
    
    $
    2,277
    
    
    $
    
    
    
    $
    2,277
    
    
    $
    
 
 (1)
    
    Represents interest-only strips, of which variable interest-only strips represent
substantially all of the balance. Also, includes certain private label CMOs for which quoted
market prices are not available.(2)
    
Represents certain private label and agency CMOs for which quoted
market prices are not available.(3)
    
    Included as part of securities held for trading in the Consolidated Statement of
Financial Condition.(4)
    
    Included as part of accrued expenses and other liabilities in the Consolidated Statement
of Financial Condition.  Quarter ended
    
    
    Nine month period endedSeptember 30, 2008
    
    
    September 30, 2008Securities
    
    
    Securities
    
    
    
    
    
    
    Securities
    
    
    SecuritiesHeld for
    
    
    Available
    
    
    Servicing
    
    
    Held for
    
    
    Available
    
    
    Servicing(In thousands)
    
    Trading
    
    
    for Sale
    
    
    Assets
    
    
    Trading
    
    
    for Sale
    
    
    AssetsBeginning balance:
    
    $
    50,701
    
    
    $
    20,420
    
    
    $
    145,527
    
    
    $
    67,992
    
    
    $
    6,366
    
    
    $
    150,238Change in fair value
    
    
    (1,722
    )
    
    
    (1,854
    )
    
    
    (8,349
    )
    
    
    (4,734
    )
    
    
    (2,268
    )
    
    
    (15,448
    )Principal repayment/amortization of premium and discount
    
    
    
    
    
    
    (160
)
    
    
    
    
    
    
    (91
)
    
    
    120
    
    
    
    Transfer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,188
    )
    
    
    14,188
    
    
    
    Capitalization / Sales, net
    
    
    
    
    
    
    
    
    
    
    2,329
    
    
    
    
    
    
    
    
    
    
    
    4,717Ending balance
    
    $
    48,979
    
    
    $
    18,406
    
    
    $
    139,507
    
    
    $
    48,979
    
    
    $
    18,406
    
    
    $
    139,507
 Financial Assets and Liabilities 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 GAAP. These adjustments to fair value usually result
from application of lower-of-cost-or-market accounting or write-downs of individual assets.
The valuation methodologies used to measure these fair value
 30




---



##### Table of Contents



adjustments are described
above. For assets measured at fair value on a nonrecurring basis in 2008, that were still
held in the balance sheet at period end, the following table provides the level of valuation
assumptions used to determine each adjustment and the carrying value of the related
individual assets or portfolios at September 30, 2008.
 Loss for the Nine MonthPeriod Ended(In thousands)
    
    Carrying Value
    
    Level 1
    
    Level 2
    
    Level 3
    
    September 30, 2008Assets:Loans receivable(1)
    
    $
    46,259
    
    
    $             
    
    $             
    
    $
    46,259
    
    
    $
    (10,487
    )
 
 (1)
    
    Represents the carrying value and related write-downs of loans for which adjustments are based on
the appraised value of the collateral. z.
    
    DerivativesAs of September 30, 2008 and December 31, 2007, the Company had the following derivative
financial instruments outstanding:
 September 30, 2008
    
    
    December 31, 2007Fair Value
    
    
    
    
    
    
    Fair ValueNotional
    
    
    
    
    
    
    
    
    
    
    Notional(In thousands)
    
    Amount
    
    
    Asset
    
    
    Liability
    
    
    Amount
    
    
    Asset
    
    
    LiabilityCash Flow Hedges:Interest rate swaps
    
    $
    380,000
    
    
    $
    
    
    
    $
    (2,277
    )
    
    $
    80,000
    
    
    $
    
    
    
    $
    (937
    )Other Derivatives:Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,000
    
    
    
    
    
    
    
    (1,951
    )Interest rate caps
    
    
    270,000
    
    
    
    1,770
    
    
    
    
    
    
    
    270,000
    
    
    
    1,481
    
    
    
    Forward contracts
    
    
    45,000
    
    
    
    231
    
    
    
    
    
    
    
    29,000
    
    
    
    
    
    
    
    (6
    )Total
    
    $
    695,000
    
    
    $
    2,001
    
    
    $
    (2,277
    )
    
    $
    494,000
    
    
    $
    1,481
    
    
    $
    (2,894
    )
  Net (loss) gain for the
    
    
    Other Comprehensive Income for theQuarters Ended September 30,
    
    

Quarters Ended September 30, (1)(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cash Flow Hedges:Interest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    662
    
    
    $
    Other Derivatives:Futures on U.S. Treasury notes
    
    
    
    
    
    
    2,338
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    81
    
    
    
    (8,619
    )
    
    
    
    
    
    
    Interest rate caps
    
    
    (475
    )
    
    
    (35
    )
    
    
    
    
    
    
    Forward contracts
    
    
    (293
    )
    
    
    4,323
    
    
    
    
    
    
    
    Total
    
    $
    (687
    )
    
    $
    (1,993
    )
    
    $
    662
    
    
    $

 
 (1)
    
    Net of tax. Net (loss) Gain for the
    
    
    Other Comprehensive Income for theNine Month Periods
    
    
    Nine Month Periods EndedEnded September 30,
    
    
    September 30,(1)(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cash Flow Hedges:Interest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    418
    
    
    $
    Other Derivatives:Futures on U.S. Treasury notes
    
    
    
    
    
    
    2,338
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (76
    )
    
    
    (4,899
    )
    
    
    
    
    
    
    Interest rate caps
    
    
    289
    
    
    
    (35
    )
    
    
    
    
    
    
    Forward contracts
    
    
    (1,099
    )
    
    
    8,842
    
    
    
    
    
    
    
    Total
    
    $
    (886
    )
    
    $
    6,246
    
    
    $
    418
    
    
    $
    
 
 (1)
    
    Net of tax. 31




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##### Table of Contents



The Company maintains an overall interest rate risk-management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations in earnings
that are caused by interest rate volatility. The Companys goal is to manage interest rate
sensitivity by modifying the repricing or maturity characteristics of certain balance sheet
assets and liabilities so that net interest margin is not, on a material basis, adversely
affected by movements in interest rates. To achieve its risk management objectives, the
Company uses a combination of term funding, derivative financial instruments, particularly
interest rate swaps, caps, as well as other types of contracts such as forward sales
commitments.At September 30, 2008 and December 31, 2007, Doral Financials interest rate swaps had
weighted average receive rates of 3.19% and 4.88%, respectively. At September 30, 2008 and
December 31, 2007, the Companys interest rate swaps had weighted average pay rates of
3.71% and 4.51%, respectively.The following table discloses Doral Financials derivative financial instruments
classification and hedging relationships:
 September 30, 2008
    
    
    December 31, 2007(In thousands)
    
    Notional
    
    
    Fair Value
    
    
    Notional
    
    
    Fair ValueAmount
    
    

    Asset

    
    
    Liability


    
    
    Amount
    
    
    Asset
    
    
    LiabilityDerivatives
designated as cash flow hedges:Hedging FHLB advances
    
    $
    380,000
    
    
    $
    
    
    
    $
    (2,277
    )
    
    $
    80,000
    
    
    $
    
    
    
    $
    (937
    )Derivatives not designated as hedges
    
    
    315,000
    
    
    
    2,001
    
    
    
    
    
    
    
    414,000
    
    
    
    1,481
    
    
    
    (1,957
    )Total
    
    $
    695,000
    
    
    $
    2,001
    
    
    $
    (2,277
    )
    
    $
    494,000
    
    
    $
    1,481
    
    
    $
    (2,894
    )
 Cash Flow HedgesAs of September 30, 2008 and December 31, 2007, the Company had $380.0 million and $80.0
million, respectively, outstanding pay fixed interest rate swaps designated as cash flow
hedges with maturities between October 2008 and November 2012, and between September 2008
and October 2012, respectively. The Company designated the mentioned pay fixed interest rate
swaps to hedge the variability of future interest cash flows of adjustable rate FHLB
Advances. For the first quarter of 2008 and the year ended December 31,
2007, no ineffectiveness was recognized. During the second quarter of
2008, the Company recognized $103,000 of ineffectiveness for the
interest rate swaps designated as cash flow hedges. For the quarter ended September 30, 2008, no ineffectiveness was recognized.
As of September 30, 2008, the amount of cash flow hedges included in accumulated other
comprehensive loss, net of tax of $97,000, was an unrealized loss of
approximately $153,000, which the
Company expects to reclassify approximately $660,000 into earnings during the next twelve
months. As of December 31, 2007, the amount of cash flow hedges included in accumulated other
comprehensive loss, net of tax, was an unrealized loss of $0.6 million.The Company held $115.0 million in freestanding interest rate swaps agreements as of
December 31, 2007. These swaps were designated as cash flow hedges as of January 1, 2008, to
hedge the variability of future interest cash flows of adjustable rate FHLB Advances.Trading and Non-Hedging ActivitiesDoral Financial held $315.0 million and $414.0 million in notional value of derivatives not
designated as cash flow hedges at September 30, 2008 and December 31, 2007, respectively.The Company purchases interest rate caps to manage its interest rate exposure. Interest rate
cap agreements generally involve purchases of out of the money caps to protect the Company
from larger rate moves and to provide the Company with positive convexity. 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 September
30, 2008 and December 31, 2007, the Company had outstanding interest rate caps with a
notional amount of $270.0 million. For the quarter and nine month period ended September 30,
2008, the Company recognized a loss of $0.5 million and a gain of $0.3 million,
respectively, on interest rate caps transactions. For the quarter and nine month period
ended September 30, 2007, the Company recognized a loss of $35,000 on interest rate caps
transactions.The Company entered into forward contracts to create an economic hedge on its mortgage
warehouse line. As of September 30, 2008 and December 31, 2007, the Company had forwards
with a notional amount of $45.0 million and $29.0 million, respectively, and recorded losses
of $0.3 million and $1.1 million for the quarter and nine month period ended September 30,
2008, compared to gains of $4.3 million and $8.8 million, respectively, for the
corresponding periods of 2007, on these derivatives.
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Credit risk related to derivatives arises when amounts receivable from a counterparty exceed
those payable. Because the notional amount of the instruments only serve 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. Doral Financials maximum loss related to credit
risk is equal to the gross fair value of its derivative instruments. Doral Financial deals
only with derivative dealers that are national market makers with strong credit ratings in
their derivative 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 Doral Financial when their unsecured loss positions exceed certain negotiated
limits.All derivative contracts to which Doral Financial is a party settle monthly, quarterly or
semiannually. Further, Doral Financial has netting agreements with the dealers and only does
business with creditworthy dealers. Because of these factors, Doral Financials credit risk
exposure related to derivatives contracts at September 30, 2008 and December 31, 2007 was
not considered material.aa.
    
    Recent Accounting PronouncementsBusiness Combinations. On December 2007, the FASB issued SFAS No. 141(revised), Business
Combinations. This statement replaces SFAS No. 141 and applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more businesses. SFAS
141(revised) retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting (purchase method) be used for all business combinations. This statement defines
the acquirer as the entity that obtains control in the business combination and requires the
acquirer to be identified.SFAS 141 (revised) requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquired entity at the acquisition date,
measured at their fair values as of that date. In addition, this statement expands and
improves the information reported about assets acquired and liabilities assumed arising from
contingencies. Contingencies arising from a business combination should be recognized as of
the acquisition date and measured at their acquisition date fair values.This Statement applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period on or after December 15,
2008. Earlier application is not permitted. The effective date of this Statement is the same
as that of the related SFAS No.160, Noncontrolling Interest in Consolidated Financial
Statements. The adoption of this
Statement is not expected to have an impact on the Companys financial statements.Disclosures about Derivative Instruments and Hedging Activities. In March 2008, The FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This
statement improves the transparency of financial reporting and expands the disclosure
requirements of SFAS 133 with the intent to provide users of financial statements with an
enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how
derivative instruments and
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related hedged items are accounted for under SFAS 133 and its
related interpretations; and (c) how derivative instruments and related hedged items affect
an entitys financial position, financial performance, and cash flows.To meet those objectives, this statement requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures about fair value amounts of,
and gains and losses, on derivatives instruments, and disclosures about credit-risk-related
contingent features in derivatives agreements.This statement has the same scope as SFAS 133 and accordingly, applies to all entities. This
Statement applies to all derivative instruments, including bifurcated derivative
instruments and related hedged items accounted for under SFAS 133 and its related
interpretations. This Statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative disclosures for
earlier periods at initial adoption. The Company is currently evaluating the effect, if any,
of the adoption of this Statement on its financial statements, for
the year ended December 31, 2008.The Hierarchy of Generally Accepted Accounting Principles. In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement
identifies the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles (GAAP) in the
United States (the GAAP hierarchy).The current GAAP hierarchy, as set forth in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it
is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB
Statements of Financial Accounting Concepts, which are subject to the same level of due
process as FASB Statements of Financial Accounting Standards, below industry practices that
are widely recognized as generally accepted but that are not subject to due process.The FASB believes that the GAAP hierarchy should be directed to entities because it is the
entity (not its auditor) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting
literature established by the FASB and is issuing this Statement to achieve that result.There is no expectation that this Statement will result in a change in current practice.
However, transition provisions have been provided by the FASB in the unusual circumstance
that the application of the provisions of this Statement results in a change in practice.This Statement is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles". The Company is currently
evaluating the effect, if any, of the adoption of this Statement on its financial
statements.Determining the Fair Value of a Financial Asset When the Market for that Asset is not
Active. On October 2008, the FASB issued FASB Staff Position (FSP) FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for that Asset is not Active". The FSP
clarifies the application of SFAS No. 157, Fair Value Measurements, in an inactive market
and illustrates how an entity would determine fair value when the market for a financial
asset is not active. The FSP states that an entity should not automatically conclude that a
particular transaction price is determinative of fair value. In a dislocated market,
judgment is required to evaluate whether individual transactions are forced liquidations or
distressed sales. When relevant observable market information is not available, a valuation
approach that incorporates managements judgments about the assumptions that market
participants would use in pricing the asset in a current sale transaction would be
acceptable. The FSP also indicates that quotes from brokers or pricing services may be
relevant inputs when measuring fair value, but are not necessarily determinative in the
absence of an active market for the asset. In weighing a broker quote as an input to a fair
value measurement, an entity should place less reliance on quotes that do not reflect the
result of market transactions. Further, the nature of the quote (for example, whether the
quote is an indicative price or a binding offer) should be considered when weighing the
available evidence.The FSP is effective immediately, and for prior periods for which financial statements have
not been issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as change in accounting estimate following the guidance
in FASB Statement No. 154, Accounting Changes and Error Corrections.Accordingly, we adopted
the FSP prospectively, beginning July 1, 2008. The adoption of the FSP did not have a
material impact on our financial statements or fair value determination.Disclosures about Credit Derivatives and Certain Guarantees  An Amendment of FASB
Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161.In September 2008, the FASB issued Staff Position No. 133-1 and FIN
45-4, Disclosures about Credit Derivatives and Certain Guarantees: An
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Amendment of FASB
Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161. This FSP is intended to improve disclosures about credit derivatives
by requiring more information about the potential adverse effects of changes in credit risk
on the financial position, financial performance, and cash flows of the sellers of credit
derivatives. It amends FAS 133, Accounting for Derivative Instruments and Hedging
Activities, to require disclosures by sellers of credit derivatives, including credit
derivatives embedded in hybrid instruments. The FSP also amends FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others(FIN 45), to require an additional disclosure about the
current status of the payment/performance risk of a guarantee. The provisions of the FSP
that amend FAS 133 and FIN 45 are effective for reporting periods (annual or interim) ending
after November 15, 2008. The Company is currently evaluating the effect, if any, of the
adoption of this FSP on its financial statements, commencing on January 1, 2009.Accounting for Transfer of Financial Assets and Repurchase Financing Transactions.On
February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, Accounting for Transfer
of Financial Assets and Repurchase Financing Transactions.The FSP requires an initial
transfer of a financial asset and a repurchase financing that was entered into
contemporaneously or in contemplation of the initial transfer to be evaluated as a linked
transaction under FAS 140 unless certain criteria are met, including that the transferred
asset must be readily obtainable in the marketplace.The FSP is effective for financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. Earlier application is not
permitted. The Company is currently evaluating the effect, if any, of the adoption of this
FSP on its financial statements, commencing on January 1, 2009.bb.
    
    Subsequent EventsMotion to intervene. In October 2008, Doral Bank PR filed a motion to intervene in a case
filed by R&G Financial Corporation (R&G) against the Federal Home Loan Mortgage
Corporation (Freddie Mac). The motion sought to obtain a copy of the agreement between R&G
and Freddie Mac with respect to the mortgage servicing rights on loans serviced by R&G on
behalf of Freddie Mac. The Company believes that this agreement will clarify Doral Bank PRs
position with regards to a separate agreement between the Company and Freddie Mac with
respect to servicing the loans R&G services for Freddie Mac. The
Court denied the motion and Doral Bank PR filed a motion for reconsideration of the matter.Purchase of mortgage servicing rights. On October 31, 2008, Doral Bank PR purchased from R&G
Mortgage Corporation (R&G Mortgage) the mortgage servicing rights of approximately $330
million in mortgage loans, consummating the purchase and sale agreement that had been
entered into by the parties on September 9, 2008. The mortgage servicing rights purchased by
Doral Bank PR related to mortgage loans that had been previously sold on a
servicing-retained basis by R&G Mortgage to Doral Bank PR.
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FORWARD LOOKING STATEMENTS
   
    
    the ability of Doral Financial to collect full or partial
payment of the $43.3
million receivable from Lehman Brothers, Inc. (LBI), which relates to the excess
of the value of securities owned by Doral Financial that were held by LBI above the
amounts owed by Doral Financial under the terminated repurchase agreements and
forward agreement, and the possibility that Doral Financial may have
to accrue a loss
with respect to this receivable once it obtains additional information regarding
the SIPC liquidation proceeding for LBI and the financial condition
of LBI.
Depending on the amount of loss, if any, that may
ultimately be accrued by Doral Financial with respect to the pending
LBI claim, the results of operations of Doral Financial in the
applicable period may be significantly adversely affected.
    
    A decline in the market value of our mortgage-backed securities and other assets may require us to recognize an other-than-temporary
impairment against such assets under Generally Accepted Accounting
Principles (GAAP) if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and
intent to hold assets to maturity or for a period of time sufficient
to allow for recovery of the amortized cost of such assets.
    
    the strength or weakness of the real estate markets and of the consumer and
commercial credit sectors and its impact on the credit quality of Doral Financials
loans and other assets;
    
    Doral Financials ability to derive sufficient income to realize the benefit of
its deferred tax assets;
    
    the strength or weakness of the Puerto Rico and the United States economies;
    
    decreased demand for our products and services and lower revenue and earnings
because of a recession in the United States and a continued recession in Puerto
Rico;
    
    increased funding costs due to a market illiquidity and increased competition
for funding;
    
    changes in interest rates and the potential impact of such changes in interest
rates on Doral Financials net interest income;
    
    the commercial soundness of the various counterparties of financing and other
securities transactions of Doral Financial, which could lead to possible losses
when the collateral held by Doral Financial to secure the obligations of the
counterparty is not sufficient or to possible delays or losses in recovering any
excess collateral belonging to Doral Financial held by the counterparty;
    
    the performance of U.S. capital markets;
    
    the fiscal and monetary policy of the federal government and its agencies;
    
    potential adverse development from ongoing enforcement actions by bank
regulatory agencies;
    
    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 to
us, or (ii) limits our ability to foreclose on properties or collateral or makes
foreclosures less economically feasible;
    
    changes in our accounting policies or in accounting standards, and changes in
how accounting standards are interpreted or applied;
    
    risks arising from material weaknesses in Doral Financials internal control
over financial reporting; and
    
    developments in the regulatory and legal environment for financial services
companies in Puerto Rico and the United States.
  Risk
Factors
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 SUBSEQUENT EVENTS
  OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss attributable to common shareholders for the third quarter of 2008 amounted
to $10.1 million, or a diluted loss per share of $0.19, compared to net loss of $70.5
million, or a diluted loss per share of $1.59, for the third quarter of 2007.
    
    Net interest income for the third quarter of 2008 was $47.0 million, compared to
$39.4 million for the corresponding period in 2007. The increase of $7.6 million in net
interest income for 2008, compared to 2007, was primarily driven by a $9.7 million
decline in interest expense partially offset by a reduction in interest income of $2.0
million. The reduction in interest expense was due to (1) a $3.0 million reduction in
deposit costs as a result of the repositioning of the Companys deposit products and
the general decline in interest rates, and (2) a $6.7 million reduction in borrowing
costs, $5.9 million of which was associated with the decrease in interest expense for
repurchase agreements, and a $2.9 million decrease in loans payable borrowing expense due to the
general decline in interest rates, resulting in a reduction of 0.81% in average cost of
funds, partially offset the $0.7 billion increase in average interest bearing
liabilities. The decline in interest expense was offset by a decrease in interest
income of $2.0 million primarily associated with the reduction of $794.0 million in
average balance of investment securities and of $527.1 million of other
interest-earning assets, primarily money markets. The reduction in interest income
resulted in a 0.65% reduction in interest earning asset yields largely offset by a $0.9
billion increase in the interest earning asset average balance. Average
interest-earning assets increased from $8.7 billion for the
third quarter of 2007 to
$9.6 billion for the third quarter of 2008, while the average interest
bearing-liabilities increased from $7.8 billion to $8.5 billion, respectively. The
growth in interest earning assets, net of the growth in interest bearing liabilities,
was partially funded by the $610.0 million recapitalization of the Company in July
2007, allowing for a reduction in the Companys leverage. The reduction in leverage,
together with the decline in cost of funds, resulted in an expansion in the net
interest margin from 1.81% in the third quarter of 2007 to 1.96% in the third quarter
of 2008 (see Tables A and C below for information regarding the Companys net interest
income).
    
    For the third quarter of 2008, the provision for loan and lease losses amounted to
$7.2 million, compared to $5.1 million for the same period in 2007, an increase of $2.1
million. The increase in the provision for loan losses is mostly due to the increase in
delinquencies in the residential loan portfolio.
    
    Non-interest income for the third quarter of 2008 was $11.9 million, compared to a
loss of $109.6 million for the same period in 2007, an increase of $121.5 million. The
loss in the third quarter of 2007 was primarily related to the sale of $1.9 billion in
securities and extinguishment of associated liabilities as part of the Companys effort
to reduce its interest rate risk profile following the recapitalization on July 19,
2007. During the third quarter of 2008, the Company terminated its repurchase financing
and TBA (To-Be-Announced) forward agreements with Lehman
Brothers, Inc. (LBI) as LBI
was placed in a Securities Investor Protection Corporation (SIPC) liquidation
proceeding after the filing for bankruptcy of its parent Lehman
Brothers Holdings, Inc.
The termination of the agreements has also caused Doral to recognize a previously
unrealized loss on the value of the securities subject to the agreements, resulting in
a $4.2 million charge during the quarter ending September 30, 2008. Please refer to
note x for further information.
    
    Non-interest expense for the third quarter of 2008 was $52.4 million, compared to
$73.2 million for the corresponding period in 2007. The $20.8 million reduction in
non-interest expense for the quarter was driven by the elimination of expenses
associated with the 2007 recapitalization efforts and cost control measures implemented
by the Company in 2008. The elimination of expenses and cost control measures impacted
total compensation and benefits cost by $13.8 million, other expenses by $7.4 million
and professional services by $4.3 million. These reductions were partially offset by
increases in the Companys communication and information systems expense of $2.8
million, largely associated with the increase in ATH and VISA debit card activity which
was  offset by an increase in retail banking fees of
$2.7 million, and occupancy and other
office expenses of $1.6 million associated with increases in utilities.
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
    
    For the third quarter of 2008, Doral Financial recognized an income tax expense of
$1.1 million, compared to $86.3 million tax benefit for the corresponding period in
2007, an increase of $87.3 million. The recognition of the income tax benefit for the
third quarter of 2007 was principally related to changes in the Companys valuation
allowance for its deferred tax assets resulting from changes in earnings expectations
used to evaluate the realization of the tax assets as a result of the Companys $610.0
million recapitalization in July 2007.
    
    During the third quarter of 2008, the Company had other comprehensive loss of
approximately $62.1 million, compared to the recognition of other comprehensive income
of $130.7 million for the corresponding 2007 period. The gain in 2007 was due to the
sale of $1.9 billion in investment securities during the third quarter of 2007. The
Companys other comprehensive loss for the third quarter of 2008 was driven primarily
by the reduction in value of its private label CMOs. As of September 30, 2008, the
Companys balance for accumulated other comprehensive loss (net of income tax benefit)
increased to $195.4 million, compared to $33.1 million as of December 31, 2007, an
increase of $162.3 million.
    
    Doral Financials loan production for the third quarter of 2008 was $318.3 million,
compared to $354.0 million for the comparable period in 2007, a decrease of
approximately 10%. The decrease in Doral Financials loan production for the third
quarter of 2008 was primarily the result of tighter commercial and consumer
underwriting standards and the decision to cease financing new housing projects in
Puerto Rico.
    
    Total assets as of September 30, 2008 were $10.0 billion, an increase of 7% compared
to $9.3 billion as of December 31, 2007. The increase in total assets during the three
quarters of 2008 was due primarily to a net increase in the Companys available for
sale securities portfolio of approximately of $0.9 billion and an increase in its loan
portfolio of $0.2 billion, partially offset by a $0.5 billion reduction in money market
investments and securities purchased under agreements to resell. Total liabilities increased $0.9 billion, principally due to the increase
of borrowings used to finance the purchase of the securities. During September 2008,
the Company reduced its assets and liabilities by $0.5 billion, associated with the
termination of repurchase financing arrangements and the sale of the collateral
associated with such financing arrangements with Lehman Brothers, Inc. (LBI) as a
result of the SIPC liquidation proceedings of LBI as of September 19, 2008.
 INTERNAL CONTROL OVER FINANCIAL REPORTING
  CRITICAL ACCOUNTING POLICIES
  Fair Value Measurements
 Fair Value of Financial Instruments
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
    
    Level 1  Valuation is based upon 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.
      RECENT ACCOUNTING PRONOUNCEMENTS
 Business Combinations Business
Combinations
  Noncontrolling Interest in Consolidated
Financial Statements
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Disclosures about Derivative Instruments and Hedging Activities Disclosures about Derivative Instruments and Hedging Activities Accounting for Derivative Instruments and Hedging Activities
   The Hierarchy of Generally Accepted Accounting Principles The Hierarchy of Generally Accepted Accounting Principles
    The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles"
 Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active Determining the Fair Value of a
Financial Asset When the Market for that Asset is not Active Fair Value Measurements
 Accounting Changes and Error Corrections.
 Disclosures about Credit Derivatives and Certain Guarantees  An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No.
161. Disclosures about Credit Derivatives and Certain Guarantees:
An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161
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Accounting for Derivative Instruments and Hedging Activities Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others
 Accounting for Transfer of Financial Assets and Repurchase Financing Transactions. Accounting for Transfer of Financial
Assets and Repurchase Financing Transactions.
  RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007
  NET INTEREST INCOME
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TABLE A  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 QUARTERS ENDED SEPTEMBER 30,2008
    
    
    2007AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,633,559
    
    
    $
    87,055
    
    
    
    6.15
    %
    
    $
    4,962,065
    
    
    $
    86,285
    
    
    
    6.90
    %Mortgage-backed securities
    
    
    2,432,288
    
    
    
    28,336
    
    
    
    4.63
    %
    
    
    872,737
    
    
    
    13,495
    
    
    
    6.13
    %Interest-only strips
    
    
    48,203
    
    
    
    1,975
    
    
    
    16.30
    %
    
    
    60,223
    
    
    
    1,650
    
    
    
    10.87
    %Investment securities
    
    
    1,140,883
    
    
    
    12,723
    
    
    
    4.44
    %
    
    
    1,934,863
    
    
    
    21,612
    
    
    
    4.43
    %Other interest-earning assets
    
    
    301,801
    
    
    
    2,727
    
    
    
    3.59
    %
    
    
    828,865
    
    
    
    11,819
    
    
    
    5.66
    %Total interest-earning assets/interest income
    
    
    9,556,734
    
    
    $
    132,816
    
    
    
    5.53
    %
    
    
    8,658,753
    
    
    $
    134,861
    
    
    
    6.18
    %Total non-interest-earning assets
    
    
    736,015
    
    
    
    
    
    
    
    
    
    
    
    1,097,282Total assets
    
    $
    10,292,749
    
    
    
    
    
    
    
    
    
    
    $
    9,756,035LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,880,171
    
    
    $
    36,197
    
    
    
    3.71
    %
    
    $
    3,427,144
    
    
    $
    39,147
    
    
    
    4.53
    %Repurchase agreements
    
    
    2,227,336
    
    
    
    22,097
    
    
    
    3.95
    %
    
    
    2,472,871
    
    
    
    28,007
    
    
    
    4.49
    %Advances from FHLB
    
    
    1,730,815
    
    
    
    17,934
    
    
    
    4.12
    %
    
    
    1,100,910
    
    
    
    13,477
    
    
    
    4.86
    %Loans payable
    
    
    376,993
    
    
    
    4,263
    
    
    
    4.50
    %
    
    
    421,724
    
    
    
    7,190
    
    
    
    6.76
    %Notes payable
    
    
    279,213
    
    
    
    5,285
    
    
    
    7.53
    %
    
    
    419,708
    
    
    
    7,605
    
    
    
    7.19
    %Total interest-bearing liabilities/interest expense
    
    
    8,494,528
    
    
    $
    85,776
    
    
    
    4.02
    %
    
    
    7,842,357
    
    
    $
    95,426
    
    
    
    4.83
    %Total non-interest-bearing liabilities
    
    
    635,089
    
    
    
    
    
    
    
    
    
    
    
    641,885Total liabilities
    
    
    9,129,617
    
    
    
    
    
    
    
    
    
    
    
    8,484,242Stockholders equity
    
    
    1,163,132
    
    
    
    
    
    
    
    
    
    
    
    1,271,793Total liabilities and stockholders equity
    
    $
    10,292,749
    
    
    
    
    
    
    
    
    
    
    $
    9,756,035Net interest-earning assets
    
    $
    1,062,206
    
    
    
    
    
    
    
    
    
    
    $
    816,396Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    47,040
    
    
    
    
    
    
    
    
    
    
    $
    39,435Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.51
    %
    
    
    
    
    
    
    
    
    
    
    1.35
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.96
    %
    
    
    
    
    
    
    
    
    
    
    1.81
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    112.50
    %
    
    
    
    
    
    
    
    
    
    
    110.41
    %
 
 (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 the option, but not an obligation, to buy-back the pools serviced.(2)
    
    Interest income on loans includes $0.3 million and $0.4 million for the third quarter of 2008 and 2007, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials 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. 43




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TABLE B  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 NINE MONTH PERIODS ENDED SEPTEMBER 30,2008
    
    
    2007AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,545,650
    
    
    $
    258,347
    
    
    
    6.22
    %
    
    $
    5,073,794
    
    
    $
    262,604
    
    
    
    6.92
    %Mortgage-backed securities
    
    
    2,006,439
    
    
    
    77,374
    
    
    
    5.15
    %
    
    
    1,415,581
    
    
    
    56,820
    
    
    
    5.37
    %Interest-only strips
    
    
    49,930
    
    
    
    5,405
    
    
    
    14.46
    %
    
    
    54,476
    
    
    
    4,539
    
    
    
    11.14
    %Investment securities
    
    
    1,163,894
    
    
    
    41,401
    
    
    
    4.75
    %
    
    
    2,326,134
    
    
    
    76,498
    
    
    
    4.40
    %Other interest-earning assets
    
    
    573,833
    
    
    
    14,043
    
    
    
    3.27
    %
    
    
    1,163,009
    
    
    
    44,891
    
    
    
    5.16
    %Total interest-earning assets/interest income
    
    
    9,339,746
    
    
    $
    396,570
    
    
    
    5.67
    %
    
    
    10,032,994
    
    
    $
    445,352
    
    
    
    5.93
    %Total non-interest-earning assets
    
    
    767,996
    
    
    
    
    
    
    
    
    
    
    
    860,853Total assets
    
    $
    10,107,742
    
    
    
    
    
    
    
    
    
    
    $
    10,893,847LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,929,883
    
    
    $
    116,113
    
    
    
    3.95
    %
    
    $
    3,718,674
    
    
    $
    126,040
    
    
    
    4.53
    %Repurchase agreements
    
    
    1,982,643
    
    
    
    62,501
    
    
    
    4.21
    %
    
    
    3,236,232
    
    
    
    106,319
    
    
    
    4.39
    %Advances from FHLB
    
    
    1,666,818
    
    
    
    52,741
    
    
    
    4.23
    %
    
    
    1,049,662
    
    
    
    40,121
    
    
    
    5.11
    %Loans payable
    
    
    384,151
    
    
    
    14,340
    
    
    
    4.99
    %
    
    
    429,802
    
    
    
    22,124
    
    
    
    6.88
    %Notes payable
    
    
    279,512
    
    
    
    15,936
    
    
    
    7.62
    %
    
    
    752,806
    
    
    
    38,520
    
    
    
    6.84
    %Total interest-bearing liabilities/interest expense
    
    
    8,243,007
    
    
    $
    261,631
    
    
    
    4.24
    %
    
    
    9,187,176
    
    
    $
    333,124
    
    
    
    4.85
    %Total non-interest-bearing liabilities
    
    
    646,123
    
    
    
    
    
    
    
    
    
    
    
    722,627Total liabilities
    
    
    8,889,130
    
    
    
    
    
    
    
    
    
    
    
    9,909,803Stockholders equity
    
    
    1,218,612
    
    
    
    
    
    
    
    
    
    
    
    984,044Total liabilities and stockholders equity
    
    $
    10,107,742
    
    
    
    
    
    
    
    
    
    
    $
    10,893,847Net interest-earning assets
    
    $
    1,096,739
    
    
    
    
    
    
    
    
    
    
    $
    845,818Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    134,939
    
    
    
    
    
    
    
    
    
    
    $
    112,228Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.43
    %
    
    
    
    
    
    
    
    
    
    
    1.08
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.93
    %
    
    
    
    
    
    
    
    
    
    
    1.50
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    113.31
    %
    
    
    
    
    
    
    
    
    
    
    109.21
    %
 
 (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 the option, but not an obligation, to buy-back the pools serviced.(2)
    
    Interest income on loans includes $1.0 million and $2.2 million for the nine month period ended September 30, 2008 and 2007, respectively, of income from prepayment penalties related to the Companys loan
portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials 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.  44




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TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
 QUARTERS ENDEDSEPTEMBER 30,2008 COMPARED TO 2007(In thousands)
    
    INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    11,513
    
    
    $
    (10,743
    )
    
    $
    770Mortgage-backed securities
    
    
    24,017
    
    
    
    (9,176
    )
    
    
    14,841Interest-only strips
    
    
    (330
    )
    
    
    655
    
    
    
    325Investment securities
    
    
    (8,918
    )
    
    
    29
    
    
    
    (8,889
    )Other interest-earning assets
    
    
    (7,518
    )
    
    
    (1,574
    )
    
    
    (9,092
    )TOTAL INTEREST INCOME VARIANCE
    
    $
    18,764
    
    
    $
    (20,809
    )
    
    $
    (2,045
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    5,115
    
    
    $
    (8,065
    )
    
    $
    (2,950
    )Repurchase agreements
    
    
    (2,827
    )
    
    
    (3,083
    )
    
    
    (5,910
    )Advances from FHLB
    
    
    7,682
    
    
    
    (3,225
    )
    
    
    4,457Loans payable
    
    
    (767
    )
    
    
    (2,160
    )
    
    
    (2,927
    )Notes payable
    
    
    (2,557
    )
    
    
    237
    
    
    
    (2,320
    )TOTAL INTEREST EXPENSE VARIANCE
    
    $
    6,646
    
    
    $
    (16,296
    )
    
    $
    (9,650
    )NET INTEREST INCOME VARIANCE
    
    $
    12,118
    
    
    $
    (4,513
    )
    
    $
    7,605
 TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
 FOR THE NINE MONTH PERIODS ENDEDSEPTEMBER 30,2008 COMPARED TO 2007(In thousands)
    
    INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    24,609
    
    
    $
    (28,866
    )
    
    $
    (4,257
    )Mortgage-backed securities
    
    
    23,847
    
    
    
    (3,293
    )
    
    
    20,554Interest-only strips
    
    
    (378
    )
    
    
    1,244
    
    
    
    866Investment securities
    
    
    (38,157
    )
    
    
    3,060
    
    
    
    (35,097
    )Other interest-earning assets
    
    
    (22,737
    )
    
    
    (8,111
    )
    
    
    (30,848
    )TOTAL INTEREST INCOME VARIANCE
    
    $
    (12,816
    )
    
    $
    (35,966
    )
    
    $
    (48,782
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    7,155
    
    
    $
    (17,082
    )
    
    $
    (9,927
    )Repurchase agreements
    
    
    (41,149
    )
    
    
    (2,669
    )
    
    
    (43,818
    )Advances from FHLB
    
    
    23,604
    
    
    
    (10,984
    )
    
    
    12,620Loans payable
    
    
    (2,351
    )
    
    
    (5,433
    )
    
    
    (7,784
    )Notes payable
    
    
    (24,217
    )
    
    
    1,633
    
    
    
    (22,584
    )TOTAL INTEREST EXPENSE VARIANCE
    
    $
    (36,958
    )
    
    $
    (34,535
    )
    
    $
    (71,493
    )NET INTEREST INCOME VARIANCE
    
    $
    24,142
    
    
    $
    (1,431
    )
    
    $
    22,711
 45




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PROVISION FOR LOAN AND LEASE LOSSES
      NON-INTEREST INCOME
  Net Gain (Loss) on Mortgage Loan Sales and Fees.
  46




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QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Total loan sales and securitization(1)
    
    $
    111,642
    
    
    $
    52,451
    
    
    $
    259,216
    
    
    $
    164,401MSRs capitalized
    
    $
    2,329
    
    
    $
    1,219
    
    
    $
    5,304
    
    
    $
    3,765
 
 (1)
    
    Excludes $13.8 million and $17.8 million related to cash window sales for the quarters
ended September 30, 2008 and 2007, respectively, and $42.2 million and $50.6 million for the nine month
periods ended September 30, 2008 and 2007, respectively. Trading Activities.
  TABLE E  COMPONENTS OF TRADING ACTIVITIES
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net realized gains (losses) on sales of securities held for trading
    
    $
    225
    
    
    $
    (2,704
    )
    
    $
    3,188
    
    
    $
    (7,038
    )Gain on the IO valuation
    
    
    40
    
    
    
    3,014
    
    
    
    11
    
    
    
    6,773Net unrealized gains (losses) on trading securities, excluding IOs
    
    
    2,320
    
    
    
    (22,222
    )
    
    
    (663
    )
    
    
    (25,973
    )Net realized and unrealized (losses) gains on derivative
instruments
    
    
    (687
    )
    
    
    (1,993
    )
    
    
    (886
    )
    
    
    6,246Total
    
    $
    1,898
    
    
    $
    (23,905
    )
    
    $
    1,650
    
    
    $
    (19,992
    )
   Net Gain (Loss) on Investment Securities.
 Net Servicing Income.
 47




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TABLE F  NET SERVICING INCOME
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Servicing fees (net of guarantee fees)
    
    $
    7,686
    
    
    $
    8,419
    
    
    $
    23,885
    
    
    $
    26,803Late charges
    
    
    2,144
    
    
    
    2,243
    
    
    
    6,634
    
    
    
    6,852Prepayment penalties
    
    
    65
    
    
    
    127
    
    
    
    313
    
    
    
    490Interest loss
    
    
    (1,023
    )
    
    
    (946
    )
    
    
    (5,541
    )
    
    
    (2,818
    )Other servicing fees
    
    
    102
    
    
    
    116
    
    
    
    505
    
    
    
    295Servicing income, gross
    
    
    8,974
    
    
    
    9,959
    
    
    
    25,796
    
    
    
    31,622Change in fair value of mortgage servicing rights
    
    
    (8,349
    )
    
    
    (1,933
    )
    
    
    (15,448
    )
    
    
    (8,213
    )Total net servicing income
    
    $
    625
    
    
    $
    8,026
    
    
    $
    10,348
    
    
    $
    23,409
 Commissions, Fees and Other Income.
 TABLE G  COMMISSIONS, FEES AND OTHER INCOME
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Retail banking fees
    
    $
    7,542
    
    
    $
    4,847
    
    
    $
    20,511
    
    
    $
    15,341Insurance agency commissions
    
    
    2,885
    
    
    
    1,982
    
    
    
    8,146
    
    
    
    6,716Asset management fees and commissions
    
    
    
    
    
    
    139
    
    
    
    149
    
    
    
    425Other income
    
    
    146
    
    
    
    9,435
    
    
    
    8,146
    
    
    
    10,508Total
    
    $
    10,573
    
    
    $
    16,403
    
    
    $
    36,952
    
    
    $
    32,990
  48




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NON-INTEREST EXPENSE
  TABLE H  NON INTEREST EXPENSE
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Compensation and employee benefits
    
    $
    17,542
    
    
    $
    31,375
    
    
    $
    53,677
    
    
    $
    88,578Taxes, other than payroll and income taxes
    
    
    2,550
    
    
    
    2,565
    
    
    
    7,351
    
    
    
    8,849Advertising
    
    
    2,752
    
    
    
    2,397
    
    
    
    7,257
    
    
    
    6,327Professional services
    
    
    6,686
    
    
    
    10,986
    
    
    
    20,696
    
    
    
    47,987Communication and information systems
    
    
    7,107
    
    
    
    4,271
    
    
    
    18,228
    
    
    
    13,589Occupancy and other office expenses
    
    
    6,607
    
    
    
    5,039
    
    
    
    18,256
    
    
    
    17,789Depreciation and amortization
    
    
    4,170
    
    
    
    4,129
    
    
    
    12,297
    
    
    
    13,607Other
    
    
    5,034
    
    
    
    12,456
    
    
    
    24,875
    
    
    
    28,329Total non-interest expense
    
    $
    52,448
    
    
    $
    73,218
    
    
    $
    162,637
    
    
    $
    225,055
    49




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##### Table of Contents



INCOME TAXES
         50




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##### Table of Contents



Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
    BALANCE SHEET AND OPERATING DATA ANALYSIS
 PERFORMANCE RATIOS
  TABLE I  PERFORMACE RATIOS
 QUARTERS ENDED
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,2008
    
    2007
    
    2008
    
    2007Return on average assets
    
    
    (0.07
    )%
    
    
    (2.53
    )%
    
    
    (0.03
    )%
    
    
    (1.68
    )%Return on average common equity
    
    
    (6.80
    )%
    
    
    (40.02
    )%
    
    
    (5.67
    )%
    
    
    (52.70
    )%Average common equity to average assets
    
    
    5.73
    %
    
    
    7.16
    %
    
    
    6.38
    %
    
    
    3.77
    %
 LOAN PRODUCTION
  51




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##### Table of Contents



TABLE J  LOAN PRODUCTION
 Quarters Ended
    
    
    Nine Month Periods EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except for average initial loan balance)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007FHA/VA mortgage loansNumber of loans
    
    
    787
    
    
    
    335
    
    
    
    2,008
    
    
    
    1,069Volume of loans
    
    $
    103,948
    
    
    $
    35,360
    
    
    $
    246,197
    
    
    $
    111,047Percent of total volume
    
    
    33
    %
    
    
    10
    %
    
    
    23
    %
    
    
    12
    %Average initial loan balance
    
    $
    132,081
    
    
    $
    105,552
    
    
    $
    122,608
    
    
    $
    103,879Conventional conforming mortgage loansNumber of loans
    
    
    169
    
    
    
    255
    
    
    
    645
    
    
    
    1,030Volume of loans
    
    $
    20,605
    
    
    $
    27,851
    
    
    $
    77,479
    
    
    $
    119,503Percent of total volume
    
    
    6
    %
    
    
    8
    %
    
    
    7
    %
    
    
    13
    %Average initial loan balance
    
    $
    121,923
    
    
    $
    109,220
    
    
    $
    120,122
    
    
    $
    116,022Conventional non-conforming mortgage loans(1)Number of loans
    
    
    1,006
    
    
    
    1,040
    
    
    
    3,186
    
    
    
    1,988Volume of loans
    
    $
    119,179
    
    
    $
    130,954
    
    
    $
    410,808
    
    
    $
    259,298Percent of total volume
    
    
    38
    %
    
    
    37
    %
    
    
    38
    %
    
    
    29
    %Average initial loan balance
    
    $
    118,468
    
    
    $
    125,917
    
    
    $
    128,942
    
    
    $
    130,431Construction developments loans(2)Number of loans
    
    
    11
    
    
    
    5
    
    
    
    24
    
    
    
    20Volume of loans
    
    $
    38,284
    
    
    $
    27,719
    
    
    $
    82,880
    
    
    $
    46,533Percent of total volume
    
    
    12
    %
    
    
    8
    %
    
    
    8
    %
    
    
    5
    %Average initial loan balance
    
    $
    3,480,364
    
    
    $
    5,543,800
    
    
    $
    3,453,333
    
    
    $
    2,326,650Disbursement under existing construction development loansVolume of loans
    
    $
    18,083
    
    
    $
    57,653
    
    
    $
    69,696
    
    
    $
    183,331Percent of total volume
    
    
    6
    %
    
    
    16
    %
    
    
    7
    %
    
    
    20
    %Commercial loans(3)Number of loans
    
    
    11
    
    
    
    88
    
    
    
    189
    
    
    
    286Volume of loans
    
    $
    4,333
    
    
    $
    61,254
    
    
    $
    122,227
    
    
    $
    148,550Percent of total volume
    
    
    1
    %
    
    
    17
    %
    
    
    11
    %
    
    
    16
    %Average initial loan balance
    
    $
    393,909
    
    
    $
    696,068
    
    
    $
    646,704
    
    
    $
    519,406Consumer loans(3)Number of loans
    
    
    643
    
    
    
    1,842
    
    
    
    7,215
    
    
    
    5,623Volume of loans
    
    $
    9,219
    
    
    $
    13,228
    
    
    $
    57,747
    
    
    $
    39,904Percent of total volume
    
    
    3
    %
    
    
    4
    %
    
    
    5
    %
    
    
    5
    %Average initial loan balance
    
    $
    14,337
    
    
    $
    7,181
    
    
    $
    8,004
    
    
    $
    7,097Other(4)Number of loans
    
    
    2
    
    
    
    0
    
    
    
    3
    
    
    
    2Volume of loans
    
    $
    4,600
    
    
    $
    
    
    
    $
    6,600
    
    
    $
    2,188Percent of total volume
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Total loansNumber of loans
    
    
    2,629
    
    
    
    3,565
    
    
    
    13,270
    
    
    
    10,018Volume of loans
    
    $
    318,251
    
    
    $
    354,019
    
    
    $
    1,073,634
    
    
    $
    910,354
 
 (1)
    
    Includes $6.9 million and $6.6 million in second mortgages for the quarters ended September 30, 2008 and 2007, respectively, and $24.5 million and $15.8 million in second mortgages for the nine
month periods ended September 30, 2008 and 2007, respectively.(2)
    
    Related to new commitments to fund construction loans in New York.(3)
    
    Commercial and consumer lines of credit are included in the loan production according to the credit limit approved.(4)
    
    Consists of multifamily loans.   52




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1 2
  TABLE K  LOAN ORIGINATION SOURCES
 NINE MONTH PERIODS ENDED SEPTEMBER 30,2008
    
    2007Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    55
    %
    
    
    
    
    
    
    55
    %
    
    
    50
    %
    
    
    
    
    
    
    50
    %Wholesale(1)
    
    
    13
    %
    
    
    
    
    
    
    13
    %
    
    
    4
    %
    
    
    
    
    
    
    4
    %Housing Developments(2)
    
    
    6
    %
    
    
    8
    %
    
    
    14
    %
    
    
    23
    %
    
    
    2
    %
    
    
    25
    %Other(3)
    
    
    10
    %
    
    
    8
    %
    
    
    18
    %
    
    
    19
    %
    
    
    2
    %
    
    
    21
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Includes new construction development loans and the disbursement of existing construction development loans. For the nine month period ended September
30, 2008, Doral Financial did not enter into new commitments to fund construction loans in Puerto Rico.(3)
    
    Refers to commercial, consumer and multifamily loans. MORTGAGE LOAN SERVICING
  53




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TABLE L
LOANS SERVICED FOR THIRD PARTIES
 AS OF SEPTEMBER 30,(Dollars in Thousands, Except for Average Size of Loans)
    
    2008
    
    
    2007Composition of Portfolio Serviced for Third Parties at Period End:GNMA
    
    $
    2,197,416
    
    
    $
    2,117,982FHLMC/FNMA
    
    
    3,528,940
    
    
    
    3,826,582Other conventional mortgage loans(1)(2)
    
    
    3,841,629
    
    
    
    4,603,588Total portfolio serviced for third parties
    
    $
    9,567,985
    
    
    $
    10,548,152Selected Data Regarding Mortgage Loans Serviced for Third Parties:Number of loans
    
    
    113,504
    
    
    
    125,527Weighted- average interest rate
    
    
    6.48
    %
    
    
    6.53
    %Weighted- average remaining maturity (months)
    
    
    247
    
    
    
    255Weighted- average gross servicing fee rate
    
    
    39
    %
    
    
    0.38
    %Average servicing portfolio
    
    $
    9,798,979
    
    
    $
    11,264,057Principal prepayments
    
    $
    499,277
    
    
    $
    585,752Constant prepayment rate
    
    
    6
    %
    
    
    6
    %Average size of loans
    
    $
    84,296
    
    
    $
    84,031Servicing assets, net
    
    $
    139,507
    
    
    $
    163,854Delinquent Mortgage Loans and Pending Foreclosures at Period End:60-89 days past due
    
    
    2.19
    %
    
    
    1.92
    %90 days or more past due
    
    
    2.70
    %
    
    
    1.71
    %Total delinquencies excluding foreclosures
    
    
    4.89
    %
    
    
    3.63
    %Foreclosures pending
    
    
    2.48
    %
    
    
    2.21
    %Servicing Portfolio Activity:Beginning servicing portfolio
    
    $
    10,072,538
    
    
    $
    11,997,324Additions to servicing portfolio
    
    
    301,386
    
    
    
    215,018Servicing sold and released due to repurchases(3)
    
    
    (53,493
    )
    
    
    (738,699
    )Run-off(4)
    
    
    (752,446
    )
    
    
    (925,491
    )Ending servicing portfolio
    
    $
    9,567,985
    
    
    $
    10,548,152
 
 (1)
    
    Excludes $4.0 billion and $3.3 billion of loans owned by Doral Financial at
September 30, 2008 and 2007, respectively.(2)
    
    Includes portfolios of $184.4 million and $209.4 million at September 30, 2008 and
2007, respectively, of delinquent FHA/VA and conventional mortgage loans.(3)
    
    As of September 30, 2008, includes $26.7 million of principal balance of loans
repurchased from a third party. As of September 30, 2007, includes $693.9 million of principal
balance of loans related to MSRs sales.(4)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 54




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LIQUIDITY AND CAPITAL RESOURCES
  Impact of Recapitalization of the Holding Company and Restructuring of Mortgage Operations on
Liquidity
    55




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Liquidity of the Banking Subsidiaries
  Cash Sources and Uses
    Primary Sources of Cash
  56




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TABLE M
SOURCES OF BORROWINGS
 AS OF SEPTEMBER 30, 2008
    
    AS OF DECEMBER 31, 2007AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGE(Dollars in thousands)
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,301,797
    
    
    
    3.64
    %
    
    $
    4,268,024
    
    
    
    4.11
    %Repurchase Agreements
    
    
    1,876,199
    
    
    
    3.43
    %
    
    
    1,444,363
    
    
    
    4.97
    %Advances from FHLB
    
    
    1,723,400
    
    
    
    3.97
    %
    
    
    1,234,000
    
    
    
    4.94
    %Loans Payable
    
    
    373,044
    
    
    
    7.27
    %
    
    
    402,701
    
    
    
    6.88
    %Notes Payable
    
    
    278,521
    
    
    
    7.31
    %
    
    
    282,458
    
    
    
    7.31
    %
   TABLE N
AVERAGE DEPOSIT BALANCE
 NINE MONTH PERIOD ENDED
    
    
    YEAR ENDEDSEPTEMBER 30, 2008
    
    
    DECEMBER 31, 2007AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,905,877
    
    
    
    4.50
    %
    
    $
    2,782,709
    
    
    
    4.94
    %Regular passbook savings
    
    
    330,538
    
    
    
    2.60
    %
    
    
    380,710
    
    
    
    3.56
    %NOW and other transaction accounts
    
    
    391,863
    
    
    
    1.33
    %
    
    
    437,321
    
    
    
    3.04
    %Money market accounts
    
    
    301,467
    
    
    
    3.54
    %
    
    
    171,371
    
    
    
    4.05
    %Other interest-bearing deposits
    
    
    138
    
    
    
    0.65
    %
    
    
    
    
    
    
    Total interest-bearing
    
    
    3,929,883
    
    
    
    3.95
    %
    
    
    3,772,111
    
    
    
    4.54
    %Non-interest bearing
    
    
    253,594
    
    
    
    
    
    
    
    309,482
    
    
    
    Total deposits
    
    $
    4,183,477
    
    
    
    3.71
    %
    
    $
    4,081,593
    
    
    
    4.20
    %
   TABLE O
CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    503,245Over three through six months
    
    
    741,534Over six through twelve months
    
    
    728,878Over twelve months
    
    
    742,332Total
    
    $
    2,715,989
  57




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Other Uses of Cash
     58




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REGULATORY CAPITAL RATIOS
  TABLE P
REGULATORY CAPITAL RATIOS
 As of September 30, 2008DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    17.9%
    
    
    16.3
    %
    
    
    18.2
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    16.5%
    
    
    15.0
    %
    
    
    17.6
    %Leverage Ratio(1)
    
    9.9%
    
    
    7.7
    %
    
    
    14.1
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR
and Tier 1 capital to adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of September
30, 2008. Ratios were prepared as if the company were subject to the requirement for
comparability purposes. As of December 31, 2007DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    17.8
    %
    
    
    12.5
    %
    
    
    13.8
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    16.5
    %
    
    
    11.3
    %
    
    
    13.0
    %Leverage Ratio(1)
    
    
    10.8
    %
    
    
    6.0
    %
    
    
    10.6
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR
and Tier 1 capital to adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of
December 31, 2007. Ratios were prepared as if the company were subject to the requirement for comparability purposes.    59




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ASSETS AND LIABILITIES
    OFF-BALANCE SHEET ACTIVITIES
       60




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Risk Factors
 CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE Q  CONTRACTUAL OBLIGATIONS
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,301,797
    
    
    $
    2,693,590
    
    
    $
    1,317,277
    
    
    $
    83,189
    
    
    $
    207,741Repurchase agreements(1) (2)
    
    
    1,876,199
    
    
    
    878,699
    
    
    
    691,000
    
    
    
    206,500
    
    
    
    100,000Advances from FHLB(1) (2)
    
    
    1,723,400
    
    
    
    572,480
    
    
    
    663,920
    
    
    
    487,000
    
    
    
    Loans payable(3)
    
    
    373,044
    
    
    
    42,363
    
    
    
    73,795
    
    
    
    61,244
    
    
    
    195,642Notes payable
    
    
    278,521
    
    
    
    4,602
    
    
    
    7,240
    
    
    
    35,462
    
    
    
    231,217Other liabilities
    
    
    129,573
    
    
    
    128,573
    
    
    
    1,000
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    41,792
    
    
    
    5,633
    
    
    
    9,551
    
    
    
    6,256
    
    
    
    20,352Total Contractual Cash Obligations
    
    $
    8,724,326
    
    
    $
    4,325,940
    
    
    $
    2,763,783
    
    
    $
    879,651
    
    
    $
    754,952
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $178.5 million of repurchase agreements with an average rate of 5.95% and $304.0 million in advances from
FHLB-NY with an average rate of 5.40%,which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from FHLB-NY are included in the less than one year category in the above table but have actual
contractual maturities ranging from July 2009 to March 2012.They are included on the first call date basis because increases in
interest rates over the average rate of the Companys callable borrowings may induce the lenders to exercise their call right.(3)
    
    Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at variable
interest rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are required to be repaid according to the
regular amortization and prepayments of the underlying mortgage loans. For purposes of the table above, the Company used a CPR of 8.98%
to estimate the repayments. TABLE R  OTHER COMMERCIAL COMMITMENTS (1)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    129,313
    
    
    $
    83,521
    
    
    $
    45,782
    
    
    $
    10
    
    
    $
    Commitments to sell loans
    
    
    265,203
    
    
    
    265,203
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    4,282
    
    
    
    4,282
    
    
    
    
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    1,029,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,029,179Total
    
    $
    1,427,977
    
    
    $
    353,006
    
    
    $
    45,782
    
    
    $
    10
    
    
    $
    1,029,179
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  61




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Interest Rate and Market Risk Management
  Doral Financials Risk Profile
    Market Value
    
    Net Interest IncomeAs of September 30, 2008
    
    Of Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (6.26
    )%
    
    
    7.82
    %- 100 BPS
    
    
    (1.88
    )%
    
    
    (13.64
    )%
 Market Value of
    
    Net Interest IncomeAs of December 31, 2007
    
    Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (10.7
    )%
    
    
    (0.8
    )%- 100 BPS
    
    
    1.2
    %
    
    
    (1.9
    )%
 
 (1)
    
    Based on 12-month forward change in net interest income.   62




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(Dollars
in thousands)
    
    September 30, 2008
    
    December 31, 2007Change in fairChange in interest
    
    value of available
    
    Change in fair value ofrates (basis points)
    
    for sale securities
    
    available for sale securities+200
    
    $
    (169,102
    )
    
    $
    (223,737
    )+100
    
    
    (80,430
    )
    
    
    (102,851
    )Base
    
    
    
    
    
    
    -100
    
    
    62,991
    
    
    
    70,755-200
    
    
    105,554
    
    
    
    129,464
  Derivatives
  TABLE S
INTEREST RATE SWAPS
 (Dollars in thousands)NOTIONAL
    
    MATURITY
    
    PAY
    
    RECEIVE
    
    FAIRAMOUNT
    
    DATE
    
    FIXED RATE
    
    FLOATING RATE
    
    VALUECASH FLOW HEDGE$
    200,000
    
    
    July, 2010
    
    
    3.00
    %
    
    3-month LIBOR minus 0.04%
    
    $
    1,15610,000
    
    
    September, 2009
    
    
    4.57
    %
    
    1-month LIBOR plus 0.02%
    
    
    (131
    )8,000
    
    
    September, 2010
    
    
    4.62
    %
    
    1-month LIBOR plus 0.02%
    
    
    (202
    )3,000
    
    
    September, 2011
    
    
    4.69
    %
    
    1-month LIBOR plus 0.05%
    
    
    (96
    )15,000
    
    
    October, 2008
    
    
    4.44
    %
    
    1-month LIBOR plus 0.06%
    
    
    (3
    )10,000
    
    
    October, 2009
    
    
    4.30
    %
    
    1-month LIBOR plus 0.04%
    
    
    (113
    )8,000
    
    
    October, 2010
    
    
    4.37
    %
    
    1-month LIBOR plus 0.02%
    
    
    (172
    )6,000
    
    
    October, 2011
    
    
    4.51
    %
    
    1-month LIBOR plus 0.02%
    
    
    (155
    )5,000
    
    
    October, 2012
    
    
    4.62
    %
    
    1-month LIBOR plus 0.05%
    
    
    (146
    )20,000
    
    
    November, 2008
    
    
    4.43
    %
    
    1-month LIBOR plus 0.03%
    
    
    (17
    )20,000
    
    
    November, 2009
    
    
    4.35
    %
    
    1-month LIBOR plus 0.02%
    
    
    (262
    )15,000
    
    
    November, 2010
    
    
    4.42
    %
    
    1-month LIBOR
    
    
    (346
    )15,000
    
    
    November, 2011
    
    
    4.55
    %
    
    1-month LIBOR plus 0.02%
    
    
    (416
    )45,000
    
    
    November, 2012
    
    
    4.62
    %
    
    1-month LIBOR plus 0.02%
    
    
    (1,374
    )$
    380,000
    
    
    
    
    
    
    
    
    
    
    $
    (2,277
    )
  63




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TABLE T
INTEREST RATE CAPS
 (Dollars in thousands)NOTIONAL
    
    
    MATURITY
    
    ENTITLED PAYMENT
    
    PREMIUM
    
    
    FAIRAMOUNT
    
    
    DATE
    
    CONDITIONS
    
    PAID
    
    
    VALUE$
    25,000
    
    
    September, 2010
    
    1-month LIBOR and 5.00%
    
    $
    205
    
    
    $
    5215,000
    
    
    September, 2011
    
    1-month LIBOR and 5.50%
    
    
    134
    
    
    
    7215,000
    
    
    September, 2012
    
    1-month LIBOR and 6.00%
    
    
    143
    
    
    
    10835,000
    
    
    October, 2010
    
    1-month LIBOR and 5.00%
    
    
    199
    
    
    
    9115,000
    
    
    October, 2011
    
    1-month LIBOR and 5.00%
    
    
    172
    
    
    
    11415,000
    
    
    October, 2012
    
    1-month LIBOR and 5.50%
    
    
    182
    
    
    
    15150,000
    
    
    November, 2012
    
    1-month LIBOR and 6.50%
    
    
    228
    
    
    
    28350,000
    
    
    November, 2012
    
    1-month LIBOR and 5.50%
    
    
    545
    
    
    
    50950,000
    
    
    November, 2012
    
    1-month LIBOR and 6.00%
    
    
    350
    
    
    
    390$
    270,000
    
    
    
    
    
    
    
    
    $
    2,158
    
    
    $
    1,770
 Freestanding Derivatives.
 Derivatives  Hedge Accounting.
  TABLE U  FAIR VALUE RECONCILIATION
 Nine Month Period Ended(In thousands)
    
    September 30, 2008Fair value of contracts outstanding at the beginning of the period
    
    $
    (476
    )Adjustment related to swaps designed as cash flow hedge during the period
    
    
    1,952Changes in fair values during the period
    
    
    525Fair value of contracts outstanding at the end of the period
    
    $
    2,001
 64




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TABLE V  SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of September 30, 2008
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValuePrices actively quoted
    
    $
    231
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    231Prices provided by
internal sources
    
    
    
    
    
    
    214
    
    
    
    1,556
    
    
    
    
    
    
    
    1,770$
    231
    
    
    $
    214
    
    
    $
    1,556
    
    
    $
    
    
    
    $
    2,001
    TABLE W  DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    September 30, 2008Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    Total Fair
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Value
    
    
    (in years)AA
    
    
    2
    
    
    $
    650,000
    
    
    $
    2,926
    
    
    $
    (3,433
    )
    
    $
    (507
    )
    
    
    2.61AA-
    
    
    1
    
    
    
    45,000
    
    
    
    264
    
    
    
    (33
    )
    
    
    231
    
    
    
    0.32Total Derivatives
    
    
    3
    
    
    $
    695,000
    
    
    $
    3,190
    
    
    $
    (3,466
    )
    
    $
    (276
    )
    
    
    2.46(1)      Based on the S&P Long Term Issuer Credit Ratings.(2)      Based on legal entities. Affiliated legal entities are reported separately.(3)      For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable
(net).(Dollars in thousands)
    
    December 31, 2007Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    Total Fair
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Value
    
    
    (in years)AA
    
    
    1
    
    
    $
    250,000
    
    
    $
    241
    
    
    $
    (2,889
    )
    
    $
    (2,648
    )
    
    
    2.95AA-
    
    
    1
    
    
    
    215,000
    
    
    
    1,241
    
    
    
    
    
    
    
    1,241
    
    
    
    4.45A+
    
    
    2
    
    
    
    29,000
    
    
    
    6
    
    
    
    (12
    )
    
    
    (6
    )
    
    
    0.04Subtotal
    
    
    4
    
    
    $
    494,000
    
    
    $
    1,488
    
    
    $
    (2,901
    )
    
    $
    (1,413
    )
    
    
    3.43
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). 65




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Credit Risk
     Loss Mitigation Strategies
   Accounting by Debtors and Creditors
of Troubled Debt Restructurings Accounting by Creditors for Impairment of a Loan
 66




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Non-performing assets and allowance for loan and lease losses
   67




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TABLE X  NON-PERFORMING ASSETS
 AS OF
    
    
    AS OF(Dollars in thousands)
    
    SEPTEMBER 30, 2008
    
    
    DECEMBER 31, 2007Non-performing loans:Residential mortgage loans  held for sale (1)
    
    $
    5,146
    
    
    $
    4,603Residential mortgage loans  held for investment
    
    
    311,511
    
    
    
    256,949Total non-performing residential mortgage loans (2)
    
    
    316,657
    
    
    
    261,552Other lending activities:Construction and land loans, classified as substandard but
accruing
    
    
    
    
    
    
    113,254Construction loans in non-performing status
    
    
    224,203
    
    
    
    152,021Commercial real estate loans
    
    
    102,399
    
    
    
    86,590Commercial real estate loans  held for sale
    
    
    889
    
    
    
    Consumer loans
    
    
    2,853
    
    
    
    4,303Commercial non-real estate loans
    
    
    2,027
    
    
    
    3,040Lease financing receivable
    
    
    464
    
    
    
    1,032Land loans
    
    
    25,588
    
    
    
    14,507Total non-performing other lending activities
    
    
    358,423
    
    
    
    374,747Total non-performing loans
    
    
    675,080
    
    
    
    636,299Repossessed assets
    
    
    231
    
    
    
    419OREO(3)
    
    
    57,583
    
    
    
    38,154Total NPAs of Doral Financial (consolidated)
    
    $
    732,894
    
    
    $
    674,872Total NPAs as a percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
    
    
    13.65
    %
    
    
    12.93
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    7.34
    %
    
    
    7.25
    %Total non-performing loans to total loans (excluding GNMA
defaulted loans)
    
    
    12.29
    %
    
    
    11.91
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding loans held for sale) at end of
period
    
    
    18.41
    %
    
    
    19.75
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing residential
mortgage loans and other non-performing loans held for
sale) at end of period(4)
    
    
    25.88
    %
    
    
    27.66
    %
 
 (1)
    
    Does not include approximately $141.1 million and $126.0 million of GNMA defaulted loans (for which the
Company has the option, but not an obligation, to buy-back from the pools serviced), included as part of the loans held
for sale portfolio as of September 30, 2008 and December 31, 2007, respectively.(2)
    
    Includes approximately $5.0 million and $2.1 million of FHA/VA loans where the principal balance of
these loans is insured or guaranteed under applicable programs and interest is, in most loses, fully recovered in
foreclosure proceedings as of September 30, 2008 and December 31, 2007, respectively.(3)
    
    Excludes FHA/VA claims amounting to $19.8 million and $16.4 million as of September 30, 2008 and
December 31, 2007, respectively.(4)
    
    The proportion of the allowance for loan and leases allocated to residential mortgage loan portfolio
historically has been lower than in other lending portfolios. A substantial part of the amounts due on delinquent
residential mortgage loans has been historically recovered through sale of property after foreclosure or negotiated
settlements with borrowers. For purposes of comparability with the industry, the ratio of allowance for loan and lease
losses to 68




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##### Table of Contents



total non-performing loans excludes the allowance allocated to residential mortgage loans from the numerator
and the total residential mortgage loans portfolio and other non-performing loans held for sale from the denominator.   Accounting by Debtors and Creditors of Troubled
Debt Restructurings
   TABLE Y  COMPOSITION OF MORTGAGE NON-PERFORMING ASSETS
 COLLATERAL TYPE
    
    LOAN TO VALUE
    
    DISTRIBUTIONFHA/VA loans
    
    
    
    
    
    
    1.5
    %Loans with private mortgage insurance
    
    
    
    
    
    
    7.8
    %Loans with no mortgage insurance
    
    
    < 60
    %
    
    
    16.3
    %61-80
    %
    
    
    46.4
    %81-90
    %
    
    
    20.3
    %Over 91
    %
    
    
    7.7
    %Total loans
    
    
    
    
    
    
    100.0
    %
   69




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##### Table of Contents



As of
    
    
    As of(Dollars in thousands)
    
    September 30, 2008
    
    
    December 31, 2007Construction loans(1)
    
    $
    529,698
    
    
    $
    588,174Total undisbursed funds under existing commitments(2)
    
    $
    62,517
    
    
    $
    139,172Construction loans on non-accrual status
    
    $
    224,203
    
    
    $
    152,021Construction and land loans, classified as substandard but accruing(3)
    
    
    
    
    
    
    113,254Total non-performing construction loans
    
    $
    224,203
    
    
    $
    265,275Net charge offs  Construction loans
    
    $
    12,238
    
    
    $
    6,060Allowance for loan losses  Construction loans
    
    $
    46,514
    
    
    $
    56,776Non-performing construction loans to total construction loans
    
    
    42.33
    %
    
    
    45.10
    %Allowance for loan losses  construction loans to total construction loans
    
    
    8.78
    %
    
    
    9.65
    %Net charge-offs to total construction loans
    
    
    2.31
    %
    
    
    1.03
    %
 
 (1)
    
    Includes $437.6 million and $422.4 million of construction loans for residential housing projects as of September 30, 2008 and December
31, 2007, respectively. Also includes $92.4 million and $165.8 million of construction loans for commercial, condominiums and multi-family projects as of
September 30, 2008 and December 31, 2007, respectively.(2)
    
    Excludes undisbursed funds to matured loans and loans in non-accrual status.(3)
    
    Since January l, 2008, the Company placed in non-accrual all residential construction loans classified as substandard if their source of
payment was interest reserves funded by Doral Financial. 70




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TABLE Z  ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTERS ENDED
    
    
    NINE MONTH PERIODSSEPTEMBER 30,
    
    

ENDED SEPTEMBER 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    122,099
    
    
    $
    85,875
    
    
    $
    124,733
    
    
    $
    67,233Provision (recovery) for loan and lease losses:Construction loans
    
    
    1,870
    
    
    
    (1,822
    )
    
    
    1,986
    
    
    
    76Residential mortgage loans
    
    
    4,048
    
    
    
    1,489
    
    
    
    10,972
    
    
    
    14,231Commercial real estate loans
    
    
    (1,152
    )
    
    
    3,503
    
    
    
    1,949
    
    
    
    6,801Consumer loans
    
    
    1,612
    
    
    
    1,275
    
    
    
    5,538
    
    
    
    6,588Lease financing
    
    
    (36
    )
    
    
    119
    
    
    
    201
    
    
    
    310Commercial non-real estate loans
    
    
    (362
    )
    
    
    912
    
    
    
    716
    
    
    
    2,448Land secured loans
    
    
    1,229
    
    
    
    59
    
    
    
    1,316
    
    
    
    (81
    )Other(1)
    
    
    
    
    
    
    (473
    )
    
    
    
    
    
    
    Total provision for loan and lease losses
    
    
    7,209
    
    
    
    5,062
    
    
    
    22,678
    
    
    
    30,373Charge-offs:Construction loans
    
    
    (3,905
    )
    
    
    
    
    
    
    (12,238
    )
    
    
    (513
    )Residential mortgage loans
    
    
    (217
    )
    
    
    (879
    )
    
    
    (1,416
    )
    
    
    (879
    )Commercial real estate loans
    
    
    138
    
    
    
    (68
    )
    
    
    (3,889
    )
    
    
    (947
    )Consumer loans
    
    
    (1,547
    )
    
    
    (1,653
    )
    
    
    (5,713
    )
    
    
    (4,832
    )Lease financing
    
    
    (376
    )
    
    
    (484
    )
    
    
    (843
    )
    
    
    (869
    )Commercial non-real estate loans
    
    
    (413
    )
    
    
    (879
    )
    
    
    (1,066
    )
    
    
    (2,365
    )Total charge-offs
    
    
    (6,320
    )
    
    
    (3,963
    )
    
    
    (25,165
    )
    
    
    (10,405
    )Recoveries:Commercial real estate loans
    
    
    11
    
    
    
    
    
    
    
    88
    
    
    
    Consumer loans
    
    
    105
    
    
    
    92
    
    
    
    538
    
    
    
    319Lease financing
    
    
    9
    
    
    
    43
    
    
    
    210
    
    
    
    43Commercial non-real estate loans
    
    
    30
    
    
    
    34
    
    
    
    61
    
    
    
    53Total recoveries
    
    
    155
    
    
    
    169
    
    
    
    897
    
    
    
    415Net charge-offs
    
    
    (6,165
    )
    
    
    (3,794
    )
    
    
    (24,268
    )
    
    
    (9,990
    )Other(1)
    
    
    
    
    
    
    473
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    123,143
    
    
    $
    87,616
    
    
    $
    123,143
    
    
    $
    87,616Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    2.34
    %
    
    
    1.94
    %
    
    
    2.34
    %
    
    
    1.94
    %Provision for loan losses to net charge-offs
    
    
    116.93
    %
    
    
    133.42
    %
    
    
    93.45
    %
    
    
    304.03
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.47
    %
    
    
    0.30
    %
    
    
    0.63
    %
    
    
    0.35
    %Allowance for loan losses to net charge-offs, annualized
    
    
    502.05
    %
    
    
    582.08
    %
    
    
    379.89
    %
    
    
    655.98
    %
 
 (1)
    
    Represents the portion of allowance for loans transferred during the first quarter of 2007 from the loans receivable portfolio
to the loans held for sale portfolio, in connection to the sale of certain assets of Doral Bank NY completed during the third
quarter of 2007.  TABLE AA  ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
 September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans receivable:Construction
    
    $
    46,514
    
    
    
    10
    %
    
    $
    56,766
    
    
    
    12
    %Residential mortgage loans
    
    
    30,620
    
    
    
    68
    %
    
    
    21,064
    
    
    
    66
    %Commercial  secured by real estate
    
    
    21,547
    
    
    
    15
    %
    
    
    23,399
    
    
    
    15
    %Consumer
    
    
    7,524
    
    
    
    1
    %
    
    
    7,161
    
    
    
    2
    %Lease financing receivable
    
    
    1,071
    
    
    
    1
    %
    
    
    1,503
    
    
    
    1
    %Commercial non-real estate
    
    
    2,779
    
    
    
    3
    %
    
    
    3,068
    
    
    
    2
    %Land secured
    
    
    13,088
    
    
    
    2
    %
    
    
    11,772
    
    
    
    2
    %Total
    
    $
    123,143
    
    
    
    100
    %
    
    $
    124,733
    
    
    
    100
    %
   71




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##### Table of Contents



Accounting by Creditors for Impairment of a Loan
 Accounting for Contingencies
   Operational Risk
  Overview of Operational Risk Management
  72




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##### Table of Contents



Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions
  Business Risk Factors
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
  73




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  A loss may have to be accrued by Doral Financial with respect to a pending Lehman Brothers,
Inc. claim
  
  74




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##### Table of Contents



There can be no assurance that the actions of the U.S. government, U.S. Federal Reserve, U.S.
Treasury and other governmental and regulatory bodies for the purpose of stabilizing the U.S.
financial markets, or market response to those actions, will achieve the intended effect.
    Current levels of market volatility are unprecedented.
  The soundness of other financial institutions could affect us.
   Difficult market conditions have already affected our industry and may adversely affect us.
   75




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##### Table of Contents




    
    We expect to face increased regulation of our industry, including as a result of the
EESA. Compliance with such regulation may increase our costs and limit our ability to
pursue business opportunities.
    
    Our ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage, and underwrite our customers become less
predictive of future behaviors.
    
    The processes we use to estimate losses inherent in our credit exposure requires
difficult, subjective, and complex judgments, including forecast of economic conditions and
how these economic predictions might impair the ability of our borrowers to repay their
loans, which may no longer be capable of accurate estimation and which may, in turn, impact
the reliability of the processes.
    
    Our ability to borrow from other financial institutions or to engage in sales of
mortgage loans to third parties (including mortgage loan securitization transactions with
government sponsored entities) on favorable terms or at all could be adversely affected by
further disruptions in the capital markets or other events, including deteriorating
investor expectations.
    
    Competition in our industry could intensify as a result of increasing consolidation of
financial services companies in connection with current market conditions.
    
    We may be required to pay significantly higher Federal Deposit Insurance Corporation
premiums on our insured deposits because market developments could lead to a significant
depletion of the insurance fund of the FDIC and reduce the ratio of reserves to insured
deposits.
 We have experienced declines in the market value of some of our assets.
  Our risk management policies and procedures may leave us exposed to unidentified or unanticipated
risk, which could negatively affect us.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
 76




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##### Table of Contents



ITEM 6. EXHIBITS
    77




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##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
                    (Registrant)Date: November 14, 2008
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: November 14, 2008
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President and
Chief Financial Officer 78




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description12.1
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31.1
    
    
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 79